What Is EBITDAX?
EBITDAX is an indicator of financial performance that is used when reporting earnings, specifically for oil and mineral exploration companies. The acronym stands for "Earnings Before Interest, Taxes, Depreciation (or Depletion), Amortization, and Exploration Expense."
- EBITDAX is a valuation metric used for oil and gas companies that measures a firm's ability to produce income from operations and service debts.
- EBITDAX expands EBITDA by excluding the exploration costs.
- Under EBITDAX, companies capitalize on exploration costs when new oil and gas reserves are found.
- Noncash expenses, such as deferred taxes and impairments, are added back in under EBITDAX.
EBITDAX is a valuation metric used specifically for oil and gas companies, also known as exploration and production (E&P) companies. It measures a company’s ability to produce income from its operations in any given year.
The calculation of EBITDAX excludes costly exploration expenses and gives the true EBITDA (earnings before interest, taxes, and depreciation, and amortization) of the firm. Exploration costs are the costs an oil or gas company incurs while searching for oil or gas to drill. Exploration costs include the cost of researching appropriate places to drill and the cost of actually drilling. Exploration costs are recognized in the ﬁnancial statements as exploration, abandonment, and dry hole costs. These costs require considerable capital expenditures for equipment, labor, and other costs.
The recognized recurring earnings and expenses associated with the exploration costs could be significantly different depending on whether the company uses the successful efforts or full cost method of accounting.
EBITDAX vs. EBITDA
For companies that use the successful efforts method of accounting, EBITDAX can be thoughts of as EBITDA before exploration costs. The successful efforts method is a conservative approach to accounting that is used in the oil and gas industry as a way of accounting for certain operating expenses.
Under this method, a company only capitalizes on those costs associated with the location of new oil and gas reserves when those reserves have been found. If exploration is unsuccessful with costs incurred, the costs will instead be charged to expense as incurred.
For full-cost companies, meanwhile, exploration costs are embedded in depreciation and depletion. Full-cost is an accounting method that does not differentiate between operating expenses associated with successful and unsuccessful exploration projects. Thus, EBITDAX equalizes both accounting types and excludes the impact of both accounting and structural issues associated with E&P companies.
When calculating EBITDAX, noncash expenses, such as impairments, accretion of asset retirement obligation, and deferred taxes, should also be added back in. The formula does not account for one-off or otherwise unusual revenues and expenses, only recurring ones. In addition to the formula above, EBITDAX can also be calculated as follows:
Advantages and Disadvantages of EBITDAX
EBITDAX is a measure of the income a business has available to service its debts or make interest payments on its loans. The metric gauges a company’s ability to repay its loan and is especially useful when a company wants to acquire another company.
The EBITDAX would cover any loan payments needed to finance the takeover. However, as a financial metric, it is scrutinized deeply by analysts and lenders. This is because companies that are not successful in their exploration efforts may use EBITDAX (in place of EBITDA) as a way of improving their appearance of profitability.
As an investor, it is always good practice to scrutinize the financial figures, and especially those calculated for you, reported by any company, and EBITDAX is no exception. It may be worth comparing EBITDA with EBITDAX when considering investing in an oil and gas company that had exploration expenses.