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 company is capable 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 compared among peers and 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 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 revenue. The higher the turnover rate, the better. A value of 0.75 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 Devon Energy (NYS: DVN) and see how it stacks up against its peers:
Return on Assets
Fixed-Asset Turnover Ratio
Source: Capital IQ, a Standard & Poor's company; company filings.Devon Energy's assets don't seem to generate bad returns compared with some of its peers or the industry average. However, its fixed-asset turnover ratio appears a bit weak.
Deeper analysis suggests that the company is the most expensive of the group when comparing future cash flows from proved reserves. But I expect its reserves to grow. Onshore production hit a record 600,000 barrels of oil equivalent per day last quarter, with a lot more properties yet to be developed. The newer and hotter shale plays will see further drilling this year, and that should bring down the multiple's value.
Keeping this in mind, I feel that the stock may actually be slightly underpriced compared to its book value.
Foolish bottom line
This isn't the only way to evaluate a company, although assets generally indicate how well 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, Devon Energy appears to be doing fine.
If you'd like to stay up to speed on the top news and analysis on Devon Energy, add it to My Watchlist.
At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Devon Energy. 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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