EOG RESOURCES INC annual report, FY2011

Full document

EOG Resources, Inc. — 2011 Form 10-K Summary

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. EOG explores for, develops, produces and markets oil, natural gas liquids (NGLs) and natural gas, primarily in the United States and Canada, with international operations including Trinidad. Its strategy emphasized returns on capital and a shift toward oil and liquids-rich development. The fourth-quarter figures below are unaudited supplementary information in the filing.

Financial and operating performance

  • Revenue: Net operating revenues were $10.13 billion, up 66% from $6.10 billion in 2010. Wellhead revenues rose 41% to $6.86 billion. Revenue also included $626 million of mark-to-market derivative gains, $493 million of net asset-disposition gains and $2.12 billion of gathering, processing and marketing revenue; associated marketing costs were $2.07 billion.
  • Profit and margins: Operating income was $2.11 billion versus $523 million; net income was $1.09 billion versus $161 million. Diluted EPS was $4.10 versus $0.63. Operating and net margins were approximately 20.9% and 10.8%, respectively, compared with 8.6% and 2.6% in 2010. The effective tax rate fell to 42.9% from 60.6%.
  • Fourth quarter: Revenue was $2.77 billion, operating income $303 million, net income $121 million and diluted EPS $0.45. Versus fourth-quarter 2010, revenue rose about 55%, operating income 73% and net income 125%. Fourth-quarter operating income was materially below the third quarter’s $950 million.
  • Production and prices: Total production averaged 422.7 thousand barrels of oil equivalent per day, up 9% year over year. Oil and condensate volume rose to 113.4 thousand barrels per day from 74.7; NGL volume rose to 42.4 thousand barrels per day from 30.4. Natural gas volume declined 5% to 1.602 billion cubic feet per day. Composite realized prices, before financial derivatives, were $92.79 per barrel for oil, $50.41 per barrel for NGLs and $3.83 per Mcf for gas. Liquids were about 37% of total production, versus 27% in 2010.
  • Cash flow and investment: Operating cash flow was $4.58 billion, up from $2.71 billion. Investing cash outflow was $5.75 billion; total expenditures were $7.26 billion, including $6.60 billion for exploration and development. Financing provided $1.01 billion, including $1.39 billion net proceeds from a common-stock offering. Cash declined to $616 million from $789 million. Operating cash flow did not cover total expenditures.
  • Margins and costs: Impairments were $1.03 billion, including $745 million related to North American natural-gas assets. DD&A was $2.52 billion. Lease-and-well expense was $6.11 per Boe, versus $4.96; the filing’s specified per-Boe cost subtotal rose to $28.55 from $24.59 and excludes certain costs, including impairments and taxes other than income.
  • Debt and liquidity: Debt was $5.04 billion at year-end, down $220 million in principal, and debt-to-total capitalization declined to 28% from 34%. Current assets of $3.25 billion exceeded current liabilities of $2.52 billion (working capital approximately $732 million; current ratio approximately 1.29). EOG had no year-end commercial-paper borrowings and no borrowings under its new $2.0 billion revolving credit facility, maturing in 2016.
  • Reserves: Estimated proved reserves increased 104 million Boe to 2.054 billion Boe. EOG added 387 million Boe from drilling and technical evaluation, while revisions were negative 59 million Boe; proved oil and NGL reserves increased while proved gas reserves declined.

Material changes versus 2010

  • Results improved substantially, supported by higher oil and NGL volumes and prices, particularly rapid Eagle Ford growth. Eagle Ford oil-window production of oil, condensate and NGLs averaged 34.1 thousand barrels per day, versus 4.3 thousand in 2010.
  • Gas production and revenue weakened: natural-gas volume declined 5%, and wellhead gas revenue fell 7%, reflecting lower deliveries and prices. Management reduced planned 2012 activity in the Upper Gulf Coast because of low gas prices.
  • Capital spending increased, while the company issued $1.39 billion of common stock and sold assets to support investment. The debt-to-capital ratio improved, though total debt remained about $5.0 billion.
  • Asset impairments increased to $1.03 billion from $743 million. Derivative gains recognized in revenue rose to $626 million from $62 million; these include unrealized mark-to-market effects and should not be treated as equivalent to operating cash receipts.

Outlook, commentary and risks

  • For 2012, EOG forecast total production growth of 5.5%, liquids growth of 30%, and an 11% decline in North American natural-gas production. Planned capital expenditures were $7.4–$7.6 billion, excluding acquisitions; management expected spending to exceed operating cash flow and planned non-core asset sales to help fund the gap.
  • Management expected oil and liquids-rich development to remain the priority, including Eagle Ford, Bakken/Three Forks, Barnett Combo, Wolfcamp and Leonard plays. The filing describes planned drilling in multiple basins; execution depends on economics, infrastructure and service availability.
  • Commodity prices remain a major earnings and cash-flow exposure. Management estimated 2012 sensitivity, including derivatives, of approximately $31 million of net income and $46 million of operating cash flow for each $1 per barrel change in oil and related NGL prices; natural-gas sensitivity was approximately $11 million and $16 million, respectively, for each $0.10 per Mcf change.
  • Key disclosed risks include oil and gas price volatility; drilling, reserve-estimation and impairment uncertainty; availability and cost of rigs, services, sand, water and transport; production interruptions; environmental rules, greenhouse-gas requirements and potential hydraulic-fracturing regulation; derivative counterparty and regulatory risks; foreign-country and currency risks; and access to financing. Management stated that ordinary-course lawsuits and claims were not expected, individually or collectively, to materially adversely affect financial position, results or cash flow.
  • Other notable items: EOG established a $2.0 billion unsecured revolving facility, repaid $220 million of notes at maturity, and increased its quarterly dividend from $0.16 to $0.17 per share beginning in 2012. The 2011 common-stock offering increased the share base. Management reported effective disclosure controls and internal control over financial reporting; Deloitte & Touche issued unqualified audit opinions.

Important facts for investors to verify

  • Separate recurring production economics from material non-cash derivative gains, asset-sale gains and impairments when assessing earnings and cash generation.
  • Track whether the 2012 production targets and liquids growth are achieved, and whether lower gas production and prices affect reserve replacement and asset values.
  • Assess the funding plan for capital expenditures above forecast operating cash flow, including asset-sale proceeds, borrowing capacity and any further equity or debt issuance.
  • Review the assumptions behind proved reserves, reserve revisions and the $1.03 billion impairment charge, particularly for gas-weighted assets.
  • Monitor debt maturities, contractual commitments, liquidity, derivative positions and exposure to commodity-price movements and counterparties.