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. However, these assets must be capable of generating profitable returns.
Value for the money
That's because these returns indicate whether a company has the capability to use 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. 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 compared with 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 be looking for in this industry.
- The fixed-asset turnover ratio, or 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 0.55 looks pretty good.
- Total enterprise value/discounted future cash flows, which 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 account for unproven reserves.
With these factors in mind, let's take a look at Southwestern Energy
Return on Assets
Fixed-Asset Turnover Ratio
Source: Capital IQ, a division of Standard & Poor's; company filings.
Southwestern Energy's assets generate the best returns compared with its peers, and its returns are well above the industry average. The company's fixed-asset turnover is also better than that of its peers, though it's on par here with the industry average.
The company looks a tad expensive when we compare its future cash flows from proven reserves. However, I'm not too surprised, given the historically consistent and strong rate of returns.
In addition, a price-to-book of 4.16 might make the stock look a little expensive compared with its peers. However, a five-year historical average P/B of 5.6, coupled with a consistently strong rate of returns, suggests that the stock may well be undervalued.
Foolish bottom line
These aren't the only criteria 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, Southwestern Energy appears to be doing pretty fine.
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Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.