What it means
Oil is measured in barrels, natural gas in thousand cubic feet (written Mcf) and some liquids in gallons. Adding those numbers together makes no sense, so energy companies convert everything into a single unit.
When the unit is gas, the result is called natural gas equivalent, usually shown as Mcfe or Bcfe (billion cubic feet equivalent). The standard industry conversion is six Mcf of gas for one barrel of oil.
It is based on the approximate heat content of each fuel, not on what either one sells for. That distinction matters because it is a measure of energy, not of value.
Investors and lenders meet this figure constantly in reserve reports, production updates and acquisition models. It allows a quick comparison of a gas-heavy producer with an oil-heavy one, and it lets unit costs such as operating cost per Mcfe be calculated on a consistent base.
The big nuance is that the energy ratio and the price ratio often drift far apart. If oil sells at a much higher price per unit of energy than gas, a company can have a large equivalent volume but modest revenue.
Analysts therefore look at the production mix as well as the headline equivalent number. Some companies reverse the conversion and report barrels of oil equivalent (BOE), which divides gas volumes by six instead.
The two methods use the same ratio and give the same answer, only expressed in a different unit, so it is vital to check which unit a report is using before comparing companies.
In practice
Real-world examples.
Example
An exploration company in a finance meeting reports that production grew to 5 billion cubic feet equivalent this quarter. The analyst asks how much of that is oil, because the revenue per unit will look very different if most of it is gas.
Example
A private equity buyer evaluating an oil and gas acquisition converts all the target's reserves into Mcfe so that it can compare the price paid per Mcfe against similar deals in the market.
Example
A utility company with a fuel-supply contract tied to gas prices converts the energy content of a delivered fuel oil cargo into gas equivalent to check whether it is cheaper to burn oil or gas for the next month.
Formula
Calculation
Natural gas equivalent (Mcfe) = Gas volume (Mcf) + (Oil volume in barrels x 6)
Worked example: a small producer sells 300,000 Mcf of gas and 20,000 barrels of oil in a year.
Oil converted to gas equivalent = 20,000 x 6 = 120,000 Mcfe
Total production = 300,000 + 120,000 = 420,000 Mcfe
Suppose gas sells at $3 per Mcf and oil at $60 per barrel. Revenue = (300,000 x $3) + (20,000 x $60) = $900,000 + $1,200,000 = $2,100,000.
Revenue per Mcfe = $2,100,000 / 420,000 = $5.00 per Mcfe.
Notice that oil is only 120,000 of the 420,000 Mcfe (about 29% of volume) but brings in $1,200,000 of the $2,100,000 revenue (about 57%), which shows why the equivalent figure alone can mislead.Case study
Seen in the real world.
Redwater Basin Energy is an illustrative, fictional company with two divisions. One drills mainly for gas and the other drills mainly for oil, and the board wanted a single production target to reward managers across both.
The finance director proposed a target of 500,000 Mcfe for the year. The gas division quickly hit its share of the target because gas volumes were large, while the oil division fell short even though it earned far more revenue per unit.
After the first quarter the board added a second measure, revenue per Mcfe, alongside the volume target. In this illustrative story the lesson was that an energy-equivalent figure is a useful common yardstick, but it needs a value measure next to it.
Watch out
Common mistakes.
- Assuming the six to one ratio reflects relative prices, when it only reflects approximate energy content.
- Comparing a company reporting Mcfe with one reporting barrels of oil equivalent without converting to the same unit first.
- Treating a rising equivalent production number as proof of rising profit, when the mix shifting towards low-priced gas can mean volume goes up while revenue falls.
Questions
People also ask.
Why do companies use six as the conversion factor?
It is a long-standing industry convention that roughly matches the heat content of a barrel of oil to the heat content of gas, so it is easy to apply and widely understood.
Is Mcfe the same as BOE?
They use the same six to one ratio but are expressed in different units, so one barrel of oil equivalent equals six Mcfe.
Can other fuels be converted to a gas equivalent?
Yes, any fuel with a known heat content can be converted, and natural gas liquids are commonly included using either the same ratio or their own energy-based factors.
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