Recycle Ratio

Recycle ratio 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 finding and developing the barrel of oil. The profit per barrel is known in industry terminology as "netback," and finding and development costs are abbreviated to "F&D." The higher the ratio, the better, with a sustained ratio over 1x a necessary condition for an oil and gas producer to stay in business.

Netback, or "operating netback" to be more precise, is equivalent to revenues less production expenses, transportation expenses and royalties on a per barrel of oil equivalent (BOE) basis. Finding and development costs in its most basic form is 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 whether an oil and gas are 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, its recycle ratio would be 2x. Both netback and F&D costs are non-IFRS and non-GAAP measures given mainly by Canadian producers and some U.S. producers to provide investors and analysts information to assess their profitability per barrel relative to the field cost of replacing that barrel. The recycle ratios are tracked through cycles and used for peer comparisons.

The recycle ratio is subject to variations to the simplified version above. Canadian Natural Resources Limited reported 2017 recycle ratios of 4.5x and 4.2x for proved reserves and proved plus probable reserves. The denominator was FD&A, excluding future development costs (FDC). Added to the set of recycle ratios was FD&A including FDC. With FDC, the recycle ratios were 1.9x for both proved and proved plus probable reserves. The point is that 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.