EOG Resources, Inc. — 2012 Q1 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2011. EOG is an independent oil and natural gas producer, increasingly focused on U.S. crude oil and liquids-rich development, including the Eagle Ford Shale.
Key financial and operating metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net operating revenues | $2.807 billion | $1.897 billion; up 48% |
| Operating income | $560 million | $272 million; reported operating margin approximately 19.9% versus 14.4% |
| Net income | $324 million | $134 million |
| Diluted earnings per share | $1.20 | $0.52 |
| Operating cash flow | $1.078 billion | $957 million |
| Investing cash flow | $(1.375) billion | $(1.428) billion |
| Capital expenditures | $2.105 billion total expenditures | $1.745 billion |
| Cash and equivalents | $294 million at March 31 | $616 million at December 31, 2011 |
| Long-term debt | $5.011 billion carrying value | $5.009 billion at December 31, 2011 |
Operating cash flow less investing cash flow was approximately negative $298 million. Cash declined $322 million during the quarter. Current assets were $3.042 billion and current liabilities $2.772 billion. EOG reported a 28% debt-to-total-capitalization ratio, unchanged from year-end. It had no commercial paper borrowings or revolving-credit-facility borrowings outstanding at March 31; its revolving facility totaled $2.0 billion.
Total production averaged 449.8 thousand barrels of oil equivalent per day, up from 409.1 thousand. Crude oil and condensate production rose to 140.8 thousand barrels per day from 94.4 thousand; natural gas liquids rose to 51.1 thousand barrels per day from 35.4 thousand. Natural gas volumes declined 8% to 1,547 million cubic feet per day. Oil and NGLs made up approximately 43% of company production, versus 32% a year earlier.
Material changes versus the prior comparable period
- Higher crude oil volumes and prices drove crude oil and condensate revenue up 73% to $1.310 billion. The composite realized price increased 15% to $101.12 per barrel.
- Natural gas revenue fell 37% to $367 million, reflecting a 33% decline in the composite realized price to $2.61 per Mcf and lower deliveries. NGL revenue rose 33% to $198 million as higher volumes more than offset lower prices.
- Net operating revenue included $134 million of mark-to-market commodity derivative gains, compared with $67 million of losses in Q1 2011. Gathering, processing and marketing revenue increased 82%, but its margin after marketing costs was only $13 million, versus $10 million.
- Operating expenses increased to $2.247 billion from $1.625 billion. DD&A rose $181 million to $749 million, and impairments rose to $133 million from $89 million. Lease and well and transportation costs also increased.
- Operating cash flow increased $120 million, while oil and gas property additions rose to $1.879 billion from $1.528 billion. Asset-sale proceeds were approximately $450 million, primarily from properties and acreage in the Upper Gulf Coast, Rocky Mountain area and Permian Basin.
Outlook, commentary, risks and unusual items
- Management estimated 2012 capital expenditures of $7.4–$7.6 billion, excluding acquisitions, with a focus on U.S. and Canadian crude oil and liquids-rich plays. It expected full-year capital spending to exceed operating cash flow and planned non-core asset sales to partially cover the shortfall. EOG said it could adjust spending and had multiple financing alternatives.
- Management expected 2012 crude oil, condensate and NGL production to increase in both volume and share of total production compared with 2011. It cited Eagle Ford growth and reported that its St. James, Louisiana crude-oil unloading facility received its first unit train in April 2012; the facility has approximately 100,000 barrels-per-day capacity.
- EOG increased its quarterly dividend from $0.16 to $0.17 per share, effective for the April 30, 2012 payment. The Q1 dividend declared was $0.17 per share.
- Commodity derivatives create exposure to price movements and counterparty terms. EOG reported substantial oil and gas derivative positions extending through 2014; mark-to-market changes affect reported earnings. Derivative agreements can also require collateral or accelerated settlement under specified credit events.
- Other notable items include $67 million of net gains on asset dispositions and a $75 million pretax impairment charge for certain proved properties and other assets, including an impairment based on a third-party offer. The filing also reports $133 million of total impairment expense, a broader income-statement category.
- Risks identified include volatile commodity prices and demand, drilling and reserve-recovery results, transportation and service availability and costs, regulatory and environmental requirements, access to capital, and political and operating risks in international areas. Management said ordinary-course legal claims were not expected to have a material adverse effect. The filing states that first-quarter results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of earnings and cash generation reflects production growth and realized commodity prices versus derivative gains, asset-sale gains and working-capital movements.
- Whether the planned $7.4–$7.6 billion capital program and expected asset sales can be funded while maintaining the stated balance-sheet objectives, especially given the projected spending shortfall versus operating cash flow.
- Whether liquids production growth can continue, and how lower natural gas prices and volumes affect returns and future impairments.
- The economic impact and settlement or extension features of the commodity derivative positions, including counterparty exercise options and collateral provisions.
- Progress, approvals, costs and timing for major development projects, including East Irish Sea and Central North Sea plans and the proposed Kitimat LNG project.