What Is Net Acres?

Net acres is the amount of leased real estate that a petroleum and/or natural gas company holds, pertaining to a company's true working interest. Net acres differ from gross acres, as the net acres reduces the total leased acres by the actual percentage of ownership in a given lease. So if a company shares half of its working interest in a 10,000 acres lease with another company, the company's net acres will increase by only 5,000 acres while its gross acres will count the whole 10,000. If a company holds the entire working interest for a particular project, its net acreage and gross acreage will be the same. Net acres are also referred to as net mineral acres.

Key Takeaways

  • Net acres is the amount of leased real estate that a petroleum and/or natural gas company holds, pertaining to a company's true working interest.
  • Net acres can be calculated on a per project basis by multiplying the gross acres with the percentage of ownership.
  • Net acres can be construed as a measure of a company's potential for revenue and increases or decreases in the figure are indicators of expansion or contraction.

Understanding Net Acres

Net acres can be calculated on a per project basis simply by multiplying the gross acres with the percentage of ownership. Net acres are most commonly referenced in terms of a specific project. That said, analysts and media pundits sometimes reference an oil and gas company's total net acres or the net acres in a particular formation or region. This is generally done to illustrate a company's exposure. For example, if Venezuela is going through a period of political instability, an analyst will point out the net acres that the oil companies they cover have in the region.

What Net Acres Tell Investors

Net acres is an industry specific metric rather than a general investment measure like return on invested capital (ROIC). First and foremost, a company's total net acres is a useful indication of the company's size. The oil and gas majors have millions of net acres as part of their global footprint. For any company, however, increases and decreases in the net acres are a clear signal of expansion or contraction. Focusing down, the total net acres can be broken up by country, giving investors an idea of exposure and positioning in different markets and regions. Finally, net acres can be sorted by type, showing how much exploration and development is being done in shale versus oil sands for example.

Of course, net acres doesn't tell the whole story. There are further questions about what the company is doing with that acreage. How many wells are producing? How much exploratory drilling is planned for the lease? How soon will the net acres shift from exploration to actual production? What are the possible reserves and what are the proven reserves for the net acres? The answers to these questions require investors to move beyond net acres and deeper into finer oil and gas industry metrics. Net acres is most useful as an indicator of size and a passable proxy for growth.

Net Royalty Acres

A related concept to net acres is net royalty acres, which represents the royalty interest of a holder in an oil and gas lease. Quite often oil companies lease land, instead of purchasing it, from residents. In such cases, landowners are entitled to a royalty percentage of the revenue derived from drilled wells on the land. Net royalty acres is used to price mineral or royalty interest from the owner's percentage of the land. It is calculated by multiplying the owner's interest in a tract by the number of acres in the tract of land. Net royalty acres is different from net acres, however, and does not have a direct bearing in assessment of companies.