What Is the Average Profit Margin for the Oil & Gas Drilling Sector?
Oil and gas industry profit margins are an important variable for those considering energy investments and a perennial political issue when gasoline prices rise quickly.
Oil and gas industry profits are highly dependent on the revenue generated from sales of oil and gas, commodities subject to particularly sharp price swings. As a result, oil and gas profit margins tend to be volatile. That volatility means industry profit margins are more useful as signposts for recent trends than as a rationale for long-term investment or policy decisions.
Key Takeaways:
- Oil and gas production profit margins are volatile, varying widely with energy prices
- The average net profit margin for oil and gas production was 4.7% in 2021 and 31.3% in Q4 2021.
- Oil and gas production profits soared in 2021 as energy prices rebounded from a deep slump in the early stages of the COVID-19 pandemic.
- Net and operating income tends to understate oil and gas producers' cash flow, which can be invested in additional production or returned to shareholders.
Understanding Net and Operating Profit Margins
The net profit margin of a company is determined by dividing its net income (the difference between revenue and expenses) by revenue.
Net Profit Margin Percentage = [(Revenue – Cost of Goods Sold – Operating Expenses – Other Expenses – Interest – Taxes) / Revenue] X 100
Operating profit margin is calculated by dividing operating income (the difference between revenue and the sum of cost of goods sold, operating expenses and depreciation) by revenue.
Operating Profit Margin Percentage = [(Revenue – Cost of Goods Sold – Operating Expenses – Depreciation, Depletion & Amortization) / Revenue] X 100
Note that the main difference between net profit margin and operating profit margin is that the latter does not include interest, taxes and non-operating expenses other than depreciation, depletion and amortization (DD&A).
Because oil and gas producers often report considerable non-cash DD&A expense, profit measures such as net income and operating income often understate the cash flow available to be apportioned between dividends, share repurchases and capital spending.
Oil and Gas Drilling Profit Margin
In Q4 2021, the average net margin for oil and gas production was 31.3%, according to CSIMarket. That was up from 3.2% in Q3, -1.4% in Q2, and -22% in Q1, for a 12-month trailing average of 4.7%.
A different online data set based on fiscal year 2020 accounting data calculates the average net profit margin for the oil and gas production and exploration sector at about 2.8%.
The operating margin for oil and gas production was 44.4% in Q4 2021 and 23% for the full year, according to CSIMarket. For oil and gas exploration and production stocks included in the S&P 500 index, the aggregate operating profit margin was 19.6% in Q4 2021, according to Yardeni Research.
Oil & Gas Profit Trends
By the broadest measure used to calculate the gross domestic product, aggregate corporate profits from petroleum and coal products increased to a seasonally adjusted annual rate of $11.2 billion in Q3 2021, from $2.7 billion in Q2 2021 and losses at a $55.6 billion annual rate in Q3 2020. Those figures include midstream profits from shipping and storing crude and downstream income from refining it in addition to the profits of the upstream oil and gas drillers.
Meanwhile, the reported net profits of 41 large publicly traded oil and gas producers and refiners, also in Q3 2021, totaled $16.7 billion, compared with a loss of $16.7 billion a year earlier. Chevron Corporation (CVX) alone reported Q4 2021 earnings of $5.1 billion and annual fiscal 2021 earnings of $15.6 billion. Chevron had $29.2 billion in annual cash flow from operations, free cash flow of $21.1 billion and spent $11.6 billion on dividends and share repurchases.
Industry critics contend oil industry profits would be better spent on lowering energy prices, with direct subsidies or through investments in increased production. Energy company investors have strongly disagreed, often pressing for increased share repurchases and dividends.
