What is Operating Netback?
Operating netback is a measure used in the oil and gas industry to reflect the net profit on oil and gas after royalties, production, and transportation expenses.
How Does Operating Netback Work?
The formula for operating netback is:
Operating Netback = Price - Royalties - Production - Transportation
Let's assume that Company XYZ drills for oil in the Gulf of Mexico. For every barrel of oil it sells, it must pay $5 in royalties, $5 in production costs, and $10 in transportation costs. A barrel of oil sells for $100. Using the formula above, Company XYZ's operating netback is:
Operating Netback = $100 - $5 -$5 - $10 = $80
Why Does Operating Netback Matter?
Operating netback is important in the oil and gas industry because it allows analysts to compare the operations of different oil and gas producers without being distracted by nonoperating, financing, or other extraneous costs. It simply shows how efficient the company is at extracting and selling its product.
However, it is important to note that operating netback is a non-GAAP measure, meaning that different companies might use different formulas to calculate the measure. Thus, it is important to learn how each company calculates operating netback when conducting comparisons.