The energy sector comprises of oil and gas, utilities, nuclear, coal, and alternative energy companies. But for most people, it's the exploration and production, drilling, and refining of oil and gas reserves that make the energy sector such an attractive investment. Choosing the right investment—whether that means purchasing shares in an oil and gas company, an 澳洲幸运5官方开奖结果体彩网:exchange-traded fund (ETF), or a mutual fund—to help you make a profit means you'll have to do your homework, just like the professiꦺonals ꧒do.

Analysts in the oil and gas sector use five 澳洲幸运5官方开奖结果体彩网:multiples to get a bette🐭r idea of how companies in the sector are faring against th🌃eir competition. These multiples tend to expand in times of low commodity prices and decrease in times of high commodity prices. A basic understanding of these widely-used multiples is a good introduction to the fundamentals of the oil and gas sector.

Enterprise Value/EBITDA

The first multiple we'll look at is EV/EBITDA—澳洲幸运5官方开奖结果体彩网:enterprise value compared to earnings before interest, tax, depreciation, and amortization This multiple is also referred to as the 澳洲幸运5官方开奖结果体彩网:enterprise multiple.

A low ratio indicates that the company might be 澳洲幸运5官方开奖结果体彩网:undervalued. It is useful for transnational comparisons as it ignores the distorting effects of different taxes for each country. The lower the multiple the better, and in comparing the company to its peers, it could be considered 🥂undervalued if the multiple is low.

The EV/EBITDA ratio compares the oil and gas business—free of debt—to EBITDA. This is an important metric as oil and gas firms typically have a great deal of debt and the EV includes the cost of paying it off. EBITDA measures profits before interest. It is used to determine the value of an oil and gas company. EV/EBITDA is often used to find takeover candidates, which is common within the oil and g🍸as sector.

Exploration costs are typically found in the financial statements as exploration, abandonment and dry hole costs. Other non-cash expenses that should be added back in are 澳洲幸运5官方开奖结果体彩网:impairments, accretion of 澳洲幸运5官方开奖结果体彩网:asset retirement obligations, and deferred taxes.

Advantages of EV/EBITDA

One of the main advantages of the EV/EBITDA ratio over the better-known 澳洲幸运5官方开奖结果体彩网:price-earnings ratio (P/E) and the 澳洲幸运5官方开奖结果体彩网:price-to-cash-flow ratio (P/CF) is that it is unaffected by a company's 澳洲幸运5官方开奖结果体彩网:capital structure. If a company issued more shares, it would decrease the earnings per share (EPS), thus increasing the P/E ratio and making the company look more expensive. But its EV/EBITDA ratio would not change. If a company is highly 澳洲幸运5官方开奖结果体彩网:leveraged, the P/CF ratio would be low, while the EV/EBITDA ratio would make the company look average or ♓rich.

Enterprise Value/Barrels of Oil Equivalent Per Da𓆉y

This is enterprise value compared to daily production. Also referred to as 澳洲幸运5官方开奖结果体彩网:price per flowing barrel, this is a key metric used by many oil and gas analysts. This measure takes the enterprise value (market capitalization + debt – cash) and divides it by 澳洲幸运5官方开奖结果体彩网:barrels of oil equivalent per day, or BOE/D.

All oil and gas companies report production in BOE. If the multiple is high compared to the company's peers, it is trading at a premium. If the multiple is low amongst its peers, it is trading at a discount.

As useful as this metric is, it does not take into account the potential production from undeveloped fields. Investors should also determine the cost of developing new fields to get a better idea of an oil company's 澳洲幸运5官方开奖结果体彩网:financial health.

Enterprise Value/Proven and Probable Reserves

This is enterprise value compared to proven and probable reserves (2P). It's an easily calculated metric which requires no estimates or assumptions. It helps analysts understand how well its resources will support the company's operations.

Reserves can be proven, probable, or 澳洲幸运5官方开奖结果体彩网:possible reserves. 澳洲幸运5官方开奖结果体彩网:Proven reserves are typically known as 1P. Many analysts refer to it as P90, or having 90% probability of being produced. 澳洲幸运5官方开奖结果体彩网:Probable reserves are referred to as P50 or having a 50% certainty of being produced. When used in conjunction with one another, they are referred to as 2P.

The EV/2P ratio should not be used in isolation, since reserves are not all the same. However, it can still be an important metric if little is known about the company's 澳洲幸运5官方开奖结果体彩网:cash flow. When this multiple is high, the ꦗcompany would trade at a premium for a given amount of oil in the ground. A low 😼value would suggest a potentially undervalued firm.

EV/3P can also be used. That is proven, probable, and possible reserves together. However, as possible reserves have only a 10% chance of bein▨g produced it is not as common.

Price/Cash Flow Per Share

澳洲幸运5官方开奖结果体彩网:Oil and gas analysts often use price compared to cash flow per share or P/CF as a multiple. Cash flow is simply harder to manipulate than 澳洲幸运5官方开奖结果体彩网:book value and P/E ratio.

The calculation is simple. Take the price per share of the company that is trading and divide it by the 澳洲幸运5官方开奖结果体彩网:cash flow per share. To limit the effects of 澳洲幸运5官方开奖结果体彩网:volatility, a 30-day or 60-day 澳洲幸运5官方开奖结果体彩网:average price can be used.

The cash flow, in this case, is the 澳洲幸运5官方开奖结果体彩网:operating cash flow. That number does not reflect exploration expenses, butܫ it does include non-cash expenses, depreciation, amortization, deferred taxes, and d🧜epletion.

This method allows for better comparisons across the sector. For the most accurate 🍰results, the share amount in calculating cash flow per share should use the fully diluted number of shares. One disadvantage of this meꦦthod is that it can be misleading in case of above average or below average financial leverage.

Enterprise Value/Debt-Adjusted Cash Flow

This is EV/DACF—enterprise value compared to 澳洲幸运5官方开奖结果体彩网:debt-adjusted cash flow. The capital structures of oil and gas firms can be dramatically different. F꧋irms with higher levels of debt will show a 🌠better P/CF ratio, which is why many analysts prefer the EV/DACF multiple.

This multiple takes the enterprise value and divides it by the sum of 澳洲幸运5官方开奖结果体彩网:c𒁏ash flow from operating activities and all financial charges including 澳洲幸运5官方开奖结果体彩网:interest expense, current income taxes, and preferred shares.