WHY IS OIL A LOW PROFIT MARGIN BUSINESS

Profit margins for oil and gas are low compared to many other industries The low profit margins are the result of several factors Oil and gas companies have large capital expenditures (equipment, exploration, drilling, etc ) that are necessary to make sales The return on these investments can take years to realize The price of oil is set on the world market Once the cost of production is covered, the price of oil goes to the market price The oil market is very volatile Oil companies have to pay taxes Oil companies must pay taxes in the countries where they operate and then pay taxes in their home countries The cost of oil production is constantly changing The price of oil is constantly changing The cost of production is a result of many factors that must be evaluated WHAT IS TAX RATE? Tax rate is the rate at which a company pays taxes on its income The tax rate is based on a combination of factors including the companys income and the jurisdiction in which the company is located WHAT IS THE DIFFERENCE BETWEEN STRIPPING AND WET PRODUCTION COSTS? Stripping costs are costs associated with getting the oil out of the ground Wet production costs are costs associated with getting the oil out of the ground and into a pipeline Wet production costs include drilling, completion and production costs WHAT IS A COMPANY’S LEVERAGE? Leverage is the ratio of a company€™s debt to its assets WHAT IS THE DIFFERENCE BETWEEN CAPITAL EXPENDITURES AND DEPRECIATION? Depreciation is a non-cash expense that is used to match the cost of fixed assets with their useful life Depreciation is used to match the cost of an asset with the revenues that the asset generates Depreciation is usually calculated using the straight-line method Capital expenditures are expenditures used to replace fixed assets Capital expenditures are usually calculated using the straight-line method What is EBITDA? Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a measure of a company's profitability EBITDA is a measure of profitability for a company that does not include financial information about the company’€™s debt or interest expense