What Is a Recycle Ratio?

A recycle ratio, or recycle rate, is a key profitability measure of the oil and gas industry. The ratio is calculated by dividing the profit per barrel of oil by the cost of fin༺ding and dev꧂eloping that barrel of oil.

The profit per barrel is known in industry terminology as "netback," and 澳洲幸运5开奖号码历史查询:finding and development costs are abbreviated to "F&D." The higher the ratio, the better, with a sustained ratio over 1x a necessa♚ry condition for an oil and gas producer to stay in business.

Understanding a Recycle Ratio

Netback, or 澳洲幸运5开奖号码历史查询:operating netback (to be more precise), is equivalent to revenues minus production expenses, transportation expenses, and royalties on a per 澳洲幸运5开奖号码历史查询:barrel of oil equivalent (BOE) basis. 澳洲幸运5开奖号码历史查询:Finding and development costs 🔜in their most basic form are⭕ equivalent to exploration and development costs per BOE of proved reserves added during the year. FD&A, another number often reported in conjunction with F&D, adds costs of acquisition.

The F&D number indicates whet💛her an oil and gas company is adding reserves at a low or reasonable cost. If an energy firm generates an operating netback of $50 per barrel and its F&D costs were $25 per barrel, itꦿs recycle ratio would be 2x.

Both netback and F&D costs are non-澳洲幸运5开奖号码历史查询:Internati🐻onal Financial Reporting Standards (IFRS) and non-澳洲幸运5开奖号码历史查询:generally accepted ac🥂counting principles (GAAP) measures given mainly by Canadian prꦛoducers and some U.S. producers to provide investors and analysts information to assess their profitability per barrel relative to the field cost of rep🐈lacing that barrel. The recycle ratios are tracked through cycles and used for peer comparisons.

Oil and gas companies have control only in certain components of the recycle ratio. For example, the price at which they sell a barrel of oil is for the most part out of their hands as they cannot control 澳洲幸运5开奖号码历史查询:oil prices. A♚n oil and gas company can control its costs of finding and developing oil, such as prov🅺iding accurate information to geologists, reducing frack stages, and implementing more consistent well-to-well placement.

Real-World Example

The recycle ratio is subject to variations to the simplified version above. Canadian Natural Resources Limited reported 2018 recycle ratios of 8.7x and 11.8x for proved reserves and proved plus probable reserves. The denominator was FD&A, excluding changes in future development costs (FDC).

Added to the set of recycle ratios was FD&A including the change in FDC. With FDC changes, the recycle ratios were 2.9x for proved reserves and 2.5x for proved plus probable reserves. This shows tꦦhat there may be numerous recycle ratios in the industry. To make performance comparisons across these oil 🔴and gas companies, it is essential that the components for the ratio are identical.