What Is Gross Acres?
In finance, the term "gross acres" refers to the amount of leased real estate held by a resource-extraction company. Gross acres goes hand in hand with "net acres," which is sometimes referred to as "net mineral acres." Both are significant factors in the business of oil and gas companies.
- "Gross acres" refers to land that is leased by one or more resource extraction companies in the hopes of extracting a resource for sale.
- Determining the gross acres of a natural resource company allows investors and analysts to determine the size of a project, resource potential, and a company's exposure to a certain region or country.
- "Gross acres" is similar to "net acres," the difference being that "net acres" refers to the amount of land one company holds if more than one company has holdings in a single property.
- Investors use both gross acres and net acres to measure or assess a company's risk profile and profitability.
Understanding Gross Acres
Investors and analysts often refer to the gross acreage of natural resource companies in order to gauge the size of specific projects or the exposure of that company to projects in a particular region or country.
For example, if there is political instability in a specific part of the world, investors may wish to know what amount of gross acreage the company holds in that region. By comparing the regional gross acres against the company's overall portfolio, investors can better assess the company's exposure to the political risks of that region.
In a situation where multiple companies are leasing a single property, the term "gross acres" would be used to describe the total number of acres leased by those companies, whereas "net acres" would be used to describe only the portion leased by the specific company in question.
Gross vs Net Acres
If a company is the sole lessee of a particular property, then the gross acres and net acres of that project would be the same.
Gross and net acres are also calculated in relation to specific types of projects. For example, oil industry analysts might keep track of what percentage of an oil company's project pipeline is related to unconventional oil plays, such as shale oil.
Other considerations—such as how effectively the company is utilizing its leased acreage—would also be taken into consideration, although these more general questions would be answered using broader metrics such as the company's return on invested capital (ROIC).
Gross acres plays a large part in oil and gas exploration. When an oil company's geologists believe a certain area of land holds possible oil reserves that could be extracted, an oil company will attempt to lease that land to identify the oil pockets.
In this scenario, there are different methods in which an oil company could compensate the land owner. It could simply lease it from the owner for a fee or it could pay the owner a percentage of profits if oil is discovered, refined, and sold. The latter holds more risk for the landowner, but also a greater possible return.
Example of Gross Acres
To illustrate, consider a scenario in which 3,000 acres of land are leased by companies A, B, and C, with the intent of uncovering oil reserves. In this scenario, the gross acreage is 3,000 since that is the total amount of land leased and shared by all three companies.
The net acreage, on the other hand, is calculated by multiplying each company's ownership share by the gross acreage. Therefore, if each company owns one-third of the total, then the net acreage of each company would be 1,000.
Investors in these companies would consider the gross and net acres when assessing the company's risk profile and management efficiency. For example, if company A has far greater net acres in its overall portfolio despite generating similar profits as its competitors, then investors in company A may feel that its management is inefficient at utilizing its invested capital.
Similarly, if company B's portfolio of projects is disproportionately located in countries with politically volatile environments, then investors in company B may feel they are not being adequately compensated for the company's heightened risks.