capex meaning

When you decide to buy equipment today, you are doing so because you believe that the equipment will generate future economic benefits, or profits. In this case you are quite literally expending capital (money) in exchange for other types of assets to help the business grow. Capex spending is often financed with the cost of an asset spread over its life. Moving onto the assumptions, maintenance capex as a percentage of revenue was 2.0% in Year 0 – and this % of revenue assumption is going to be straight-lined across the projection period.

Operating Expense (OpEx)

Yes, Steve, the last part you touched on is exactly the right way to think about it. Now we are very constructive on the longer-term gas forecast for demand in North America. And while U.S. production surprised to the upside in 2023, several developments have altered the U.S. supply outlook this year. Rig counts have remained flat over the past eight, nine months, and oil drilled but uncompleted or DUC inventory has been drawn down. And thank you for joining us for the EOG Resources first quarter 2024 earnings conference call. An updated investor presentation has been posted to the investor relations section of our website and we will reference certain slides during today’s discussion.

Types of Capital Expenditures (CapEx)

We recently drilled a 3.7 mile lateral on our [Inaudible] in the South, which is an EOG wide record lateral length. This well is scheduled to come online later this year, and we are excited to continue driving similar efficiencies as we increase our activity across this asset. For 2024, we are on target to drill and complete 20 net wells in the Utica across our northern, central and southern acreage, Navigating Financial Growth: Leveraging Bookkeeping and Accounting Services for Startups which supports a full rig program and enables significant well cost reductions. During the first quarter, we repurchased 6.4 million shares for $750 million, averaging about $118 per share. Since we began using our buyback authorization at the start of last year, we have bought back more than 15 million shares or nearly 3% of shares outstanding for an average price of about $115 per share.

capex meaning

The Role of Capital Expenditure in Corporate Financial Management

Given the expensive nature of capital expenditures, investors closely monitor how much debt is being taken on by a company to ensure the money is being spent wisely. For American businesses, generally accepted accounting principles (GAAP) often dictate how an expenditure is treated on their financial statements. They must understand the long-term financial implications of how their reporting will be affected and how external parties may view the company’s health. As such, a company must understand the long-term financial implications of how its reporting will be affected and how external parties may view the company’s health as a result. Since the management of capital expenditures in a large organization may involve numerous employees, departments, or even regions, clear policies for everyone to follow should be put in place to put the budget on track.

Impact on Capex of Step Costs

capex meaning

Therefore, the prior year’s PP&E balance is deducted from the current year’s PP&E balance. The reason that depreciation is added back is attributable to the fact that depreciation is a non-cash item. It is important to note that this is an industry specific ratio and should only be compared to a ratio derived from another company that has similar CapEx requirements. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. For example, an organization will buy a stone crusher that will be used for the entire life of the organization and can only be replaced if it is deemed as not sufficient to support the objectives of the organization.

  • Both choices can be good for your company, and different choices might be needed for different projects.
  • The key difference between capital expenditures and operating expenses is that operating expenses recur on a regular and predictable basis, such as in the case of rent, wages, and utility costs.
  • We also think the pull on natural gas this summer because pricing is soft, will also continue to be great as well.
  • Meanwhile, Company A’s ongoing production relies on a committed workforce, utilities, and consumption of materials—all examples of operating expenses.

Real-World Example of Capital Expenditures

  • Globally, spare capacity has kept inventory levels around the five-year average to start the year and we forecast these barrels returning to the market throughout the second half of the year and aligned with growing demand.
  • Shareholders who receive dividend payments pay close attention to CapEx numbers, looking for a company that pays out income while continuing to improve prospects for future profit.
  • It’s always difficult when you actually completely shutter a program.
  • Capex is used to buy or invest in tangible capital assets, such as real estate; raw materials; and plant, property and equipment (PP&E).

This means the company is investing money to drive future growth. Investing in long-term capital assets, such as acquiring a new business or purchasing real estate and equipment, would result in negative Capex cash flow. However, such capital outlays often reflect an optimism and aggressiveness on the part of company management and are seen as healthy for a company rather than negative.

For this reason, CapEx is considered a capitalized expenditure and not an expense. In this simple example, the choice to buy these future economically productive assets represents CapEx. In the final two steps, we’ll project PP&E and then back out the implied capital expenditure amount using the formula mentioned earlier.

Although capital expenditures are very massive, they are incurred only once in the lifespan of the organization. So I’d say we could look to increase the activity I think we’ve talked in the past of being prepared to increase it with the upcoming LNG and just overall demand. But as far as assigning a hard level to it, Steve, we’ll have the infrastructure in place. We have the not only the takeaway infrastructure but in basin, things like sand and water wines and things of that nature. Management must make the call on whether capital expenditures come directly from company funds or if they must be financed. Financing increases the debt level of a firm, which also needs to be taken into consideration.

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