Used to assess oil and gas company efficiency and profitability

What is Netback?

Netback is a calculation used to assess companies specifically in the oil and gas industry. This benchmark considers the revenue generated from the sale of oil and gas, and nets it against specific costs required to bring the product to market. Often this is shown as a per barrel measurement. It essentially shows how much the company retains from the sale of a single barrel of oil or oil byproducts. Netback per barrel can be used to assess company efficiency over time or to compare a company to its competitors.


Netback Oil Graphic


Quick Summary

  • Netback is a benchmark used in the oil and gas industry to assess the profitability and efficiency of a company based on the price, production, transportation, and selling of their products
  • This benchmark is calculated by subtracting royalties, transportation, and other operating costs from revenue
  • Netback/barrels of oil/byproducts is a useful metric for assessing a company over time and comparing the company to its competitors
  • This benchmark can be found in the management discussion and analysis section of a company’s annual report


How is Netback Calculated?

Netback is calculated by starting with revenue and subtracting the costs of production, transportation, marketing, and other costs of bringing the oil and gas to market.:

Netback = Oil and Gas Revenue – Realized Loss on Financial Derivatives – Royalties – Operating Expenses – Transportation


Netback is often calculated as a per barrel of oil equivalent (BOE) instead, giving a more useful figure to assess the company by:

Netback/BOE = Price – Realized Loss on Financial Derivatives/BOE – Royalties/BOE – Operating Expense/BOE – Transportation/BOE


Why is Netback Important?

Netback is an important benchmark because it is a very useful measure for assessing a company without the bias of non-operating, financing, or other costs. Calculating this metric essentially tells an analyst how efficient the company is at producing and selling its oil and gas products. Taking this number per unit of barrels of oil equivalent gives a type of efficiency ratio. By monitoring netback/BOE over time, the efficiency of the company’s production, transporting and selling can be evaluated. A falling netback/BOE might indicate issues that should be further looked into.

Netback/BOE is also a very useful measure to look at when comparing different companies. Depending on the value, an analyst will be able to judge whether a company can more efficiently produce and market oil, allowing them to retain more profits from the sale of each barrel of oil. A higher netback/BOE will also show how able a company is at dealing with price volatility in the market. A higher netback/BOE suggests that in times of falling prices, the company would still be able to remain profitable.

Netback, however, is not a standardized equation. Different companies may calculate netback and netback/BOE using various methods and may include or exclude different items. Netback/BOE can still be used to look at changes over time for a specific company, however, when comparing the netback of competitors it is important to adjust the equation to ensure they are comparable values.


Netback – Worked Example

Let us consider an example of calculating the netback of a company. Say a company has oil and gas revenues of $11,000,000. They pay royalties of $300,000, transportation costs of $500,000, and have operating expenses of $3,800,000. If they sold 275,000 barrels of oil equivalents, what is their operating netback in dollars, and in dollars per barrel?

To calculate the operating netback, we start with revenues and subtract the costs of bringing the product to market:

Netback = $11,000,000 – $300,000 – $500,000 – $3,800,000 = $6,400,000

Here we see that the total netback is $6,400,000. To make this number more useful for analysts, netback per barrel can be calculated. Netback per barrels of oil can start with price, and each cost can be thought of as a per barrel cost. However, to calculate netback/BOE we can also simply divide the netback by the number of barrels:

Netback/BOE = $6,400,00/275,000 BOE = $23.27/BOE

The calculation for netback is generally found in the management discussion and analysis of a company’s annual report. This benchmark is most often shown in a table. Below illustrates what would generally be seen for a company:


Netback Table


Additional Resource

Thank you for reading CFI’s article on the netback benchmark. If you would like to learn more about related concepts, check out CFI’s other resources:

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