What it means
Oil is measured in barrels and gas in cubic feet, which makes a company producing both impossible to summarise in one figure without a conversion. The standard industry convention treats 6,000 cubic feet of natural gas as one barrel of oil equivalent, because that volume of gas carries roughly the same energy as a barrel of crude.
The measure matters because almost every headline number in the sector is quoted per BOE. Production, reserves, operating cost, cash flow and acquisition prices are all expressed this way, so analysts can line up a gas-weighted producer against an oil-weighted one.
Reserves disclosures use the same unit, usually written as MBOE for thousands and MMBOE for millions. A company reporting 40 MMBOE of proved reserves is saying its booked reserves equal 40 million barrels of oil once the gas has been converted.
The nuance that catches people out is that energy equivalence is not price equivalence. Six thousand cubic feet of gas and one barrel of oil hold similar energy, but they frequently sell for very different money, so a gas-heavy BOE figure can be worth far less in revenue than an oil-heavy one of the same size.
For this reason analysts also look at the oil and gas split behind the total, and sometimes at a price-weighted equivalent instead. Two companies can report identical BOE production and generate quite different cash flow if one is 80% oil and the other 80% gas.
Costs are quoted on the same basis, which is where the measure earns its keep in management reporting. Dividing total operating cost by total BOE gives a cost per unit that can be tracked month by month and compared with the realised price per BOE to show the cash margin on every unit produced.
In practice
Real-world examples.
Example
An analyst comparing two producers finds both reporting 90,000 BOE of quarterly output. She splits the figures and sees one is 75% oil and the other 75% gas, which explains why the first generates nearly double the revenue from the same headline production.
Example
A lender sizing a reserve-based loan values a borrower's proved reserves at 12 MMBOE and applies a discounted cash flow test per BOE rather than per barrel. Using the common unit lets the credit committee compare the proposal with gas-weighted deals already in the book.
Example
A board reviewing an acquisition divides the $294,000,000 asking price by the target's 14 MMBOE of proved reserves to get an acquisition cost of $21 per BOE. The number is then compared with recent transactions in the same basin before the bid is approved.
Formula
Calculation
BOE = barrels of oil + (cubic feet of natural gas divided by 6,000). Suppose a producer reports 40,000 barrels of oil and 120,000,000 cubic feet of natural gas for a quarter. The gas converts to 120,000,000 divided by 6,000, which is 20,000 BOE. Total production is 40,000 + 20,000 = 60,000 BOE for the quarter. If the company realised an average of $70 per BOE, quarterly revenue would be 60,000 multiplied by $70, which is $4,200,000. With operating costs of $18 per BOE, total operating cost is 60,000 multiplied by $18, which is $1,080,000, leaving an operating margin of $4,200,000 - $1,080,000 = $3,120,000, or $52 per BOE.Case study
Seen in the real world.
Kestrel Basin Energy is an invented producer used here for an illustrative case study. Its board approved a growth target expressed purely in BOE, asking management to raise production from 50,000 to 70,000 BOE per quarter within two years.
Management hit the target by developing cheap gas acreage, lifting output to 71,000 BOE per quarter. Because the extra volume was almost entirely gas, the average realised price per BOE fell from $62 to $48, and quarterly revenue barely moved despite the 42% rise in reported production.
The fictional lesson is that a volume target in BOE can be met without improving the financial result. Kestrel's board rewrote the incentive to measure cash flow per BOE alongside volume, which changed which projects management brought forward.
Watch out
Common mistakes.
- Assuming one BOE of gas is worth the same money as one barrel of oil, when the conversion is based on energy content and not on market price.
- Comparing two producers on headline BOE alone without checking the oil and gas mix behind the total.
- Mixing up MBOE and MMBOE in a model, which is a factor of 1,000 and has turned many spreadsheets into nonsense.
Questions
People also ask.
What conversion rate is used?
The common industry convention is 6,000 cubic feet of natural gas to one barrel of oil equivalent, based on approximate energy content.
Why not just report oil and gas separately?
Companies do disclose both, but a single unit is needed to state total production, total reserves and per unit costs in one figure that can be compared across companies.
Is BOE used for anything beyond production?
Yes, it is the standard denominator for reserves, operating cost, capital spending, acquisition prices and cash flow in the oil and gas sector.
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