Oil and Gas industry

Hydrocarbons make up crude oil and natural gas, which are naturally occurring substances found in rock in the earth's crust. These organic raw materials are created by the compression of the remains of plants and animals in sedimentary rocks such as sandstone, limestone, and shale.

The sedimentary rock itself is a product of deposits in ancient oceans and other bodies of water. As layers of sediment were deposited on the ocean floor, the decaying remains of plants and animals were integrated into the forming rock. The organic material eventually transforms into oil and gas after being exposed to specific temperatures and pressure ranges deep within the earth's crust.

The oil and gas industry is broken down into three main segments: upstream, midstream, and downstream.

E&P companies measure oil production in barrels. One barrel, usually abbreviated as bbl, is equal to 42 U.S. gallons. Companies often describe production in terms of bbl per day or bbl per quarter.

A common methodology in the oil patch is to use a prefix of "M" to indicate 1,000 and a prefix of "MM" to indicate 1 million. Therefore, 1,000 barrels are commonly denoted as Mbbl, and 1 million barrels are denoted as MMbbl. For example, when an E&P company reports production of seven Mbbl per day, it means 7,000 barrels of oil per day.

As is the case for drilling, many public companies are involved in well service activity. The revenue of service companies is tied to the activity level in the oil and gas industry. Rig count and utilization rates are indicators of the amount of activity happening in the United States at any given time.

Natural gas production is described in terms of cubic feet. Similar to the convention for oil, the term Mmcf means 1 million cubic feet of gas. Bcf means 1 billion cubic feet and Tcf represents 1 trillion cubic feet.

E&P companies often describe their production in units of barrels of oil equivalent (BOE). To calculate BOE, companies usually convert gas production into oil equivalent production. In this calculation, one BOE has the energy equivalent of 6,040 cubic feet of gas or roughly one bbl to six Mcf.

Oil quantity can be converted into gas quantity in a similar fashion and gas producers often refer to production in terms of gas equivalency using the term Mcfe.

E&P companies report their oil and natural gas reserves—the quantity of oil and gas they own that is still in the ground—in the same bbl and mcf terms. Reserves are often used to value E&P companies and make predictions for their revenue and earnings. Public oil and gas companies are required to disclose proven oil and gas reserve quantities as supplementary information, but not as part of their financial statement.

Of course, new reserves are an essential source of future revenue, so E&P companies spend a lot of time and money exploring new untapped reservoirs. If an E&P company stops exploring, it will have only a finite amount of reserves and a depleting quantity of oil and gas. Revenue will inevitably decline over time. In short, E&P companies can only maintain or grow revenue by acquiring or finding new reserves.