# Earnings Before Interest, Taxes, Depreciation, Depletion, Amortization and Exploration Expenses (EBITDAX)

## What it is:

Earnings before interest, taxes, depreciation, amortization and exploration expenses (EBITDAX) is a measure of a company's operating performance in the oil and gas industry. Essentially, it's a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events, tax environments or variations in the cost of exploration.

EBITDAX is calculated by adding back the non-cash expenses of depreciation and amortization as well as expenses related to exploration to a firm's operating income.

The formula for EBITDAX is:
EBITDAX = EBIT + Depreciation + Amortization + Exploration Expenses

## How it works (Example):

EBITDAX is calculated using the company’s income statement. It is not included as a line item, but can be easily derived by using the other line items that must be reported on an income statement.

Let's take a look at a hypothetical income statement for Company XYZ:

Using the formula above, Company XYZ's EBITDAX is:

EBITDAX = \$750,000 + 100,000 + 50,000 + 10,000 = \$910,000

## Why it Matters:

EBITDA is one of the operating measures most used by analysts, but EBITDAX is far less popular. EBITDAX does not factor in the direct effects of financing decisions, making it easier to compare companies' operating performance, but it also does not factor in exploration costs that may skew results or not be characteristic of the company on a normal basis. As a result, EBITDAX allows analysts to focus on the outcome of operating decisions while excluding most of the impacts of non-operating decisions. This allows investors to focus on normal operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry. In the oil and gas industry, EBITDAX helps analysts determine how much money a company would "really" have to cover loan payments that result from an acquisition, for example.

EBITDAX, like EBITDA, can also be deceptive when applied incorrectly. It is especially unsuitable for firms saddled with high debt loads or those that must frequently upgrade costly equipment. Furthermore, EBITDAX can be trumpeted by companies with low net income or terrible exploration talent in an effort to "window-dress" their profitability. EBITDAX will almost always be higher than reported net income.

Also, because EBITDAX isn't regulated by Generally Accepted Accounting Principles (GAAP, a framework of accounting standards, rules and procedures), investors are at the discretion of the company to decide what is, and is not, included in the calculation from one period to the next. Therefore, when analyzing a firm's EBITDAX, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments, and, of course, exploration expenses.