EOG Resources, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. EOG explores, develops, produces and markets oil and natural gas, primarily in the United States; approximately 97% of year-end proved reserves were in the U.S. and 3% in Trinidad.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net operating revenues | $8.76 billion | $18.04 billion |
| Operating income (loss) | $(6.69) billion | $5.24 billion |
| Net income (loss) | $(4.52) billion; $(8.29) per diluted share | $2.92 billion; $5.32 per diluted share |
| Cash from operating activities | $3.60 billion | $8.65 billion |
| Cash and cash equivalents at year-end | $719 million | $2.09 billion |
| Total debt at year-end | $6.66 billion | $5.91 billion |
| Stockholders’ equity | $12.94 billion | $17.71 billion |
| Debt-to-total capitalization | 34% | 25% |
| Production | 572.2 thousand Boe/day | 594.7 thousand Boe/day |
| Capital expenditures | $5.22 billion | $8.63 billion |
Revenue fell 51%, chiefly because of lower realized commodity prices. Composite realized prices declined 49% for oil and condensate, 55% for NGLs and 41% for natural gas. Production volumes also decreased: total oil-equivalent production fell about 4%, while U.S. production was down about 1%. EOG recorded $6.33 billion of pretax impairments, primarily on U.S. legacy gas assets and marginal liquids plays, and reported an operating margin of approximately negative 76% and net margin of approximately negative 52% (calculated from reported results).
Net cash from operations fell $5.05 billion year over year. Investing activities used $5.32 billion, exceeding operating cash generation; cash flow from operations less total reported expenditures was approximately negative $1.62 billion. EOG paid $367 million in cash dividends. The annual dividend declared per share rose to $0.670 from $0.585, although management cautioned that future dividends depend on financial condition, cash flow and investment opportunities.
Material changes and notable items
- Proved reserves ended 2015 at 2.118 billion Boe, down 379 million Boe from 2014. Price-driven negative revisions were significant; the filing identifies a 574 million Boe downward revision primarily due to lower prices used in reserve estimates. Reserve additions from drilling and technical evaluation were 246 million Boe.
- The standardized measure of discounted future net cash flows for proved reserves fell to $9.62 billion from $27.92 billion, reflecting lower prices and reserve changes. This standardized measure is not presented as current market value.
- Capital spending was reduced substantially, and EOG completed fewer wells. It acquired approximately $481 million of properties, primarily in the Delaware Basin and North Dakota Bakken, and received about $193 million from asset sales.
- EOG issued $1.0 billion of senior notes in March 2015. After year-end, it issued another $1.0 billion of notes; proceeds were used in part to repay $400 million of notes due February 2016 and commercial paper.
- Fourth-quarter 2015 revenue was $1.80 billion and net loss was $284 million. The third quarter included a net loss of $4.08 billion, largely reflecting the impairment charges.
Outlook, risks and contingencies
- Management expected 2016 capital expenditures of approximately $2.4–$2.6 billion, excluding acquisitions, focused mainly on U.S. oil drilling in the Eagle Ford, Delaware Basin and Bakken. Total and oil production were expected to decline slightly from 2015.
- As of February 12, 2016, the cited average 2016 NYMEX prices were $34.97 per barrel for oil and $2.23 per MMBtu for natural gas. At February 25, EOG reported natural gas derivatives covering 60,000 MMBtu/day from March through August 2016 at a weighted average $2.49/MMBtu; it reported no crude oil production hedges and no commodity derivatives outstanding at December 31, 2015.
- Management estimated that each $1/barrel change in wellhead oil price, including the estimated NGL effect, would change 2016 net income by about $65 million and operating cash flow by about $81 million. Each $0.10/Mcf change in natural gas price was estimated to affect net income by about $15 million and operating cash flow by about $18 million.
- Key risks include prolonged low or further-declining oil, gas and NGL prices; additional impairments or reserve reductions; capital-market access and rising borrowing costs; drilling and production risks; transportation and processing constraints; customer and counterparty credit risk; and changing environmental, climate and hydraulic-fracturing regulation. S&P lowered its rating of EOG’s long-term debt in February 2016, citing lower commodity-price assumptions.
- The company had a $2.0 billion revolving credit facility, with no borrowings outstanding under it at year-end, and $260 million of year-end commercial paper. The filing says routine lawsuits and claims were not expected by management to have a material adverse effect. No off-balance-sheet arrangements were reported.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether realized prices, production and operating costs support the 2016 spending plan and the forecast of only a slight production decline.
- Further reserve revisions and impairments, especially given the 2015 price-driven downward reserve revisions and the sensitivity of reserve economics to commodity-price assumptions.
- Liquidity and refinancing needs, including debt maturities, commercial-paper usage, credit ratings and access to the revolving facility and capital markets.
- Whether operating cash flow can fund capital spending and dividends; management warned that sustained low prices could constrain the dividend.
- Execution and economics of priority plays, as well as the status and costs of Conwy first production, planned for March 2016, and the 2016 Trinidad program.