EOG Resources, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Financial statements are unaudited. Unless otherwise stated, amounts below are in millions of dollars.
Business context
EOG is an independent oil and natural gas producer operating in the United States, Canada, Trinidad, the United Kingdom and China. Its 2011 strategy emphasized North American crude oil and natural gas liquids development. Oil and NGLs represented approximately 33% of company production in the first half, up from 26% in the comparable 2010 period.
Financial and operating results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net operating revenues | $2,570 | $1,358 | $4,467 | $2,729 |
| Operating income | $588 | $141 | $861 | $360 |
| Net income | $296 | $60 | $430 | $178 |
| Diluted earnings per share | $1.10 | $0.24 | $1.63 | $0.70 |
| Operating cash flow | Not presented quarterly | $2,069 | $1,301 |
Q2 operating margin was approximately 22.9% versus 10.3% a year earlier; net margin was approximately 11.5% versus 4.4%. Results included $190 million of Q2 mark-to-market commodity derivative gains and $164 million of net asset-disposition gains. Q2 wellhead revenue was $1,722 million. Composite realized prices, excluding financial derivatives, were $99.77/bbl for crude oil and condensate, $51.65/bbl for NGLs and $4.08/Mcf for natural gas. Total production was 412.6 thousand Boe/day, up from 369.6 thousand.
For the first half, oil and condensate production averaged 99.4 thousand bbl/day, up 49%; NGL production averaged 37.3 thousand bbl/day, up 41%; and natural gas production averaged 1,645 MMcf/day, up 1%. Composite natural gas price fell 5% to $3.98/Mcf, while crude oil and NGL prices rose.
- Cash and liquidity: Cash was $1,577 million at June 30, up from $789 million at year-end. Current assets were $3,638 million and current liabilities $2,476 million. Two $1.0 billion revolving facilities were undrawn; no commercial paper or uncommitted-facility borrowings were outstanding.
- Cash flows and spending: First-half operating cash flow was $2,069 million; investing cash outflow was $2,595 million; financing cash inflow was $1,315 million. Cash additions to oil and gas properties and other property, plant and equipment totaled $3,463 million. First-half total expenditures, on the company’s reported expenditure basis, were $3,569 million.
- Debt and capital: Balance-sheet debt was $5,226 million, including $220 million current; aggregate principal debt was $5,260 million. Debt-to-total-capitalization was 30%, down from 34% at year-end. A March common-stock offering generated approximately $1,388 million net proceeds. The quarterly dividend increased to $0.16 per share.
Material changes versus comparable periods
- Q2 revenue rose 89% and net income rose to $296 million from $60 million. First-half revenue increased 64% and net income more than doubled. Higher crude oil and NGL production and prices were major contributors; natural gas revenue declined 4% in the first half as lower prices outweighed modest volume growth.
- First-half impairments increased to $448 million from $150 million, primarily reflecting Canadian shallow natural gas properties. Q2 impairments were $359 million, including $312 million of proved-property impairments. EOG reported a $360 million pretax write-down of proved oil and gas properties in the first half.
- First-half DD&A rose to $1,171 million from $897 million; net interest expense rose to $102 million from $55 million. The effective tax rate increased to 44% from 42% for the six-month period.
- Asset-sale proceeds were approximately $944 million in the first half. Canada reported a first-half operating loss of $319 million, compared with a $55 million loss in 2010, with impairments a key factor.
Outlook, risks and unusual items
- Management estimated 2011 exploration, development and other property, plant and equipment expenditures of $6.8–$7.0 billion, excluding acquisitions, and expected spending to exceed operating cash flow. The plan included further non-core natural gas asset sales; management also cited access to equity, debt and credit facilities as financing alternatives.
- Management expected 2011 crude oil and NGL production to continue increasing in total and as a share of production. No specific production or earnings guidance figure was provided in the filing.
- Commodity derivatives are not designated as accounting hedges; mark-to-market changes affect reported earnings. At June 30, derivative gains and losses included a net asset position for crude oil and natural gas swaps. Counterparty agreements may require collateral or accelerated settlement in specified circumstances; EOG reported no collateral posted at period-end.
- Key risks include commodity prices and demand, drilling and reserve-recovery outcomes, transportation and service availability and costs, regulation and permitting, financing access, foreign exchange and interest rates, and counterparty performance. Management said ordinary-course legal claims were not expected to have a material adverse effect, but outcomes could not be predicted.
- Four exploratory wells with costs capitalized for more than one year remained under evaluation. The filing described pending project evaluations and regulatory or infrastructure approvals, including in China, the U.K. and British Columbia.
Important facts for investors to verify
- How much reported earnings growth reflects recurring production economics versus derivative gains, asset-sale gains and the timing of impairments?
- Whether planned asset sales and other financing sources cover the projected capital-spending shortfall without materially increasing leverage or diluting shareholders.
- Whether liquids-production growth, particularly in the Eagle Ford and other U.S. plays, is sustained at expected costs and returns.
- Whether Canadian natural gas asset impairments signal further downside, and how remaining exploration projects progress through evaluation and approvals.
- The status and effect of the 2012 maturity of the $1.0 billion revolving credit agreement, commodity-derivative exposures and related counterparty provisions.