Analyzing The Oil & Gas Industry For The Right Stocks
The oil & gas industry poses a challenge in identifying the right stocks for long term success. But some expert analysis can help.
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Stock trading and investing require a good deal of technical analysis specific to the sector you’re considering investing in. The oil & gas sector offers lucrative earning opportunities, but identifying the golden stocks out there could be challenging. There are some ways to do it though, by understanding the nature of the industry and the economic climate. Experts point out certain things to consider. Vital Ratios to Gauge the Health of the Oil Company Analysts consider the profitability ratios and the sustainability ratios of oil companies to analyze how they perform. That’s because unlike other manufacturing companies, oil and gas corporations don’t just grab raw materials for producing goods. They produce the end product from depleting natural resources. They need to constantly replace what they have produced. The aforementioned ratios therefore give a clear picture of the performance of these companies. It’s always important to gauge the future viability of oil companies since they deal with non-renewable energy sources that are getting exhausted. The Profitability Ratio •
Profit per Barrel With regard to the profitability ratio, you need to measure how profitable the company is as well as what it costs financially to produce that kind of profit. The profit per barrel, called “boe”, is calculated by measuring the earnings before the tax, interest and exploration expenses, abbreviated to EBITDAX, and comparing that to the cost of producing the barrel. Taking this figure into account, you soon realize that mere earnings cannot indicate the health and viability of the company – the cost of achieving the earnings needs to be competitive as well. ExxonMobil ($XOM), Pioneer Natural Resources ($PXD) and Newfield Exploration ($NFX) are the companies that are doing better than their competitors producing somewhat equivalent amount of barrels, based on this metric. $XOM has an EBITDAX of over $40 per barrel though its production cost is only around $13 per barrel, while its immediate competitor Chevron ($CVX) spends around $15 per barrel for an EBITDAX of $40 per barrel. $PXD has an EBITDAX of around $30 per barrel at a production cost of just $8 per barrel while its immediate competitor Hess Corporation ($HES) earned similar EBITDAX at around $18 per barrel, which is double the cost of $PXD.
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Capital Cycle Ratio Another metric used to gauge profitability is to analyze the costs of replacing the reserves of oil & gas being used by the company to produce oil, called the finding, development and acquisition cost (FD&A), and comparing that to the profit made in selling these reserves. This ratio is referred to as the capital cycle ratio, and when examining this ratio $CVX comes out on top with its three-year FD&A average being
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$30 per barrel and its equivalent EBITDAX average being $40 per barrel. Chesapeake ($CHK) has a roughly similar FD&A as $CVX, but its profitability or EBITDAX average is only slightly more than $10 per barrel. The Sustainability Ratio Moving on to the sustainability ratio, this involves analyzing whether the companies have a business model that can be sustained. For that you need to analyze how much companies spend on their capital expenditure, called “capex�, and compare that to their growth in production. Analyzing this metric, $PXD and $NFX are doing well. They are experiencing a three-year growth in production exceeding 20%, but with capital spending lesser than their competitors. Such expert insight and analysis is required for successful long term stock trading and investing. You can learn the art with online stock trading.
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