Price Per Flowing Barrel
Categories: Metrics
We sure do love being able to do stuff like drive our car and heat our home in the winter, which is why we’re such big fans of oil and gas companies (ignoring for the moment their climate-slaying properties). But not all oil and gas companies are created equal, which is why we’re even bigger fans of something called “price per flowing barrel.”
“Price per flowing barrel” is one way we can assess the value of an oil and gas company, and it’s basically how much a company pays for each sweet, flowing barrel of industry juice. In order to calculate this metric, we need four crucial pieces of information: an organization’s market capital (MC), its debt (D), its per-day barrel production (BPD), and how much cash it has (C). Once we know that, we put it into an equation like so:
(MC + D – C)/BPD = price per flowing barrel
If Olive’s Oil & Gas Co. has a market cap of $50M, $30M in debt, $5M in cash, and produces 40,000 barrels of oil per day, then its price per flowing barrel is (50,000,000 + 30,000,000 – 5,000,000)/40,000, or $1,875.
This is a pretty simplified way of assessing a company’s value. And depending on what we want to do with this information, it can be of somewhat limited use. For example, if Olive’s Oil & Gas is sitting on top of a ginormous undeveloped oil field, we won’t see that recognized in its price per flowing barrel. And if we’re hoping this metric will help us compare two different oil companies, it will…but only if they’re super similar. But what it can help us do is identify market trends. If we see that many companies’ prices per flowing barrel are decreasing at the same time, it might be a red flag that the oil and gas market is about to see a bit of a financial downturn. And if we’re in the business of investing in oil and gas, that can be a very handy piece of information indeed.
