EOG Resources, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. EOG is an independent oil and natural gas producer. This unaudited filing covers the three months ended March 31, 2017, compared with the same period in 2016. Results reflect operations in the United States and internationally; the 2016 Yates Entities acquisition contributed to U.S. production.
Key financial and operating metrics
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Net operating revenues | $2.611 billion | $1.354 billion; up 93% |
| Operating income (loss) | $107.7 million | $(638.1) million |
| Net income (loss) | $28.5 million | $(471.8) million |
| Diluted EPS | $0.05 | $(0.86) |
| Operating cash flow | $898.0 million | $291.6 million |
| Cash and cash equivalents, March 31 | $1.547 billion | $1.600 billion at Dec. 31, 2016 |
| Total debt, including current portion | Approximately $6.987 billion | Debt-to-total-capitalization ratio was 33%, unchanged from year-end |
| Production | 570.7 MBoed | 549.9 MBoed; up about 4% |
| Dividends declared per share | $0.1675 | $0.1675 |
Wellhead revenues rose 82% to $1.814 billion, primarily reflecting higher commodity prices and increased oil production. Composite realized prices, excluding derivatives, rose year over year: crude oil and condensate to $50.34/bbl from $30.85, NGLs to $21.63/bbl from $10.41, and natural gas to $2.42/Mcf from $1.50. Oil and condensate production increased 18%; natural gas deliveries decreased 13%.
Operating expenses totaled $2.503 billion, including $193.2 million of impairments and $816.0 million of DD&A. The filing reports no consolidated gross-margin measure. Cash flow from operations less cash additions to oil and gas and other property, plant and equipment was approximately negative $48 million; this calculation excludes asset-sale proceeds and other investing cash flows.
At March 31, current assets were $3.394 billion and current liabilities were $2.032 billion. EOG had no commercial paper borrowings or revolver borrowings outstanding and no letters of credit under its $2.0 billion revolving credit agreement. The 2017 notes due were classified as long-term based on management’s intent and ability to replace them with other long-term debt.
Material changes versus Q1 2016
- Revenue increased 93%, and EOG returned to profitability from a substantial year-ago loss. Higher wellhead prices were the principal driver; derivative mark-to-market gains were $62 million versus $5 million.
- Operating cash flow increased by $606 million, mainly from higher wellhead revenues, partly offset by higher cash taxes and operating costs.
- Oil and condensate production rose to 315.7 MBbld from 267.9 MBbld; natural gas production fell to 1,058 MMcfd from 1,215 MMcfd. Total oil-equivalent production increased to 570.7 MBoed from 549.9 MBoed.
- Impairments increased to $193 million from $72 million, including $138 million of proved-property and related-asset impairments. DD&A fell to $816 million from $929 million, reflecting lower U.S. and Trinidad unit rates, partly offset by higher U.S. production.
- First-quarter total expenditures rose to $1.015 billion from $613 million. Financing cash flow was a $115 million use, versus a $226 million source in Q1 2016, when debt issuance contributed materially.
Outlook, risks, and unusual items
- Management expected 2017 total production and crude oil production to increase versus 2016. Planned activity emphasized U.S. crude oil drilling; Trinidad plans included four additional net wells to be drilled and three completed during the remainder of 2017.
- 2017 exploration, development, and other property and equipment expenditures were estimated at $3.7 billion to $4.1 billion, excluding acquisitions. EOG said it could adjust spending as conditions warranted.
- Commodity prices remain volatile and materially affect cash generation. EOG reported Q1 average NYMEX prices of $51.86/bbl for crude oil and $3.25/MMBtu for natural gas, up 55% and 59%, respectively, from Q1 2016.
- EOG uses financial derivatives to manage commodity-price exposure but does not designate them as accounting hedges. Q1 derivative mark-to-market gains were $62 million, while net cash received from settlements was $2 million. Contracts include natural-gas swaps, options, and collars that limit exposure above or below specified prices.
- Other unusual items include a $17 million net loss on asset dispositions, approximately $47 million of sale proceeds, and properties held for sale with $88 million book value and $13 million of associated retirement obligations at quarter-end.
- Management said ordinary-course lawsuits and claims were not expected to have a material adverse effect, although outcomes cannot be predicted. Key risks include commodity prices, development and production performance, reserve estimates, access to infrastructure and capital, regulation, and counterparty performance.
- The board-approved increase in authorized common shares from 640 million to 1.28 billion was approved by stockholders and filed in April 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether production growth and the $3.7–$4.1 billion 2017 spending plan are being delivered, and how spending is funded.
- How much of the earnings and cash-flow improvement persists if commodity prices change; distinguish realized production prices from derivative gains and marketing revenue.
- The nature, valuation, and potential recurrence of the $193 million impairment expense and the properties held for sale.
- Repayment or refinancing of the $600 million principal amount of 5.875% notes due 2017, alongside total debt and liquidity.
- The terms and scale of outstanding commodity derivatives and their potential effects on realized prices, cash flows, and collateral requirements.
- Final purchase-price allocation for the Yates acquisition and any material developments in legal, regulatory, or operational contingencies.