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, which shows how much the company is earning compared 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. The metric is pretty useful when used as a comparative measure -- against peers and also against the industry in general. A value greater than 4.5% is what investors should ideally be looking for in this industry.
- Fixed-asset turnover ratio, which consists of revenue 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 revenue. The higher the turnover rate, the better. A value of 0.6 looks ideal.
- 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 give any credit for unproved reserves.
With these in mind, let’s take a look at QEP Resources
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| QEP Resources | 5.3% | 0.4 | 1.99 | 2.90 |
|
Newfield Exploration
|
5.8% | 0.3 | 1.90 | 2.01 |
|
Cimarex Energy
|
12.1% | 0.5 | 2.11 | 2.55 |
|
Whiting Petroleum
|
8.0% | 0.4 | 2.01 | 1.79 |
Source: Capital IQ, a Standard & Poor's company, and company filings.
QEP Resources’ assets don’t seem to generate great returns compared with some of its peers, though they are slightly better than the industry average. Its fixed-asset turnover doesn’t particularly stand out.
Deeper analysis suggests that the company is the most expensive amongst its peers when compared with its future cash flows from proved reserves. QEP’s peers look cheaper with better returns generated. Given these figures, I feel that the stock is fairly priced compared to its book value.
Foolish bottom line
While this is not the only criterion you can use, assets generally indicate how oil and gas companies have been faring in terms of operations. A more comprehensive understanding can be sought by digging deeper. With slightly worse returns than the industry average and a somewhat higher valuation, QEP Resources doesn't appear to offer the best value.
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