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
  • Life-Plus-Ten Option
    To understand how this works, let's assume you'd like to invest in an annuity that, after...
  • Market Letter
    Market letters offer advice to investors interested in investing in a particular market...
  • Par
    Let's assume Company XYZ issues $10 million in bonds to the public. It may do so by...
  • Pale Recession
    Former Federal Reserve Chairman Alan Greenspan coined this term in a 2008 television...
  • Realized Gain
    Let's assume you own 100 shares of Company XYZ that you purchased for $1,000. If the...