What Is Price per Flowing Barrel?
In finance, “price per flowing barrel” is a metric used to estimate the value of a company that produces oil and gas. This calculation is performed by dividing the company’s enterprise value (EV) by the number of barrels it produces in a typical day. Enterprise value measures a company's total value.
- The price per flowing barrel is a measure that is used to assess the approximate value of a company in the oil and gas sector.
- There are a number of other factors investors also consider when trying to assess the value of a company in the industry, including the track record of the company and political considerations, among others.
- The purpose of the price per flowing barrel metric is to compare the company’s enterprise value to the number of barrels it produces each day.
- A version of this metric can also be used to estimate the value of specific projects within the oil and gas sector.
- Price per flowing barrel = EV / production barrels per day
For those unfamiliar with the concept of EV, the same expression can be rewritten as follows:
- Price per flowing barrel = (market capitalization + total debt - total cash) / production barrels per day
How Price per Flowing Barrel Works
Price per flowing barrel is a simple heuristic for assessing the approximate value of an oil and gas company. Of course, in the real world investors and analysts understand that there are many additional factors that must be taken into consideration before determining whether a given company is an attractive investment. These include the political risks associated with the regions in which their projects are located, the quality of their equipment and personnel, and their track record of uncovering and developing new projects, among many others.
In addition to helping assess the value of oil and gas companies, the price per flowing barrel metric can also be used to estimate the value of specific oil and gas projects. In this manner, a more detailed analysis of an oil and gas company might involve calculations of the individual price per flowing barrel of each of their major projects. In that scenario, the numerator in the ratio would consist of the internal costs associated with the project, instead of the EV of the company as a whole.
If the analyst observes that the company’s more recent projects show a trend toward increasingly favorable price per flowing barrel ratios, this may indicate that the company is becoming more efficient at identifying and exploiting new projects. When performing these types of project-specific analyses, the term “cost per flowing barrel” is often used to avoid confusion with the company-level valuation.
Enterprise value is seen as a more complete version of equity market capitalization, as it looks at the company's market cap, short-term and long-term debt, and any cash on the balance sheet.
Real-World Example of Price per Flowing Barrel
To illustrate, consider a company with a market cap of $20 billion, $500 million of debt, and $100 million of cash. If that company produces 600,000 barrels per day, then its price per flowing barrel would be:
- Price per flowing barrel = ($20,000,000,000 + $500,000,000 - $100,000,000) / 600,000 = $34,000
Investors and analysts can then use this metric to compare the valuation of a particular company against competing companies that have similar production projects. For example, if one of its competitors has similar projects but has a Price Per Flowing Barrel of only $25,000, then that competitor may be seen as a more attractive investment opportunity.