EOG Resources, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. EOG is an independent oil and natural gas producer operating primarily in the United States, with operations in Trinidad, the United Kingdom, China and Canada. Financial statements are unaudited.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues and other | $3.681 billion | $2.611 billion | +41% |
| Operating income | $875 million | $108 million | Up substantially |
| Net income | $639 million | $29 million | Up substantially |
| Diluted EPS | $1.10 | $0.05 | — |
| Operating cash flow | $1.552 billion | $898 million | +$654 million |
| Cash and cash equivalents | $816 million at March 31 | $834 million at Dec. 31, 2017 | Down $18 million |
Operating margin was approximately 23.8% versus 4.1% a year earlier; net margin was approximately 17.4% versus 1.1%. These margins are calculated from reported revenue. The declared dividend was $0.185 per share, up from $0.1675.
Business and operating trends
- Production increased to 659.9 thousand barrels of oil equivalent per day from 570.7 thousand, up about 16%. U.S. production rose to 602.5 thousand Boe/d from 512.6 thousand.
- Crude oil and condensate production rose 15% to 363.3 thousand barrels per day; NGL production rose 28% to 100.6 thousand barrels per day; natural gas deliveries increased 11% to 1,176 MMcfd.
- Higher crude oil prices and volumes were major revenue drivers: composite realized crude oil price increased 28% to $64.27 per barrel. Composite NGL price rose 13% to $24.46 per barrel. Composite natural gas price increased to $2.83 per Mcf from $2.42; the 2018 figure includes a $0.41-per-Mcf accounting-presentation adjustment.
- U.S. operating income was $846 million, compared with $120 million in Q1 2017. Trinidad operating income was $40 million versus $16 million; other international operations recorded an $12 million loss versus a $28 million loss.
Costs, cash flow and financial position
- Total operating expenses were $2.807 billion, up 12%. Marketing costs rose with higher third-party sales, while gathering and processing costs increased partly because of a new revenue-accounting presentation. Marketing revenues less marketing costs increased only $5 million year over year.
- DD&A declined to $749 million from $816 million, reflecting lower U.S. unit rates, partly offset by higher production. Total impairments fell to $65 million from $193 million.
- Income tax provision was $175 million versus $11 million; the effective tax rate declined to 21% from 28%, mainly reflecting the lower U.S. federal statutory rate.
- Cash used in investing was $1.456 billion, principally for oil and gas property additions of $1.365 billion. Operating cash flow exceeded investing cash outflows by approximately $96 million. Financing cash outflow was $114 million, including $97 million of dividends.
- Total debt, including current maturities, was approximately $6.435 billion; cash was $816 million. Management reported a debt-to-total-capitalization ratio of 28%, unchanged from year-end. A $2.0 billion revolving credit facility had no borrowings or letters of credit outstanding; no commercial paper was outstanding at quarter-end.
- Current assets were $3.585 billion and current liabilities $2.837 billion, a current ratio of approximately 1.26. Commodity derivatives were a net liability of $76 million at quarter-end.
Outlook, risks and notable items
- EOG expected 2018 total production and crude oil production to increase versus 2017. Planned 2018 capital expenditures were approximately $5.4–$5.8 billion, excluding acquisitions and non-cash transactions, with most directed to U.S. crude oil activities.
- Management cited continued focus on drilling, completion and operating efficiencies and described flexibility to adjust spending to market conditions. Production and earnings remain sensitive to volatile oil, NGL and natural gas prices, operating costs, infrastructure availability and execution of drilling plans.
- Q1 included a $60 million mark-to-market derivative loss, compared with a $62 million gain in the prior-year quarter; cash settlements were a $22 million outflow versus a $2 million inflow. The contracts include oil swaps and basis swaps and natural gas swaps and options, which can limit gains or offset price declines.
- Adoption of the new revenue standard increased reported revenue and expenses by $50.5 million, with no effect on operating income, net income or cash flow. Tax accounting for certain Tax Cuts and Jobs Act effects remained provisional; EOG expected to finalize provisional amounts by Q4 2018.
- Various ordinary-course lawsuits and claims were pending; management did not expect their resolution to have a material adverse effect. EOG also disclosed risks including commodity-price volatility, production and reserve uncertainty, regulatory and environmental requirements, access to infrastructure and financing, and counterparty credit risk.
Important facts for investors to verify
- Whether production growth and the $5.4–$5.8 billion capital plan translate into expected returns and cash generation.
- How realized prices, regional price differentials and derivative positions affect future revenue and cash flow.
- The extent of remaining tax-accounting adjustments and their effect on the effective tax rate.
- Capital-spending pace, liquidity and debt levels as investment outlays increase.
- Updates on the ordinary-course claims, regulatory and environmental risks, and infrastructure constraints identified in the filing.