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'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 in relation to the assets it controls and offers 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. The metric is pretty useful when used as a comparative measure -- against peers and the industry in general. Investors should look for a value greater than 5% 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, 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 0.45 looks pretty good.
- Total enterprise value/discounted future cash flows, which shows how expensive the company is compared with 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 Ultra Petroleum (NYSE: UPL ) and see how it stacks up against its peers.
|
Company
|
Return on Assets (TTM)
|
Fixed-Asset Turnover Ratio
|
P/B
|
TEV/DFCF
|
| Ultra Petroleum |
11.5% |
0.3 |
3.31 |
1.72 |
| SM Energy (NYSE: SM ) |
4.5% |
0.5 |
3.07 |
2.82 |
| EXCO Resources (NYSE: XCO ) |
3.2% |
0.3 |
1.48 |
3.24 |
| SandRidge Energy (NYSE: SD ) |
(1.6%) |
0.3 |
1.65 |
1.43 |
Sources: Capital IQ, a division of Standard & Poor's; company filings. TTM = trailing 12 months.Ultra's assets generate the best returns among these peers. However, its needs a little work.
Deeper analysis suggests that the company is on the inexpensive side compared with peers' future cash flows from proven reserves. With great returns on assets, Ultra Petroleum looks to be in a fine position. Keeping these figures in mind, I think the stock is priced fairly relative to 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, Ultra Petroleum appears to be doing fine.
We at The Motley Fool will help you to stay up to speed on the top news and analysis on Ultra Petroleum. You can start by adding it to your Watchlist.
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