EOG Resources, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. EOG is an independent oil and natural gas producer, with operations primarily in the United States and additional operations in Trinidad and China. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue and other | $4.303B | $4.782B | $13.060B | $12.701B |
| Operating income | $828M | $1.507B | $2.835B | $3.346B |
| Net income | $615M | $1.191B | $2.098B | $2.526B |
| Diluted EPS | $1.06 | $2.05 | $3.61 | $4.35 |
| Net cash provided by operating activities | Not presented separately | Not presented separately | $6.356B | $5.683B |
- Q3 revenue fell 10%, operating income 45%, and net income 48% year over year. Derived operating margin was about 19.2% versus 31.5%; net margin was about 14.3% versus 24.9%.
- For the first nine months, revenue rose 3%, while operating income fell 15% and net income fell 17%. Derived operating margin was about 21.7% versus 26.3%; net margin was about 16.1% versus 19.9%.
- At September 30, cash was $1.583B. Current assets were $4.820B and current liabilities $4.474B (derived current ratio about 1.08). Total debt, including current maturities, was $5.177B, down from $6.083B at year-end 2018; disclosed debt-to-total-capitalization was 20%, versus 24% at year-end.
- Cash used in investing was $4.980B and cash used in financing was $1.348B for the nine months. Cash increased $27M. Capital expenditures and other expenditures totaled $5.394B, including $5.207B of exploration and development expenditures.
Material changes and operating drivers
- Q3 wellhead production increased: total oil-equivalent volume was 834.2 MBoed, up from 748.8 MBoed. Crude oil and condensate volumes rose 12%, while NGL volumes rose 11% and natural gas deliveries rose 11%. Lower realized prices offset volume growth: composite crude price declined 19%, NGL price 58%, and natural gas price 22%.
- Q3 mark-to-market commodity derivative results were an $86M gain, compared with a $52M loss in Q3 2018. Nine-month results were a $243M gain versus a $298M loss. These non-cash mark-to-market results, alongside settlement cash flows, materially affected reported revenue and period comparisons.
- Q3 operating expenses increased $200M. Higher DD&A, lease and well costs, general and administrative expense, and impairments contributed; Q3 impairments were $105M versus $45M. Nine-month impairments were $290M versus $161M, including charges tied to properties and assets and higher amortization of undeveloped property costs.
- Nine-month operating cash flow increased $673M, aided by working-capital changes, lower net cash taxes paid, and higher derivative settlement receipts; lower wellhead revenue and higher cash operating costs partly offset those factors.
Outlook, risks and notable items
- Management expected 2019 total production and crude oil production to increase from 2018. It estimated 2019 capital expenditures of approximately $6.2B–$6.4B, excluding acquisitions and non-cash transactions, with most spending directed to U.S. crude oil drilling.
- EOG raised its quarterly dividend from $0.22 to $0.2875 per share, effective with the dividend paid July 31, 2019. It repaid $900M of 5.625% notes at maturity in June and entered a new $2.0B unsecured revolving credit facility maturing in 2024; no borrowings or letters of credit were outstanding under it at quarter-end.
- Adoption of the new lease accounting standard in January 2019 added recognized right-of-use assets and lease liabilities; prior-period financial results were unchanged. At September 30, operating lease liabilities totaled $869M and finance lease liabilities $61M.
- Management cited continuing volatility and uncertainty in oil, NGL, and gas prices. Other disclosed risks include production and reserve execution, market access and transportation capacity, regulation, operating costs, counterparties, financing access, weather, and geopolitical conditions. Ordinary-course litigation was not expected by management to have a material adverse effect. EOG reported compliance with its credit-facility leverage covenant and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings and revenue reflects derivative mark-to-market gains rather than physical sales, and how do realized derivative settlements affect cash flow?
- Whether production growth and lower unit costs can offset weaker commodity prices, particularly sharply lower NGL prices.
- Whether the $6.2B–$6.4B capital-spending plan and production outlook remain on track, and how spending translates into returns and cash generation.
- Drivers and potential recurrence of impairment charges, including undeveloped acreage at risk of expiring before development.
- Debt maturities, lease commitments, liquidity needs, and capacity to sustain the higher dividend amid commodity-price volatility.