Why costs matter
One of the major factors that sets an energy company—indeed, any business—apart, is its cost of doing business. For energy companies, this is mainly their Finding and Development (F&D) cost. As the term suggests, this is simply the cost an energy company incurs in the process of purchasing, leasing, exploring, drilling, and developing (via infrastructure and equipment) oil and gas fields.
All else being equal, companies with lower costs will report higher profits.
Finding and Development costs
In a recent investor presentation, Denbury Resources (DNR) put its F&D costs into perspective by comparing itself to a selection of its comparable peers.
While the ranking of each peer was not revealed, the peers it chose for this exercise included companies like Continental Resources (CLR), Concho Resources (CXO), Pioneer Natural Resources (PXD), Sandridge Energy (SD), SM Energy (SM), and Whiting Petroleum (WLL).
It may be noted that while CLR, CXO, PXD, and WLL are oil-heavy producers like Denbury, SM Energy, and Sandridge Energy are producers that have a better balance between oil and gas. All of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Denbury placed itself roughly in the middle of this peer group with a two-year average F&D cost of ~$21.50 per barrel of oil equivalent. But, in absolute dollar terms, Denbury placed itself closer to its lowest cost peer than its highest cost peer.
As a measure of capital efficiency, Denbury also calculated how much in operating profits (or EBITDA) the companies earned, when scaled by their F&D costs. Lower F&D costs and higher price realizations typically push capital efficiency higher.
We’ll discuss Denbury’s price realizations in the following part. In the meantime, alluding to its superior F&D costs, Denbury estimated its own capital efficiency ratio at ~275%—the second highest in its selected peer group.