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 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 the industry in general. Investors should be looking for a value greater than 4.1%.
- 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 0.44 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 Concho Resources
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| Concho Resources | 5.4% | 0.3 | 3.19 | 2.48 |
|
Range Resources
|
(3.9%) | 0.2 | 5.10 | 3.72 |
|
SandRidge Energy
|
(1.6%) | 0.3 | 1.88 | 1.52 |
|
Pioneer Natural Resources
|
3.5% | 0.2 | 1.86 | 2.03 |
Source: S&P Capital IQ and company filings. TTM = trailing twelve months.
Concho's assets generate the best returns among these peers. Also, these returns are above the industry average. However, its fixed-asset turnover could do better.
Deeper analysis suggests that the market has factored in the company's profitability. A comparison with peers' future cash flows from proved reserves gives a similar picture as well. Keeping these figures in mind, the stock might be priced fairly relative to its book value and reserves. Nevertheless, with fairly decent return on assets, Concho looks to be in a fine position.
The 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, Concho Resources appears to be doing fine.
The Motley Fool can help you to stay up-to-speed on the top news and analysis on Concho Resources. You can start by adding it to your Watchlist.
