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 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 5.0% is what investors should ideally be looking for in this industry.
- Fixed-asset turnover ratio, which consists of 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 0.5 looks ideal.
- Total enterprise value/discounted future cash flows, which shows how expensive the company is when 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 factors in mind, let’s take a look at Range Resources
|
Company |
Return on Assets |
Fixed-Asset Turnover Ratio |
P/B |
TEV/DFCF |
|---|---|---|---|---|
| Range Resources | (3.9%) | 0.2 | 4.48 | 3.32 |
|
Southwestern Energy
|
10.6% | 0.5 | 3.85 | 4.63 |
|
Pioneer Natural Resources
|
3.5% | 0.2 | 1.83 | 2.02 |
|
Concho Resources
|
5.4% | 0.3 | 3.26 | 2.52 |
Source: Capital IQ, a Standard & Poor's company; company filings.
Range Resources' assets generate negative returns. Compared with its peers and the industry at large, this is not very encouraging, though those losses were largely due to a (hopefully) one-time large asset writedown. Also, its fixed-asset turnover is among the weakest. While total production did increase by 29% in the first six months of 2011 compared with the corresponding period last year, this didn’t translate into returns.
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, Range 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 Range Resources, add it to My Watchlist.
