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 5.1% is what investors should be looking for in this industry.
Fixed-asset turnover ratio, or 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 0.55 looks pretty good.
Total enterprise value/discounted future cash flows 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 give any credit for unproved reserves.
With these factors in mind, let's take a look at Penn West Petroleum (NYS: PWE) and see how it stacks up against its peers:
Return on Assets
Fixed-Asset Turnover Ratio
Penn West Petroleum
Source: Capital IQ, a Standard & Poor's company; company filings.
Penn West Petroleum' assets don't seem to generate great returns compared to its peers and the industry at large. Its asset turnover is among the weakest as well. The company hasn't really recovered since the recession.
The company's price-to-book value looks cheap. However, this might be justified. The ratio is now below its five-year historical average of 1.41. It seems investors are staying away from this stock. This could either mean a buying opportunity, or it might altogether be a bad buy. Investors should dig deeper.
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, Penn West Petroleum doesn't appear to offer the best opportunity in the industry.
We at The Motley Fool will help you to stay up to speed on the top news and analysis on Penn West. You can start by adding it to your watchlist.
At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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