Energy and Industrials Technical Interview Guide: Sector-Specific Metrics and Questions

The interviewer asks: "An oil company trades at 4x EV/EBITDA while a software company trades at 15x. Why the difference?"

If you answer "different growth rates," you've missed the point. The real answer involves capital intensity, reserve depletion, commodity price risk, and the fundamental economics that make energy and industrials different from every other sector.

These industries have their own language. PV-10, finding costs, reserve replacement ratios, NAV, capacity utilization, backlog—terms that mean nothing in tech or healthcare but everything in energy and industrials.

Here's what you need to know for sector-focused interviews in these capital-intensive industries.

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Why These Sectors Are Different

Capital Intensity

Energy and industrials companies require enormous upfront investments that generate returns over decades.

The implications:

• High fixed costs create operating leverage
• Profitability depends heavily on asset utilization
• Capital allocation decisions are critical
• Depreciation and amortization are meaningful (not just accounting entries)
• EBITDA can mislead because maintenance capex is real

Commodity Exposure

Many energy and industrials companies sell undifferentiated products whose prices are set by global markets.

What this means:

• Limited pricing power
• Earnings volatility tied to commodity prices
• Focus on cost position (being the low-cost producer)
• Hedging strategies matter
• Supply/demand dynamics drive valuation

Cyclicality

Both sectors experience pronounced economic cycles.

Energy cycles:

• Oil/gas prices swing dramatically
• Exploration and production activity follows prices
• Oilfield services amplify upstream cycles

Industrial cycles:

• Tied to GDP and industrial production
• Capital goods see more volatility than consumables
• Inventory cycles create whipsaws

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Energy Sector Fundamentals

The Energy Value Chain

Upstream (Exploration & Production): Finding and extracting oil and gas. High risk, high reward. Value tied to reserves.

Midstream (Transportation & Storage): Pipelines, terminals, storage facilities. Fee-based, less commodity exposure. More stable cash flows.

Downstream (Refining & Marketing): Converting crude into products (gasoline, diesel, chemicals). Margin-driven, spread between input and output prices.

Oilfield Services: Equipment and services for E&P companies. Highly cyclical, tied to drilling activity.

Key Energy Metrics

Reserves and Production:

Metric	What It Measures
Proved reserves (1P)	Reserves with 90%+ probability of recovery
Proved + Probable (2P)	Reserves with 50%+ probability
Reserve life (R/P ratio)	Years of production at current rates
Reserve replacement ratio	New reserves found vs. production

Valuation Metrics:

Metric	Formula	Usage
EV/EBITDA	Enterprise value / EBITDA	Standard operating multiple
EV/EBITDAX	EV / (EBITDA + exploration costs)	Removes exploration volatility
EV/BOE	EV / Barrels of oil equivalent	Per-unit reserve value
EV/Production	EV / Daily production	Per-flow value
PV-10	NPV of reserves at 10% discount	SEC-required reserve value

Cost Metrics:

Metric	What It Measures
Finding & Development (F&D)	Cost to find and develop reserves
Lifting costs	Operating cost per barrel
All-in sustaining costs	Total cash costs including maintenance
Breakeven price	Oil price needed to cover costs

Net Asset Value (NAV) Analysis

NAV is the primary valuation methodology for E&P companies.

The approach:

1. Value proved reserves using DCF

   • Project production profiles
   • Apply commodity price assumptions
   • Discount at appropriate rate (usually 10%)

2. Value probable/possible reserves

   • Apply probability weighting (50% for probable, 10-25% for possible)
   • Typically lower multiples of proved value

3. Add other assets

   • Land acreage value
   • Midstream assets
   • Other investments

4. Subtract net debt

5. Compare to market capitalization

NAV premium/discount: Companies trading above NAV are valued for growth potential. Below NAV suggests market skepticism about reserves or execution.

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Industrials Sector Fundamentals

Industrials Subsectors

Capital Goods: Machinery, equipment, electrical systems. Long sales cycles, project-based revenue.

Aerospace & Defense: Commercial aircraft, military systems. Long-cycle programs, government contracts.

Transportation: Airlines, railroads, trucking, logistics. Volume-driven, fuel cost exposure.

Building Products: Construction materials, HVAC, building systems. Housing and construction cycle exposure.

Diversified Manufacturing: Conglomerates with multiple industrial businesses. Sum-of-parts valuation common.

Key Industrials Metrics

Revenue Quality:

Metric	What It Measures
Backlog	Contracted future revenue
Book-to-bill	New orders / revenue (>1 = growing)
Organic growth	Growth excluding M&A and FX
Aftermarket %	Recurring revenue from parts/service

Operational Metrics:

Metric	What It Measures
Capacity utilization	Output / maximum capacity
Inventory turns	COGS / average inventory
Days sales outstanding	How quickly customers pay
Working capital % of sales	Capital tied up in operations

Profitability:

Metric	Usage
Gross margin	Manufacturing efficiency
Operating margin	Overall cost management
EBITDA margin	Cash-adjusted profitability
ROIC	Returns on invested capital

Valuation Approaches

EV/EBITDA: Standard multiple. Compare to historical average and peers.

Industrial Subsector	Typical Range
Diversified industrials	8-12x
Aerospace & Defense	10-14x
Capital goods	7-11x
Transportation	5-9x
Building products	7-10x

Sum-of-Parts (SOTP): For conglomerates, value each segment separately and sum.

Replacement Cost: For asset-heavy businesses, what would it cost to rebuild the asset base?

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Energy Interview Questions

Valuation Questions

"How do you value an E&P company?"

Use NAV analysis as the primary methodology:

1. Start with proved reserves. Apply a DCF using forward commodity prices and the company's production profile. Discount at 10% (industry standard).

2. Add probable and possible reserves at risk-adjusted values—typically 50% of proved value for probable, 10-25% for possible.

3. Value undeveloped acreage based on comparable transactions.

4. Add any midstream or other assets at market value.

5. Subtract net debt to get equity NAV.

Compare market cap to NAV. Premium suggests growth expectations; discount suggests concerns.

Cross-check with trading multiples: EV/EBITDA, EV/Production, EV/Reserves.

"Why do oil companies trade at low multiples?"

Several factors explain low multiples:

1. Reserve depletion: Unlike other businesses, E&P companies consume their core assets (reserves) through production. Without constant reinvestment, they shrink.

2. Capital intensity: High reinvestment requirements mean less free cash flow per dollar of EBITDA.

3. Commodity volatility: Earnings are unpredictable, driven by commodity prices beyond management's control.

4. Declining demand thesis: Long-term energy transition concerns reduce terminal values.

5. ESG investor exclusion: Some investors won't own fossil fuel companies regardless of valuation.

"Walk me through a NAV model."

Start with proved developed producing (PDP) reserves—the most certain category. Project production decline curves, multiply by forward prices, subtract operating costs, and discount at 10%.

Add proved undeveloped (PUD) reserves with development costs included. Apply timing assumptions for when they're developed.

Layer in probable reserves at 50% probability weighting and possible reserves at lower weightings.

Value any non-E&P assets separately: midstream, land, other investments.

Sum to gross asset value, subtract net debt, and arrive at equity NAV.

Sector Knowledge Questions

"What's the difference between PDP, PUD, and probable reserves?"

PDP (Proved Developed Producing): Already flowing. Wells drilled, infrastructure in place. Highest certainty.

PUD (Proved Undeveloped): Proved but not yet developed. Requires additional drilling or capital. More risk than PDP.

Probable: Not proved but geologically likely. 50% probability of recovery. Significant risk.

Possible: Lower confidence still. 10-25% probability. Speculative.

The SEC requires conservative proved reserves reporting. Internal estimates often differ.

"How does the oil price affect different parts of the energy value chain?"

Upstream E&P: Directly correlated. Higher oil prices mean higher revenue and earnings, often with operating leverage.

Midstream: Partially insulated. Fee-based contracts reduce commodity exposure, but volume exposure exists. Long-term, lower prices reduce drilling activity and volumes.

Downstream refining: Complicated. Refiners benefit from crude oil price spreads, not absolute levels. Crack spreads (product prices minus crude) drive margins.

Oilfield services: Highly correlated with a lag. Low oil prices reduce drilling activity, which reduces demand for services. Operating leverage amplifies the impact.

"What are crack spreads and why do they matter?"

Crack spreads measure refining margins—the difference between refined product prices (gasoline, diesel) and crude oil input costs.

The "3-2-1 crack spread" assumes 3 barrels of crude yield 2 barrels of gasoline and 1 barrel of diesel. The spread equals: (2 × gasoline price) + (1 × diesel price) - (3 × crude price).

Wider spreads mean more profitable refining. Spreads are driven by:

• Crude supply/demand
• Product demand (seasonal driving patterns)
• Refinery capacity and utilization
• Regulatory factors (fuel specifications)

Refiners can't control crude prices but can improve operations to process cheaper crude grades.

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Industrials Interview Questions

Valuation Questions

"How do you value an industrial company?"

Industrial valuations typically use:

EV/EBITDA multiples: Primary methodology. Apply peer-derived or historical multiples to normalized EBITDA. Adjust for:

• Cyclical position (where are we in the cycle?)
• Growth profile
• Margin quality
• Capital intensity

DCF: More important than in some sectors due to capital intensity. Capex assumptions significantly affect value. Use realistic maintenance vs. growth capex split.

SOTP for conglomerates: Value each segment using segment-appropriate multiples, then sum.

Replacement cost: For asset-heavy businesses, compare market value to cost of replicating the asset base.

"Why is EBITDA potentially misleading for industrial companies?"

EBITDA ignores capital expenditure requirements. For capital-intensive industrials:

1. Maintenance capex is real: Unlike software, industrial companies must continually invest to maintain assets. EBITDA overstates cash generation.

2. Working capital matters: Industrials often have significant working capital requirements that consume cash.

3. Cyclicality distorts: Peak-cycle EBITDA applied with average multiples overvalues. Trough-cycle EBITDA undervalues.

Better to focus on free cash flow or EBITDA minus maintenance capex. Compare FCF conversion (FCF/EBITDA) across peers.

"How do you normalize earnings for cyclical companies?"

Several approaches:

Mid-cycle analysis: Estimate revenues and margins at mid-point of the cycle, not current levels. Apply multiples to normalized figures.

Average through the cycle: Use average EBITDA over a full cycle (typically 5-7 years) rather than current year.

Peak-to-trough analysis: Value the company at both cycle extremes to establish a range.

Sensitivity analysis: Model value at different cycle assumptions to understand the range.

The key is not using peak earnings with peak multiples or trough earnings with trough multiples.

Sector Knowledge Questions

"What is book-to-bill and why does it matter?"

Book-to-bill ratio = New orders / Revenue (or shipments)

• Book-to-bill > 1.0: Order book is growing. Positive sign.
• Book-to-bill = 1.0: Stable order book.
• Book-to-bill < 1.0: Order book is shrinking. Negative sign.

It's a leading indicator of future revenue. In capital goods, where order-to-delivery times can be months or years, book-to-bill signals future performance before it appears in revenue.

"How does aerospace differ from other industrials?"

Long program cycles: Aircraft programs span decades. Development costs are amortized over long production runs.

Duopoly structure: Boeing and Airbus dominate commercial aerospace, creating pricing discipline.

Aftermarket economics: Original equipment may be sold at low margins to capture high-margin aftermarket service revenue over the aircraft's life.

Defense differences: Government contracts with cost-plus structures. Long procurement cycles. Political factors matter.

Valuation implications: Higher multiples than typical industrials due to visibility (backlog), oligopoly structure, and aftermarket annuities.

"What drives margin in manufacturing businesses?"

Several factors:

Volume leverage: Fixed costs spread over more units at higher volumes. Capacity utilization directly affects margins.

Product mix: Higher-value products and aftermarket typically carry higher margins than commoditized equipment.

Operational efficiency: Manufacturing productivity, lean operations, supply chain management.

Pricing power: Differentiated products command premium pricing. Commoditized products compete on cost.

Input costs: Raw material and labor costs directly affect margins if not passed through to customers.

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Common Deal Scenarios

Energy M&A Drivers

Asset acquisitions: Buying reserves is often cheaper than finding them. Acquire when F&D costs exceed acquisition costs.

Consolidation: Scale creates operating efficiencies, spreads corporate costs, improves market access.

Portfolio optimization: Selling non-core assets to focus on core basins. Creating pure-play companies.

Private equity exits: PE-owned E&P companies selling after development phase.

Industrials M&A Drivers

Consolidation: Combining competitors to achieve scale, reduce costs, improve pricing.

Technology acquisition: Buying capabilities or IP rather than building internally.

End-market diversification: Reducing cyclicality by entering different industrial markets.

Aftermarket expansion: Acquiring installed base to capture service revenue.

Portfolio reshaping: Spinning off non-core segments, acquiring strategic adjacencies.

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Key Takeaways

Energy and industrials interviews require sector-specific knowledge that generic preparation doesn't provide.

For energy:

• Master NAV methodology
• Understand reserve classifications
• Know the value chain (upstream, midstream, downstream)
• Be able to explain why oil companies trade at low multiples
• Understand commodity price impacts by segment

For industrials:

• Know key operating metrics (backlog, book-to-bill, utilization)
• Understand cyclicality and how to normalize earnings
• Be aware of capital intensity implications for EBITDA
• Learn subsector differences (aerospace vs. machinery vs. transportation)
• Understand the importance of aftermarket revenue

The key insight:

These sectors are fundamentally about assets—depleting reserves, manufacturing facilities, equipment fleets. Value comes from efficiently operating those assets over long time horizons.

Interviewers want to see that you understand asset economics: capital intensity, utilization, reinvestment requirements, and cyclicality. Technical accuracy matters, but demonstrating you understand why these businesses work differently from software or consumer companies is what sets you apart.