The oil and gas industry is one of the most capital-intensive businesses in the world. Oil and gas companies' high earnings are necessary to enable the massive investments needed to strengthen America's rising oil and gas production. Companies' earnings allow millions of dollars to be reinvested into technologies that can aid future growth as well as satisfy shareholders' lofty expectations.
So, why should such importance surround oil and gas company earnings, particularly for those outside the industry? According to an article published by the American Petroleum Institute, many Americans don't even realize that they actually own a portion of "Big Oil." Many workers who invest a portion of their savings, whether contributing through their employer's 401(k) plan or directly through an investment firm, chances are great that those accounts include oil and natural gas stocks.
Sonecon LLC reported that 31.2% of all pension funds hold energy stocks. Mutual funds account for nearly 21% of investment in oil and gas companies, and almost 18% of all individual retirement accounts invest in oil and gas stocks.
With the ownership of these energy stocks, a vital and solid oil and gas business is essential for the security of many Americans' retirement portfolios. Many state-funded employees-such as teachers, police officers, and fire fighters-are reaping the benefits of their state-funded pension plans with strong returns performed by investment in oil and natural gas companies. According to Sonecon, "returns on oil and natural gas assets in the top two state funds in 17 states, which include almost half of all the people covered by state and local pension fund plans in the US, average 42¢ for each dollar invested compared with just 6¢ for other assets in these funds from 2005-09."
Similar profit margins
Many times the oil and natural gas industry is criticized for its large quarterly or annual profits, but the fact is the industry is in line with other major manufacturing industries when it comes to profit margins. Earnings just show one side of a company's financial performance. When assessing the strength of a company, the profit margin provides a valuable tool to equate financial performance with other industries. Profit margins can be measured by net income divided by sales.
Based on statistics reported by the US Census Bureau for second-quarter 2014 company filings, the oil and natural gas industry's profit margins were 7.2¢ of net income per dollar of sales, while all manufacturing earned at 9.3¢. Comparing other industries profit margins, the computer industry tops the list at 24.6¢ of net income per dollar of sales, beverage and tobacco at 22.2¢, and pharmaceuticals at 22¢.
Investing back
Oil and natural gas companies must have strong earnings to continue to be competitive and innovative so they can sustain themselves within the marketplace. They typically devote the largest portion of their earnings to add to their capital projects.
Company management's responsibility is to build value for their shareholders and they do this by repurchasing the company stock. When they repurchase stock, the added value to the company is beneficial to the owners of the companies-the shareholders who have invested in hopes of a sensible return on their investment. Earnings also are used to pay out dividends to shareholders.
Earnings reports that are released each quarter are a vital component to the overall picture of the industry. Oil & Gas Journal publishes each quarter the revenues and earnings of a group of oil and natural gas operating companies and refiners. The results for the most recent quarter's earnings can be found in the article starting on p. 20.