EOG Resources, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise stated.
Business context and operating performance
EOG is an independent oil and natural gas producer operating in the United States, Canada, Trinidad, the United Kingdom and China. Management emphasized North American oil and liquids-rich development. Oil, condensate and natural gas liquids represented approximately 26% of production in the first half, up from 21% a year earlier.
- Q2 production averaged 2.217 billion cubic feet equivalent per day, up about 7% from 2.077 billion in Q2 2009. Natural gas volumes declined 1%, while crude oil and condensate volumes rose 43% and NGL volumes rose 23%.
- Q2 composite realized prices, excluding financial derivatives, were $3.73/Mcf for natural gas, $72.69/barrel for crude oil and condensate, and $40.38/barrel for NGLs. Each was higher than the prior-year quarter.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net operating revenues | $1,358m | $861m | $2,729m | $2,019m |
| Operating income | $141m | $0.02m | $360m | $281m |
| Net income (loss) | $60m | ($17m) | $178m | $142m |
| Diluted EPS | $0.24 | ($0.07) | $0.70 | $0.57 |
| Net cash from operations | Not stated by quarter | Not stated by quarter | $1,301m | $1,277m |
- Q2 operating margin was approximately 10.3%, versus effectively zero in Q2 2009; first-half operating margin was approximately 13.2%, compared with 13.9%.
- First-half operating cash flow was slightly higher year over year despite reduced cash inflows from settled commodity derivatives, higher cash operating costs, income taxes and interest.
- Investing cash outflow was $2,230m in the first half, including $2,288m of additions to oil and gas properties, partly offset by working-capital movements and asset-sale proceeds. Operating cash flow less investing outflow was approximately negative $929m.
- Cash was $650m at June 30, 2010, down from $686m at year-end 2009. Long-term debt was $3,734m; total debt principal was $3,760m. The debt-to-total-capitalization ratio rose to 27% from 22%.
- EOG issued $1.0bn of senior notes in May: $500m at 2.95% due 2015 and $500m at 4.40% due 2020. It had no commercial-paper or uncommitted-facility borrowings and no borrowings or letters of credit under its $1.0bn revolving credit agreement at quarter-end.
- The declared dividend was $0.155 per share for Q2, up from $0.145. First-half dividends paid were $75m.
Changes, outlook, risks and unusual items
- Revenue rose 58% in Q2 and 35% in the first half. Higher oil, condensate and NGL prices and increased liquids volumes were important drivers; Q2 wellhead revenue increased 49%. Q2 marketing revenue also rose substantially, but marketing revenue less marketing costs was only $5m.
- First-half results included $45m of mark-to-market derivative gains versus $385m a year earlier. Cash inflows from settled natural gas derivatives were $39m versus $656m. These large prior-year comparisons affect reported revenue and cash-flow trends.
- Operating costs increased, including first-half DD&A of $897m, impairments of $150m and taxes other than income of $154m. Q2 impairments were $80m. Rising production-related, transportation and property costs contributed to the increase.
- Management budgeted approximately $5.6bn for 2010 exploration, development and other property, plant and equipment expenditures, excluding acquisitions. First-half total expenditures were $2.521bn. Management said it intended to manage the budget while maintaining a strong balance sheet, including through planned asset marketing; acceptable bids could lead to sales closing in Q4 2010.
- Management expected oil and liquids production to continue increasing in 2010 compared with 2009. EOG held approximately 505,000 net acres in the Eagle Ford and expected significant oil production there beginning in 2011. These are forward-looking expectations, not guarantees.
- After June 30, EOG entered into natural-gas price swaps for 2011 and 2012. As of August 5, disclosed swaps covered 150,000 MMBtu/day in 2011 and 100,000 MMBtu/day in 2012, at an average $5.44/MMBtu; additional 2011 volume could result if a counterparty exercised a swaption. EOG stated commodity derivatives are not designated as accounting hedges, so mark-to-market changes affect earnings.
- EOG agreed, subject to commercial and regulatory milestones, to acquire Galveston LNG, which holds interests in a proposed Canadian LNG terminal and pipeline. Preliminary project estimates were C$3bn for the terminal and C$1bn for the pipeline; construction estimates remained subject to revision.
- On July 12, EOG entered a Pennsylvania consent order resolving alleged violations related to a June 3 well-control incident. It paid a $353,419 civil penalty and was implementing additional operating practices. State authorities had authorized resumption of permitted operations.
- Management said ordinary-course lawsuits and claims were not expected to have a material adverse effect. Forward-looking risks include commodity prices, drilling and reserve uncertainty, costs and availability of services and transportation, regulation, counterparties, financing and foreign exchange. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether planned asset sales and the conditional Kitimat LNG transaction progress, and their effects on funding and the capital budget.
- Whether liquids-led production growth and the stated Eagle Ford timing are achieved, alongside the continuing decline in natural gas volumes in some regions.
- How commodity prices, derivative positions and mark-to-market accounting affect earnings and cash generation; distinguish derivative gains from realized operating performance.
- Whether the $5.6bn 2010 spending plan can be funded while maintaining liquidity and managing the higher debt ratio.
- Developments in the Pennsylvania incident, required operating changes, and any material environmental, legal or regulatory consequences.