The Most Important Metric for an Oil & Gas Company (or at least I think so...)

2022 Edition

What’s up Crude Chronicle Crew.

Let’s jump right into it this week.

Oil & Gas is a very capital intensive business.

So the rate of return on capital is the most important metric for a management team to be judged by.

This got away from oil companies in the later part of the last cycle as they pursued growth.

But as my friend, @viscosityredux points out (HERE) when management started to get compensated on return metrics things turned for the better.

Now there are some things management can’t control. They can’t control the cycles (HERE)

But they can decide what to do at certain points in the cycle and that involves deploying capital.

(For my metrics I use NOPAT ROCE. How I calculate is at the end of this post.)

Take ExxonMobil formerly known as Standard of NJ, for over 100 years when ROCE rises (blue line with dots), the stock outperforms the market (orange line).

Exxon’s returns on capital drive relative strength