What it means
Oil and gas companies are often valued on what is in the ground, but reserves are uncertain and may take years to produce. Flowing barrels refer to oil that is being produced right now, usually measured in barrels per day.
Price per flowing barrel focuses on this current output, which is easier to verify than future reserves. The calculation is simple: take the purchase price, or the enterprise value, and divide by daily production.
If a buyer pays $150,000,000 for assets producing 5,000 barrels a day, the price per flowing barrel is $30,000. The figure tells you how much you are paying for each barrel of daily output.
Analysts use it to compare transactions and to judge whether an offer is high or low relative to similar deals. A buyer paying much more per flowing barrel than others needs a reason, such as better quality oil, lower operating costs or strong growth prospects.
Likewise, a seller who receives a low figure may have sold cheaply. It is a quick screening tool and has clear limits.
It ignores the size of reserves, the cost of operating the wells, the pace at which production declines, the price of oil and the debt that comes with the assets. Two assets with the same price per flowing barrel can be very different in value if one declines quickly and the other lasts for decades.
Because of this, professionals use it alongside other measures such as price per barrel of proven reserves, operating cash flow multiples and net asset value. It is most useful for a first comparison, before detailed engineering and financial work starts.
Be careful with the definition of production. Check whether the figure includes gas converted into oil equivalent, whether it is net or gross of royalties, and whether it is current, average or forecast.
Mixing definitions makes the comparison unreliable.
In practice
Real-world examples.
Example
A mid-sized exploration company buys producing wells for $60,000,000 with output of 2,000 barrels a day. The price per flowing barrel is $30,000. The board compares it with three recent deals in the same region, which averaged $27,000. It then asks engineers whether higher oil quality justifies the extra $3,000 per barrel.
Example
A private equity firm sells a stake in a field producing 8,000 barrels a day for $200,000,000. The price per flowing barrel is $25,000. The buyer notes that the lower figure reflects fast decline rates in the field.
Example
An analyst screens takeover candidates by price per flowing barrel. Shares in a smaller producer imply $18,000 per barrel, much lower than peers at $30,000. She investigates whether heavy debt explains the gap. Using enterprise value, which includes debt, gives a fairer comparison than using share prices alone.
Formula
Calculation
Price per flowing barrel = purchase price (or enterprise value) / daily production in barrels.
A buyer acquires oil assets for $150,000,000. They currently produce 5,000 barrels a day. Price per flowing barrel = $150,000,000 / 5,000 = $30,000. A second deal values similar assets at $90,000,000 for 4,000 barrels a day, or $90,000,000 / 4,000 = $22,500. The first deal costs $7,500 more per flowing barrel, so the buyer asks why. The figure only compares the price with current output. If production falls by 25% next year, the same $150,000,000 would buy only 3,750 barrels a day, and the effective price per flowing barrel would rise to $40,000, which shows why decline rates matter.Case study
Seen in the real world.
Redrock Petroleum is a fictional producer used here for illustration. It agreed to buy a neighbour's wells for $120,000,000, with production of 4,000 barrels a day.
The price per flowing barrel was $30,000, in line with the $29,000 average of recent regional deals. But engineers found that output was falling about 25% a year, which meant the barrels would not last as long as they appeared.
The illustrative buyer negotiated the price down to $102,000,000, or $25,500 per flowing barrel, reflecting the faster decline. The simple ratio started the conversation, and technical analysis finished it.
Watch out
Common mistakes.
- Treating it as a complete valuation. It ignores reserves, decline rates, costs and debt.
- Mixing oil and gas figures without converting. Check whether production is stated in oil equivalent barrels.
- Comparing deals with different oil prices at the time. A higher oil price lifts what buyers will pay.
Questions
People also ask.
What does flowing barrel mean?
It refers to a barrel of oil produced each day from current operating wells.
How does it differ from price per reserve barrel?
Price per reserve barrel divides the price by the total recoverable barrels in the ground, not by daily output.
Is a lower price per flowing barrel better for the buyer?
Not always, because a low price may reflect fast decline, high costs or poor-quality oil. A buyer should always test the figure against engineering reports.
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