Size and Profitability in the International Oil and Gas Industry
Magne Emhjellen and Flemming Helgeland Introduction The largest vertically integrated oil companies, the so called super majors, show better results than smaller oil companies on core financial indicators and market metrics. Some central target figures that financial analysts use are returns on the capital employed, P/E ratios and EV/EBITDA. The different measures are presented and explained and how they vary according to a company’s size is illustrated. Thereafter, the reasons for this variation in financial indicators is discussed and connected to the consolidation process occurring in the oil business. Profitability Profitability shows the return on capital that is put into a company. One of the main terms used to measure results is defined as follows2:
RoACE = Return on average capital employed = (Net income + after tax net interest costs) / (Total capital – interest-free debt). Capital employed is part of the denominator while income on the same capital
is found in the numerator. The return above the fraction line must be the return on the capital entered below the fraction line. Thus, it is the result before interest costs that is part of the numerator when calculating total profitability (RoACE). Operat1 We would like to thank Trond Bjørnenak, Kjell Agnar Dragvik, Arnold Drange, Harald
Espedal, Kristian Falnes, Frøystein Gjesdal, Morten Halleraker, Odd Rune Heggheim, Atle Johnsen, Morten Lindbäck, Kjell Løvås, and Arnstein Wigestrand for their constructive comments and suggestions. Correspondence: Petter Osmundsen, Stavanger University College, Department of Industrial Economics, Section for Petroleum Economics, Post Box 8002, 4068 Stavanger, Norway. Ph.: (47) 51 83 15 68, Fax: (47) 51 83 17 50,
E-mail: [email protected], Internet: http://www.snf.no/Ansatt/Osmundsen.htm 2 For the sake of simplicity, minority interests are not included in the formulas.