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 pull out 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 with 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 also against the industry in general. A value greater than 3.4% is what investors should be looking for in this industry.
- Fixed-asset turnover ratio, which 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 0.45 looks pretty good.
- 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.
With these factors in mind, let's take a look at Quicksilver Resources (NYSE: KWK ) and see how it stacks up against its peers:
|
Company
|
Return on Assets
|
Fixed-Asset Turnover Ratio
|
P/B
|
TEV/DFCF
|
| Quicksilver Resources |
5.1% |
0.3 |
1.27 |
2.18 |
W&T Offshore
(NYSE: WTI ) |
8.7% |
0.6 |
2.27 |
1.55 |
McMoRan Exploration
(NYSE: MMR ) |
(3.8%) |
0.4 |
1.75 |
2.63 |
Kodiak Oil & Gas
(NYSE: KOG ) |
0.7% |
0.2 |
3.18 |
8.11 |
Source: Capital IQ, a Standard & Poor's company; company filings.
Quicksilver Resources' assets generate better returns than most of its peers and the industry at large. However, its asset turnover does not look particularly impressive.
Deeper analysis, however, suggests that the company is more toward the expensive side among peers when comparing its future cash flows from proven reserves. Scrutinizing the balance sheet reveals a debt of almost $2 billion, which translates into a debt-to-equity of 184%. While this might sound alarming, an encouraging factor is that this value has fallen from 306% 12 months back. Still, Foolish investors must keep an eye on this figure.
Price-to-book value looks cheap. The ratio is now well below the company's five-year historical average of 4.41. It seems investors have been staying away from this stock lately. Investors should dig deeper.
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. On the surface, though, Quicksilver Resources appears intriguing.
We at Motley Fool will help you stay up to speed on the top news and analysis on Quicksilver Resources. You can start by adding it to your watchlist.
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