1. Key Ratios For Analyzing Oil And Gas Stocks: Introduction
  2. Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance
  3. Key Ratios For Analyzing Oil And Gas Stocks: Conclusion
Oil and gas exploration and production (E&P) companies are unique from a valuation standpoint. Because of this, investors need to focus on a different subset of ratios to analyze the growth and profitability of these companies. Company revenues are important, but focus should be on netback. Oil and gas stocks are broken down into three parts:

1. Upstream

2. Midstream

3. Downstream

An oil and gas company can contain anywhere from one to all three parts. Upstream refers to E&P. The second is midstream. It includes storing, transporting and marketing of oil, natural gas liquids and natural gas. The last is downstream, which is the refining of crude and the distribution of its byproducts. These three are very different from a business and investment prospective. This article focuses on upstream and the key ratios used to analyze it.

SEE: Oil And Gas Industry Primer

Oil and gas E&P stocks have greater volatility when compared to other businesses. Oil and natural gas prices see large price swings in the face of good or bad economic news. Hedging helps to reduce a company's exposure to this risk. Finding and developing costs can also vary greatly depending on the play, and how aggressively others are working the area. Production costs are variable, as geology can differ significantly depending on the area. What separates oil and gas producers from other types of investments is depletion. Technology has increased oil production, but newer methods deplete resources at a much faster rate. Vertical wells produced oil in a more consistent fashion, where production initially increased. After a period of time that production would begin to deplete slowly. Conventional resources are now less common as most of the "easy oil" has been produced. Because of this, unconventional resources have become the main source of crude and natural gas in the United States. Horizontal drilling has high initial production rates. Depletion rates are also high, and begin immediately after production starts. Oil sands are also providing a new resource base, with extensive reserves in Canada. Both oil sands and shale provide little to no exploration risk and both types of resources are well defined.

To assess the value of an oil and gas E&P company, there are several variables of focus. Federal and state regulations can cause extrinsic problems for oil and gas. Changes in reserve pit rules are already creating additional costs. Reserve pits are where flowback is stored before the initial production phase. Fears of soil and aquifer pollution have pushed new rules. Frac water reuse is starting to be seen in some of the bigger plays. The blending of this with fresh water may become mandatory, as there are already issues with municipals being able to keep up with current water needs. Additional regulations could affect fracking, as has occurred in the Marcellus. Political risks can also affect the value of oil and gas stocks. Companies such as Marathon (NYSE:MRO) were negatively impacted by the civil war in Syria. Companies operating in the United States benefit from its stable government and politics.

SEE: Money And Politics

Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance
Related Articles
  1. Investing

    A Natural Gas Primer

    Learn why natural gas is playing a larger role in the energy industry.
  2. Investing

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  3. Investing

    How does crude oil affect gas prices?

    Understand the origins of oil, how its price is determined and where its correlation with gas prices falls in the global economy.
  4. Investing

    A Look Inside The Natural Gas Pipeline

    The United States is the Saudi Arabia of natural gas, but natural gas stocks were a mixed bag last year.
  5. Investing

    How the Oil and Gas Industry Works

    The oil and gas industry has unique terminology that's crucial for investors to understand.
  6. Investing

    Fracking Can't Happen Without These Companies

    With all the attention paid to fracking, what is are the good investment opportunities? Are the companies that extract oil and natural gas a good bet?
  7. Investing

    Natural Gas Industry: An Investment Guide

    Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
  8. Investing

    4 Reasons Natural Gas Is So Cheap

    An unseasonably warm winter wasn't the only reason why prices were cheap.
  9. Investing

    The 7 Biggest Canadian Energy Companies (IMO.TO, TRP)

    Read about the largest seven Canadian energy companies as measured by market capitalization, and learn more about their energy operations.
Frequently Asked Questions
  1. Interest Rate Risk Between Long-Term and Short-Term Bonds

    Find out the differences and effects of Interest rates between Long-term and short-term bonds. Read how interest rate risk ...
  2. How Are Dividends Pay from Exchange-traded funds (ETFs) ?

    Learn how Exchange-traded funds (ETFs) pay out the full dividend that comes with stocks held within the fund. Understand ...
  3. Who are Walt Disney's main competitors?

    Learn about how creating entertainment has been Walt Disney's niche since the 1920s, even as it faces ever-increasing competition ...
  4. Knowing the difference between EE and I bonds

    Read about the similarities and differences between the EE saving bonds and I savings bond programs created by the U.S. Department ...
Trading Center