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, and these assets must be capable of generating profitable returns -- which indicate whether a 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 no ability to pull out the oil (or natural gas, for that matter).
Here, we'll look at 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, which shows how much the company is earning compared in relation to 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. This metric is pretty useful when used as a comparative measure -- against peers and against the industry in general. A value greater than 5.3% is what investors should be ideally looking for in this industry.
- Fixed-asset turnover ratio, which consists of 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 0.8 looks ideal.
- Total enterprise value/discounted future cash flows, which shows how expensive a 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 give any credit for unproven reserves.
With these factors in mind, let's look at EOG Resources (NYSE: EOG) and see how it stacks up against its peers.
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| EOG Resources | 1.6% | 0.4 | 2.03 | 2.28 |
| Talisman Energy (NYSE: TLM) | 4.7% | 0.5 | 1.80 | 1.87 |
| Chesapeake Energy (NYSE: CHK) | 3.1% | 0.3 | 1.69 | 2.42 |
| Imperial Oil (AMEX: IMO) | 10.7% | 1.7 | 2.75 | 1.68 |
Sources: Capital IQ, a division of Standard & Poor's; company filings.
EOG Resources' assets don't seem to generate great returns compared with its peers and the industry at large. Its fixed-asset turnover is among the weakest as well.
Deeper analysis suggests that the company is on the expensive side when compared with peers' future cash flows from proven reserves. With stronger returns on assets and turnover, some peers do indeed look cheaper. Keeping these figures in mind, I think the stock is a little overpriced 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, but even on the surface, EOG Resources doesn't appear to offer the best returns in the industry.
If you'd like to stay up to speed on the top news and analysis on EOG Resources, add it to My Watchlist.
