what is netback 
netback is a summary of all costs associated with bringing one unit of oil to the marketplace and the revenues from the sale of all the products generated from that same unit it s expressed as gross profit per barrel netback is calculated by taking the revenues from the oil less all costs associated with getting the oil to a market including transportation royalties and production costs price royalties production transportation netbackthis term is only used in reference to oil producers and their associated production activities understanding netbacknetback per barrel is determined by removing the costs of production from the average realized price resulting in a net profit per barrel amount these costs include importing transportation marketing production and refining costs and royalty fees producers with higher netback prices reflect a more operationally efficient oil company because they re receiving higher profits than their competitors from the materials produced netback strengths and weaknessesit bears noting that netback is not a generally accepted accounting principles gaap equation the formula presented here is a standard but various companies might calculate netback somewhat differently to some extent this can result in a less than perfect comparison between companies although growth or falling prices can still be an indicator of an oil company s fiscal health conversely the formula does not consider operating or other types of fluctuating costs so it is a measure of efficiency netback investment analysisnetback prices can be used to compare one oil producer to another the oil producer with the higher netback price is effectively more profitable than the one with the lesser netback amount although netback demonstrates variances in profitability it doesn t indicate the reason for the variance differences in netback pricing can be caused by variations in production techniques such as whether the company is participating in land based or offshore operations as well as with different locales varying regulations between nations can cause discrepancies in overall cost from one producer to the next any challenges posed by the political instability within a region can present unique issues regarding transportation or general safety changes in netback prices attributed to a single company over time can also demonstrate whether production is becoming more or less cost effective if a selected oil company s netback price has been increasing over time it might be indicative of future success within the industry while a company showing falling netback prices might be a cause for concern for investors real world exampleit might cost an oil producer 125 to convert one barrel of light crude oil into heating oil gasoline diesel and petrochemical byproducts it owes royalties of 25 and it will cost 100 to transport the oil to the buyer the netback would be 75 assuming a sales price of 325 325 less 125 less 25 less 100 this figure allows exploration and production e p firms to compare the producer s costs with those of its competitors it also allows for more efficient planning regarding which products a company should focus on producing 