I talked a little last week about the “recycle ratio”.
This is a tool every oil and gas investor needs to understand. Without exaggeration, if you used only this one number to analyze stocks (and used it correctly—more on that in a moment) you’ll beat the market. Simple as that.
The recycle ratio is a deceptively simple, but incredibly powerful tool for uncovering quality companies in the E&P space. It cuts through the reams of data we get today on corporate performance - elegantly combining reserves reporting and financial results into one, easy-to-understand number.
This figure shows just how much value your stock is creating when it comes to drilling and developing. It’s far superior to many of the other measures analysts use:
• Dollars of market capitalization per flowing barrel – Doesn’t take into account that all flowing barrels are different. A barrel that flows for three years is worth a lot less than one that pumps for ten.
• Finding, development and acquisition (FD&A) costs – Great for showing a company’s performance on the micro level (i.e., per barrel) but doesn’t give any indication of the scale at which this is being achieved.
• Reserves growth – Growing reserves is great, but it’s critical to know how much it costs. Anyone can grow reserves if they spend enough money drilling…