EOG Resources, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods. EOG is an independent oil and gas producer, with most operations and revenue in the United States.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenues and other | $4.238B | $2.612B | $7.919B | $5.223B |
| Operating income | $965M | $128M | $1.840B | $236M |
| Net income | $697M | $23M | $1.335B | $52M |
| Diluted EPS | $1.20 | $0.04 | $2.30 | $0.09 |
| Operating cash flow | Not presented by quarter | $3.494B | $1.976B |
Derived operating margins were approximately 22.8% in Q2 2018 versus 4.9% in Q2 2017, and 23.2% for the first half versus 4.5%. Derived net margins were approximately 16.4% and 0.9% for Q2, and 16.9% and 1.0% for the first half, respectively.
- Production: Q2 total output was 702.2 thousand barrels of oil equivalent per day (Mboed), up from 603.9 Mboed; first-half output was 681.2 Mboed, up from 587.4 Mboed. Crude oil, NGL and natural gas volumes and prices all increased year over year, with growth particularly in the Permian Basin and Eagle Ford.
- Cash flow and investment: First-half investing cash outflow was $3.090B, including $3.125B of cash additions to oil and gas and other property. Financing cash outflow was $228M, mainly dividends of $204M. Cash rose to $1.008B from $834M at year-end. Operating cash flow less those cash property additions was approximately $369M, a derived measure.
- Liquidity and debt: Current assets were $4.232B and current liabilities $4.297B at June 30, 2018 (derived current ratio approximately 0.98; working capital deficit $65M). Total current and long-term debt was $6.435B, versus $6.387B at December 31, 2017. Management reported debt-to-total capitalization of 27%, down from 28%. EOG had no borrowings under its $2.0B revolving credit facility at quarter-end.
- Dividends: Q2 dividend declared was $0.185 per share. On August 2, the board raised the quarterly dividend to $0.22 per share, effective for the October 31, 2018 payment.
Material changes and management commentary
- Revenue increased 62% in Q2 and 52% for the first half. Higher crude oil prices and production were major contributors; total production also grew about 16% in both comparison periods.
- Reported results include mark-to-market derivative losses of $186M in Q2 and $246M for the first half, compared with gains of $9M and $71M in the respective 2017 periods. Cash paid for derivative settlements was $66M in Q2 and $88M for the first half.
- Management expects 2018 total production and crude oil production to increase from 2017. Its 2018 exploration, development and other property spending estimate is approximately $5.4B–$5.8B, excluding acquisitions and noncash transactions; most spending is planned for U.S. crude oil activities.
- Management cited ongoing efficiency improvements, a strong prospect inventory and a strategy focused on investment returns, cost control and maintaining a strong balance sheet. It cautioned that commodity prices are volatile and future prices cannot be predicted.
- EOG adopted the new revenue standard in 2018. The change moved certain processing fees from a revenue deduction to expenses, increasing reported revenue and expense by $50M in Q2 and $101M for the first half, with no effect on operating income, net income or cash flow.
- The effective income tax rate fell to 22% for both Q2 and the first half, from 63% and 49%, respectively, in 2017. The filing attributes the lower rate mainly to the U.S. federal statutory rate reduction to 21%, among other factors.
Risks, contingencies and unusual items
- Commodity price volatility, production and reserve execution, transportation and processing availability and costs, regulation, access to capital, counterparty credit, and geopolitical and operational risks could affect results. EOG states forward-looking statements are not guarantees.
- Outstanding commodity derivatives had a net liability fair value of $176M at June 30. Derivative agreements can require collateral or early settlement in specified circumstances; EOG reported no collateral posted or held at quarter-end.
- Various ordinary-course lawsuits and claims are pending. Management does not expect their resolution, individually or collectively, to materially adversely affect financial position, results or cash flows.
- Tax accounting amounts related to the 2017 tax law changes remained provisional; EOG expected to finalize them by Q4 2018. The filing reports no material changes in market-risk disclosures and effective disclosure controls.
Investor verification priorities
- Assess how much earnings and cash generation depend on commodity prices, production growth and the timing and accounting effects of derivatives.
- Compare planned 2018 spending with operating cash flow and monitor liquidity, working capital and debt maturities.
- Verify execution against production and capital-spending expectations, particularly in the Permian Basin and Eagle Ford.
- Review the realized impact of the dividend increase, tax-law measurement-period adjustments and the upcoming lease-accounting adoption.