DEFINITION of Price Per Flowing Barrel
Price per flowing barrel is a metric used to determine the value of an oil and gas company. Price per flowing barrel for an oil and gas company is calculated as:
(Market Cap + Debt - Cash) / Production Barrels Per Day
For example, an oil company with a market capitalization of $20 billion, debt of $500 million and $100 million in cash that produces 600,000 BPD will have a price per flowing barrel of $34,000.
BREAKING DOWN Price Per Flowing Barrel
Price per flowing barrel is a simplified method of comparing oil and gas companies, as well as oil and gas projects. When evaluating and comparing companies, it is important to note that price per flowing barrel does not take into account the potential production from undeveloped fields. Price per flowing barrel is limited as a comparative metric because it is more accurate when the production of two companies is in similar types of oil from similar types of fields. It is rare to find exact matches, so investors generally pull in more information for deeper comparisons rather than making investment decisions purely on the price per flowing barrel.
Price per Flowing Barrel on Projects
Price per flowing barrel is also used by oil and gas companies to evaluate asset purchases and projects. In this case, the company valuation figures of market capitalization, debt and cash are replaced by the acquiring costs for the asset or executing the project. So if a project is estimated to cost $12 billion and is expected to produce 180,000 barrels per day, then the price per flowing barrel for that project is $66,666. In the project context, the price per flowing barrel is often called the cost per flowing barrel to avoid confusion with the company level valuation.
Oil Prices and Price Per Flowing Barrel
Oil prices do, of course, directly impact the value of the companies that are extracting and selling it as their core business. When oil prices are strong, the price per flowing barrel metric also increases. This trend is obvious when it comes to industry mergers and acquisitions. Not only does the average price per flowing barrel paid in acquisitions rise with oil prices, but the cost for producing assets and undeveloped projects also goes up.
The prices being paid for new or existing production also provide an inside look at where industry participants see oil prices going. When companies are paying more and more for each flowing barrel, it shows they are bullish in the near term. The same could be said about merger and acquisition values within the oil industry, but the price per flowing barrel valuation of a company is not a good representation of acquisition value as the buyers offer will include some allowance for undeveloped land owned or controlled by the acquisition target. The value of this undeveloped land is theoretically factored into the overall market cap of a company, but the reality is that the market is a habitual over and under pricer when it comes to the potential production of undeveloped oil assets.