EOG Resources, Inc. — Q2 2012 Form 10-Q
Business context and period. EOG is an independent oil and gas producer operating in the United States, Canada, Trinidad and other international markets. This unaudited quarterly report covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless stated otherwise. Amounts below are in millions of dollars except per-share and operating data.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net operating revenues | $2,909 | $2,570 | $5,716 | $4,467 |
| Operating income | $692 | $588 | $1,252 | $861 |
| Net income | $396 | $296 | $720 | $430 |
| Diluted earnings per share | $1.47 | $1.10 | $2.67 | $1.63 |
| Net cash provided by operating activities | Not presented separately | Not presented separately | $2,573 | $2,069 |
Q2 operating and net margins were approximately 23.8% and 13.6%, respectively, versus 22.9% and 11.5% a year earlier. First-half operating and net margins were approximately 21.9% and 12.6%, versus 19.3% and 9.6%. These are calculated from reported figures.
- Production and mix: Q2 production averaged 480.5 thousand barrels of oil equivalent per day (MBoed), up from 412.6 MBoed. First-half production averaged 465.2 MBoed, up from 410.9 MBoed. Oil and NGLs represented approximately 44% of first-half company production, versus 33% in 2011.
- Cash flow and investment: First-half operating cash flow was $2,573 million. Investing activities used $2,855 million, including $3,748 million of additions to oil and gas properties, partly offset by $1,112 million of asset-sale proceeds. Total reported expenditures were $4,187 million. Cash declined to $280 million from $616 million at year-end 2011.
- Liquidity and debt: Current assets were $2,948 million and current liabilities $2,680 million at June 30, 2012, a current ratio of approximately 1.10 (about 1.29 at December 31, 2011). Long-term debt was $5,012 million; the company reported a 27% debt-to-total-capitalization ratio, down from 28% at year-end. No borrowings or letters of credit were outstanding under its $2.0 billion revolving credit agreement.
- Shareholder returns: The quarterly dividend increased from $0.16 to $0.17 per share, effective with the April 2012 payment. First-half dividends paid were $89 million.
Material changes versus prior period
- Revenue and earnings increased, supported by substantially higher oil production and first-half oil prices, as well as higher reported mark-to-market derivative gains and asset-disposition gains.
- Q2 crude oil and condensate revenue rose 47% to $1,376 million, while natural gas revenue fell 40% to $359 million and NGL revenue fell 18% to $150 million. Q2 realized composite prices were $95.20/Bbl for oil, $33.72/Bbl for NGLs and $2.47/Mcf for natural gas.
- First-half crude oil and condensate revenue rose 58% to $2,687 million; natural gas revenue fell 39% to $727 million. Oil and NGL volume growth was led primarily by the Eagle Ford, while lower gas prices weighed on natural gas revenue.
- First-half operating cash flow increased $504 million year over year. The company nevertheless spent more on investment than it generated from operations and funded part of the gap through asset sales.
- DD&A rose to $1,558 million in the first half from $1,171 million, and per-Boe costs in the company’s selected cost measure increased to $30.75 from $27.44. Impairment expense fell to $187 million from $448 million.
Outlook, commentary, risks and unusual items
- Management budgeted 2012 exploration, development and other property, plant and equipment expenditures of $7.4–$7.6 billion, excluding acquisitions, and expected spending to exceed operating cash flow. Planned asset sales were intended to partially cover the shortfall; EOG stated it could adjust spending and had multiple financing alternatives.
- Management expected oil and NGL production to continue increasing in 2012, both in volume and as a share of total production. The strategy emphasized North American oil and liquids-rich development.
- The St. James, Louisiana crude-by-rail unloading facility began receiving crude in April and has approximately 100 MBbld capacity. EOG also began shipping some Eagle Ford crude to Gulf Coast points via a new pipeline in July.
- In the U.K., Conwy/Corfe initial production was expected in the second half of 2013. The Columbus development plan required revision; submission was expected in Q3 2012 and approval in Q1 2013. EOG expected an investment decision on the Kitimat LNG project at the beginning of 2013.
- Derivatives contributed $188 million of Q2 mark-to-market gains and $323 million in the first half; these accounting gains are not equivalent to cash receipts. Cash inflows from settled commodity derivatives were $173 million in Q2 and $307 million in the first half. At June 30, derivative assets totaled approximately $464 million. Counterparty options could increase certain future hedge volumes.
- First-half asset sales generated approximately $1.1 billion of proceeds; reported disposition gains were $181 million. EOG also recorded $187 million of first-half impairments, including a $96 million pretax impairment of proved properties and other assets described in the fair-value note.
- EOG was negotiating a consent agreement with North Dakota regulators concerning potential air-emissions violations at certain Bakken wells. The company said it self-reported, added controls and expected reduced fines; it anticipated finalizing the agreement in the second half of 2012. Other ordinary-course claims were not expected by management to have a material adverse effect, though outcomes were uncertain.
- Key stated risks include commodity-price and demand changes, drilling and reserve-recovery performance, transportation access and cost, capital-market access, regulation and taxes, counterparties, foreign exchange, and political and operating conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether oil and NGL-led production growth and realized prices can offset weak natural gas prices and rising per-unit costs.
- Whether the $7.4–$7.6 billion 2012 spending plan, expected cash-flow shortfall and planned asset sales are achieved without materially increasing leverage.
- How much reported earnings depended on derivative mark-to-market gains and asset dispositions, versus recurring operating performance and settled cash flows.
- Whether the North Dakota air-emissions matter is resolved on the expected terms, and whether the Columbus and other development schedules remain on track.
- Future liquidity and debt trends, including cash balances, capital spending, asset-sale proceeds and availability of credit facilities.