Using EBITDAX or EBITDA for E&P Company Valuation

Oil and gas companies involved in exploration and production (E&P) can use two different measures to evaluate their financial condition: earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses (EBITDAX) or earnings before interest, taxes, depreciation and amortization (EBITDA).

E&P companies operate much differently than companies in other industries, so it is crucial they use the appropriate measurement tool when calculating their value. A typical valuation measure, such as a price-earnings ratio, does not provide the same benefits as EBITDAX or EBITDA.

Benefits of EBITDAX and EBITDA

• Exclude the impact of certain accounting and structural issues associated with E&P companies
• Remove the effect of tax differences among local, state and national governments
• Provide a more uniform or standardized means for comparing E&P companies, regardless of geographic location
• Eliminate the effects of differences in existing capital structure or leverage among companies as these measures add back interest
• Exclude depreciation and amortization expenses

Selecting the right measure

The decision between using either EBITDAX or EBITDA is dependent upon the expenses and earnings associated with exploration, as well as the company’s current stage.

EBITDAX excludes the costs of exploration. Therefore, it should be used by E&P companies that deal with significant exploration related expenditures. On the other hand, EBITDA is better suited for a company that has steady revenue from existing production because it minimizes the impact of exploration expenses on earnings. 

Appropriate use of EBITDAX or EBITDA gives company leaders and investors a more relevant measurement of an E&P company’s value. Read more in the Midland-Reporter Telegram article EBITDAX and EBITDA: Using the best measure for E&P company valuation by Kaci Howell, Weaver’s director of valuation services.