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
Returns indicate whether a given company is capable 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 pull out the oil or natural gas 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 against 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 against the industry in general. A value greater than 3.5% is what investors should be looking for in this industry.
- Fixed-asset turnover ratio is 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 0.5 looks ideal.
- Total enterprise value / discounted future cash flows shows how expensive the company is when compared against its standardized future cash flows. The denominator indicates the total present value of estimated future cash inflows from proved 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 unproved reserves.
Let's take a look at Oasis Petroleum
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| Oasis Petroleum | 4.6% | 0.3 | 4.24 | 5.0 |
|
EXCO Resources
|
3.2% | 0.5 | 1.74 | 3.54 |
|
Rosetta Resources
|
7.3% | 0.6 | 4.37 | 3.60 |
|
Brigham Exploration
|
5.6% | 0.4 | 5.07 | 4.19 |
Source: Capital IQ, a Standard & Poor's company; company filings.
Compared to its peers, Oasis Petroleum's assets don't seem to generate great returns, even though the returns are slightly better than the industry average. Its asset turnover is among the weakest, as well.
Deeper analysis suggests that the company is most expensive among peers when compared against its future cash flows from proved reserves. While estimated reserves have improved in the past three years, this does not truly justify an enterprise value five times that of its future cash flows. Keeping these figures in mind, I feel that the stock is overpriced compared to its book value and reserves.
Foolish bottom line
While this is not the only criterion investors should consider, 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 Oasis doesn't appear to offer the best opportunity in the industry.
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