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 also against the industry in general. A value greater than 4.9% is what investors should be looking for in this industry.
- 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 above 0.84 looks pretty good.
- Total enterprise value/NTM EBITDA shows how expensive the company is when compared against its earnings before interest, tax, depreciation, and amortization in the next 12 months.
With these factors in mind, let's take a look at Precision Drilling
Return on Assets (TTM)
Fixed-Asset Turnover Ratio
Source: S&P Capital IQ. TTM = trailing 12 months; NTM = next 12 months.
Precision Drilling's assets generate healthy returns when compared with its peers'. Additionally, at 5.8%, its ROA is higher than the industry average. However, its fixed-asset turnover needs some work.
While the company's price-to-book looks a tad higher than that of peers, in absolute terms, I feel this value is still on the cheaper side. This is well supported by its total enterprise value/EBITDA being relatively low compared to peers.
In terms of operations, Precision Drilling has a glut of long-term contracts in place. Thanks to the booming shale plays of North America, demand for the company's Tier 1 Super Series rigs as well as for associated services remains strong.
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, Precision Drilling seems to be doing fine.
We at The Motley Fool will help you stay up to speed on the top news and analysis on Precision Drilling. You can start by adding it to your watchlist.
Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Precision Drilling. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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