Qualified investors looking to diversify their portfolio can discover many opportunities within the oil and gas industry – specifically, through the oil and gas drilling sector. However, it would be important to remember that specific metrics should be taken into consideration to make informed investment decisions, such as gauging a firm’s level of profitability. One of the major determinants of a firm’s profitability is its profit margin.
A profit margin is used to assess the degree to which a business or a firm activity makes money. It shows the amount of percentage of sales that has been converted into profits. Investors look into a firm’s net profit margin or profit margin by using a simple calculation to identify a business’ revenues.
A business’ net profit margin will give shareholders a deeper look into how a firm is able to convert its revenue to profits for its investors.
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The profit margin is computed by completing the following calculation:
Total revenue – total expenses ÷ total company revenue
The net profit margin is computed by completing the following calculation:
Total revenue – total expenses = net income ÷ total company revenue
Net Profit Margin = [(Revenue – COGS – Operating Expenses – Other Expenses – Interest – Taxes) / Revenue] X 100
Note that this calculation does include taxes, depreciation, and interest expenses, but does not consider common stock dividends.
Profit Margin of the Oil and Gas Drilling Sector
To view the latest average net profit margin of the oil and gas industry from the NYU Stern, click here. The industry average considers the profit margins of many small-, mid-, and large-cap firms.
The impact of the COVID-19 Pandemic
The average net profit margin reported for 2021 will be impacted by the current pandemic. Excessive supply, generous financial markets, and competition from shale also had a harmful effect on the oil and gas drilling sector’s net profit margins.
On a hopeful note, IBISWorld states that revenues for businesses in the oil and gas sector are expected to recover over the next five years, as the rebounding economy, in general, is expected to renew industry demand.
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Sources:
“What Is an “Average Profit Margin Percentage”?” CHRON, https://smallbusiness.chron.com/average-profit-margin-percentage-22758.html
“What is a good profit margin?” Brex, https://www.brex.com/blog/what-is-a-good-profit-margin/
“Oil & Gas Field Services Industry in the US – Market Research Report.” IBISWorld, https://www.ibisworld.com/united-states/market-research-reports/oil-gas-field-services-industry/
“Oil and gas after COVID-19: The day of reckoning or a new age of opportunity?” McKinsey & Company, https://www.mckinsey.com/industries/oil-and-gas/our-insights/oil-and-gas-after-covid-19-the-day-of-reckoning-or-a-new-age-of-opportunity