Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Operating Netback

What it is:

Operating netback is a measure used in the oil and gas industry to reflect the net profit on oil and gas after royalties, production, and transportation expenses. 

How it works (Example):

The formula for operating netback is:

Operating Netback = Price - Royalties - Production - Transportation

Let's assume that Company XYZ drills for oil in the Gulf of Mexico. For every barrel of oil it sells, it must pay $5 in royalties, $5 in production costs, and $10 in transportation costs. A barrel of oil sells for $100.  Using the formula above, Company XYZ's operating netback is:

Operating Netback = $100 - $5 -$5 - $10 = $80

Why it Matters:

Operating netback is important in the oil and gas industry because it allows analysts to compare the operations of different oil and gas producers without being distracted by nonoperating, financing, or other extraneous costs. It simply shows how efficient the company is at extracting and selling its product.

However, it is important to note that operating netback is a non-GAAP measure, meaning that different companies might use different formulas to calculate the measure. Thus, it is important to learn how each company calculates operating netback when conducting comparisons.

Related Terms View All
  • Maintenance Expenses
    For example, let's assume that Company XYZ is a restaurant chain. Its regular maintenance...
  • Zero Layoff Policy
    Let's assume Company XYZ is an organic grocery chain that has a zero layoff policy. The...
  • Pale Recession
    Former Federal Reserve Chairman Alan Greenspan coined this term in a 2008 television...
  • Qualified Electric Vehicle
    Specifically, and according to the IRS, a qualified electric vehicle must have a battery...
  • Brokered Certificate of Deposit
    A CD is a time deposit with a bank or financial institution. The investor agrees to leave...