Investors, creditors, owners, and executives use Key Performance Indicators (KPI) to evaluate the performance of their companies and investment partnerships. However, every company has its own set of Key Performance Indicators designed to evaluate physical operations, financial status, as well as the safety of the work environment. Often, the management comes up with a set of KPIs for different categories to gauge how the company is performing financially.
Keep in mind, the primary goal of a business is to make profits and maximize value. For a company to reap maximum gains, it must lower its cost of production significantly, while generating more revenue.
So what is a key performance indicator (KPI)?
A key performance indicator (KPI) is a system of measurement used to assess or evaluate crucial factors that fuel a business. The company uses these indicators as a reference to which the status of the business and development of the organization can be evaluated explicitly.
This article details extensively the most critical key performance indicators that a company can use to measure its performance, to achieve a higher return in natural gas and oil production, as well as to ensure the business is sustainable.
Capital Spend as a Key Performance Indicator
AFE stands for Authorization for Expenditure. It is a budget document for planning a project. The form contains expenditure estimates that a company hopes to spend. Authorization for Expenditure (AFE) management is exceptionally crucial for oil and gas investments. It is a continuous process that a company needs to pursue and monitor as soon as a project starts, and even after the budget is approved.
You need to monitor the project constantly to ensure it is running within the stipulated budget frame and that it is on the right track. As aforementioned, the primary goal of Capital Spend performance indicator is to provide expenditure estimates or projections to help the senior management know how much money they expect to spend on different projects.
Return on Capital Employed KPI
Return on capital employed, also called ROACE, is a mathematical model that shows the ratio of money that a company has invested in a project (capital) against profitability. According to Investopedia, ROACE is especially helpful in the oil and gas field because it helps to analyze business performance. Notably, a business that can make supernormal profits from stringent capital will realize a higher return on capital employed, as opposed to a company that cannot convert capital into gains.
As of now, several oil & gas companies in Texas utilize the ROACE model as a KPI. To calculate Return on Capital Employed, you must consider the aggregate of opening and closing capital employed. ROACE measures how a company uses the business capital to generate more profits and future earnings.
In many countries around the world oil and gas assets belong to the government, and not the drilling company: this is as a result of the contract between the host government and the company regarding production. For example, if your company spends say, $2000 on a drilling project, you are allowed to recover $2000 back from your host government.
Upstream oil and gas investments require much capital to set up and run. You have to set apart finances for site acquisition, extraction, development, as well as production. Each of this stage has its own set of demands. For example, in the production stage, you may have to carry out new exploration projects or appraisals in the brownfields. However, such activities depend entirely on the agreement you sign with your host government.
There are two ways to finance an oil well investment. You can either borrow funds from lenders or generate your capital internally (self-financing). Each of these methods of funding has an impact on the Return on Capital Employed. Also to note, since money is injected indirectly into the business, you may have to make some adjustments to the Capital Employed. Keep in mind the Return on Capital Employed percentage is always higher than the cost of capital
Lease Operating Expenses KPI
While the demand for crude oil and gas has remained constant over time, prices have changed drastically.
For this reason, oil companies in Dallas tx rely on thin margins to survive. Lease operating expenses are the costs that you incur to keep oil production running. This amount does not include drilling and building costs. As an oil and gas investor, you should monitor these costs and try as much possible to cut on any extra spending that might strain your initial budget.
Also, it would help if you made financial decisions based on lease operating expenses projections. These projections show the economic status of your company. The high-level data extracted from LOE KPI also allows you to conduct detailed analysis in this field of interest.
Capital project efficiency KPI
The last few years has seen many oil and gas exploration companies increase their budget capital expenditure, but the problem has been funds allocation, this is according to the audit firm PricewaterhouseCoopers. Also notably, prices per- barrel oil continue to fall, which in turn, affects capex.
This is because the entire industry is moving to oil and gas sites that are difficult to drill. For this reason, therefore, it is essential to evaluate and interpret capex persuasively: capital project efficient KPI is a broad standard of measurement that ensures proper budget allocation, project overrun, and maintenance expenditure.
Cash Flow KPI
The Economic Times defines cash flow as the amount of money that a business receives or pays out. Similarly, cash flow KPI analyses the liquidity state of a company. It chronologically outlines financial data about cash flow, total revenue, and overall expense in different regions. The cash flow information contains numerical values and bar graphs that let you see the best and the worst performing cash flows at the same time. It also provides information on each region of operation.
Many activities occur during an oil and gas operation, and because these activities are hazardous, oil and gas drilling companies work relentlessly to curb their impacts on workers and the environment at large. It is vital to ensure production remains constant and sustainable. Additionally, oil investment companies should create performance indicators that can provide credible insights to shareholders and investors, so that they can understand the financial health of the company among industry competitors, as well as to be a goldmine to investors.
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