When it comes to the oil and gas industry, assets matter a lot. For companies operating in this space, there's nothing more important than reserves, rigs, submersibles, and refineries. However, these assets must be capable of generating profitable returns.
Value for money
That's because these returns indicate whether a company has the capability to use its assets efficiently and profitably. After all, it makes little sense for an exploration and production company to have a lot of acreage but no ability to pull out the oil -- or natural gas, for that matter. In short, it pays to find out how valuable these assets are to the company.
Here, we'll find out whether a given company's assets are profitable and efficient compared with its peers based on some important metrics:
- Return on assets, or net income divided by total assets. This metric shows how much the company is earning compared with 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 5.0% is what investors should be looking for in this industry.
- The fixed-asset turnover ratio, or revenues divided by total fixed assets, such as plant, property, and equipment. Fixed assets form a major chunk of total assets for companies in this industry, and 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 0.55 looks pretty good.
- Total enterprise value/discounted future cash flows, which 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 account for unproven reserves.
With these factors in mind, let's take a look at Berry Petroleum
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| Berry Petroleum | 2.7% | 0.3 | 2.31 | 1.39 |
|
SandRidge Energy |
(1.6%) | 0.3 | 2.04 | 1.58 |
|
Oasis Petroleum |
4.6% | 0.4 | 4.33 | 5.10 |
|
Bill Barrett |
4.2% | 0.4 | 1.72 | 2.27 |
Sources: Capital IQ, a division of Standard & Poor's; company filings.
Berry Petroleum's assets don't seem to generate great returns compared with its peers and the industry at large. Moreover, its asset turnover is among the weakest.
Deeper analysis suggests that the company is not too expensive among its peers when comparing its future cash flows from proven reserves. However, that's not too surprising given the unimpressive returns. With these figures in mind, I think the stock is priced appropriately compared with its book value and reserves.
Foolish bottom line
This isn't the only criterion you can use, although assets generally indicate how oil and gas companies have been faring in terms of operations. You can get a more comprehensive understanding by digging deeper. However, on the surface, Berry Petroleum doesn't appear to offer the best returns in the industry.
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