There are hundreds of ways to evaluate oil companies, and each of them will give you a different result as who is the best. As investors, we can’t rely on one metric alone, but instead we need to understand a multitude of ways to look at these companies to make better decisions.
Today, let’s look at one of the lesser used metrics and decide what oil companies are the best based on it.
Buying the future at a discount
Whenever an oil company produces oil, it depletes its reserves. So for a company to continue its growth, it needs to replace these reserves through either exploration of new fields or by acquiring someone else’s assets. The price a company pays to replace that barrel of oil it just produced are known as reserve replacement costs, and they can be a strong indicator of how a company will perform in the future.
In 2012, we saw reserve replacement costs jump to levels we haven’t seen since 2008, and some of the integrated majors, the biggest producers in the U.S., have well above average reserve replacement costs. Ultimately, high reserve replacement costs can lead to two things: more money dedicated to operational cash flow, and higher prices for consumers on the final products.
Who’s doing it the best?
It can be pretty handy to evaluate the entire industry on how efficiently it’s replacing reserves, but reserve replacement costs can be more effective in evaluating individual companies. The lower the costs, the better it is. According to Ernst & Young, the most effective company at controlling reserve replacement costs is private company Antero Resources, with a three-year average reserve replacement cost of about $2.88 per barrel of oil equivalent. Antero, and four of the other top five companies on Ernst & Young’s list, are almost pure natural gas plays. If we’ve learned one thing over the past couple of years, it’s that oil reserves and natural gas reserves are two totally different things when it comes to value. The five following companies have more than 50% liquids on their reserves and had the lowest reserve replacement costs for 2012.