EBITDAX is an indicator of financial performance used when reporting earnings for oil and mineral exploration companies. The acronym stands for earnings before interest, taxes, depreciation (or depletion), amortization, and exploration expense.

EBITDAX is calculated as follows:

EBITDAX formula
EBITDAX = revenue - expenses (excluding tax, interest, depreciation, depletion, amortization, and exploration expenses).  Investopedia

Key Takeaways

  • EBITDAX, a valuation metric used for oil and gas companies, 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 exploration costs when new oil and gas reserves are found.
  • Noncash expenses, such as deferred taxes and impairments, are added back in under EBITDAX.

Understanding EBITDAX

EBITDAX is a valuation metric used for oil and gas companies, primarily 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 recognized in the financial statements as exploration, abandonment, and dry hole costs. These costs require considerable capital expenditures for equipment, labor, and other costs.

Also, 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 is EBITDA before exploration costs for successful efforts companies. The successful efforts method is a conservative approach to oil and gas accounting method used in the oil and gas industry to account for certain operating expense. Under this method, a company only capitalizes 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, 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, EBITDA can also be calculated as follows:

  • EBITDA = EBIT + depreciation + amortization + exploration expenses

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, it is scrutinized deeply by analysts and lenders.