Considering that corporate Canada is in the midst of earnings season and energy prices are skyrocketing, it’s a good time to revisit how barrels of oil equivalent (BOE) are reported for oil and gas producers.
By law, the ‘energy equivalence ratio’ states that 6,000 cubic feet of natural gas is equal to 1 barrel of oil. But with natural gas prices hovering around $4 (U.S.) per mcf and oil prices hovering around $100, the ‘market’ ratio is more like 20:1.
The difference has a big effect on some reported costs metrics, such as comparing finding, development and acquisition (FD&A) expenses to reserve additions, noted TD Securities analyst Roger Serin. If “not all BOEs are created equal,” as Mr. Serin says, the metric can’t be applied equally across the entire oil and gas industry.
Mr. Serin illustrates his point using Advantage Oil and Gas Ltd as an example, which has a heavy natural gas weighting. The company reported about a 20 per cent production growth rate for the coming year, but that growth is actually more like 12 per cent at market conversion rates.
However, his main point isn’t that some companies benefit more than others. He simply points out that when comparing across the industry, analysts and investors need to make sure that they compare ‘apples to apples,’ or companies that have similar oil and gas weightings in their portfolios.