When it comes to the oil and gas industry, assets matter a lot. For companies operating here, there’s nothing more important than reserves, rigs, submersibles, and refineries. However, these assets must be capable of generating profitable returns.
Value for money
These returns indicate whether a given company has the capability of using its assets efficiently and profitably. After all, it makes little sense for an exploration and production company to have a lot of acreage but not the ability to extract the oil (or natural gas, for that matter) within. In short, it pays to find out how valuable these assets are to the company.
Here, we will find out whether a given company’s assets are profitable and efficient compared to its peers based on some important metrics:
- Return on assets, or net income divided by total assets, shows how much the company is earning compared to the assets it controls. The ratio is an indication of how effectively the company is converting the money it has invested in reserves, property and other equipment into net earnings. The higher the value, the more profitable the assets are. The metric is pretty useful when used as a comparative measure -- against peers and also against the industry in general. A value greater than 7.5% is what investors should ideally be looking for in this industry.
- Fixed-asset turnover ratio, or revenues divided by total fixed assets (like plant, property, and equipment). Fixed assets form a major chunk of total assets for companies in this industry. This metric shows how efficiently the company is using its fixed assets to generate revenues. The higher the turnover rate, the better. A value of 1.2 looks ideal.
- Total enterprise value/discounted future cash flows shows how expensive the company is when compared to its standardized future cash flows. The denominator indicates the total present value of estimated future cash inflows from proven reserves, less future development and production costs, discounted at 10% per annum. It’s based on today’s energy prices and doesn’t give any credit for unproven reserves.
With these in mind, let’s take a look at Canadian Natural Resources (NYSE: CNQ ) and see how it stacks up against its peers:
|
Company
|
Return on Assets
|
Fixed-Asset Turnover Ratio
|
P/B
|
TEV/DFCF
|
| Canadian Natural Resources |
3.1% |
0.3 |
1.78 |
1.23 |
|
Cenovus Energy
(NYSE: CVE )
|
4.6% |
1.2 |
2.81 |
2.27 |
|
Suncor Energy
(NYSE: SU )
|
4.6% |
0.7 |
1.27 |
1.56 |
|
EnCana
(NYSE: ECA )
|
1.4% |
0.3 |
1.07 |
1.41 |
Source: Capital IQ, a division of Standard & Poor's.
Canadian Natural’s assets don’t seem to generate great returns compared to its peers and the industry at large. Its asset turnover is among the weakest as well.
Deeper analysis suggests that the company is the cheapest among its peers when compared to its future cash flows. Also, if we consider the company’s probable reserves, future cash flows could increase by up to 40%. However, that largely depends on various factors including management’s future capital expenditures program and the intervening market conditions. Given these figures, I feel that the stock is fairly priced compared to its book value.
Foolish bottom line
While this is not the only criterion, assets generally indicate how oil and gas companies have been faring in terms of operations. A more comprehensive understanding can be sought by digging deeper, but Canadian Natural doesn’t appear to offer the best returns in the industry.
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