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BOE Is A Broken Metric

|Includes: Crescent Point Energy Corp (CPG), TRMLF

When valuing oil & gas companies, it is common to discuss their production in reference to 'barrel-of-oil equivalents', or BOEs. The metric has its justification in the fact that, roughly speaking, a barrel of oil has the same amount of energy as 5800 cubic feet of methane.

It is important to remember, however, that this is a energy equivalent, not an economic one. And so, at today's prices:

  • 1 boe of WTI oil is worth US$53.
  • 1 boe of Natural gas, priced at the AECO hub in Alberta, sells for roughly C$18 = US$13.50 (1 boe = 6000 cubic feet @ CAN$2.50 pcf)

A result of this is that the boe is almost useless as a means of evaluating energy companies, especially if they produce much natural gas.

In order to compensate, an energy company's ratio of gas to 'liquids' (oil, condensate, etc.) is often identified. For example, the production of oil-heavy Canadian producer Crescent Point Energy (NYSE:CPG) is only 10% gas, while gas-heavy Tourmaline Oil (which was not well-named) is 88% gas.

Reporting the gas percentage provides a useful signal in these cases. It would be better, however, to avoid the boe metric completely, especially for gas heavy names. Instead, production should be reported in cubic feet of natural gas and barrels of liquids.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.