EOG Resources, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. EOG is an independent oil and gas producer focused primarily on U.S. crude oil and liquids-rich assets. This unaudited filing covers the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. Results reflect higher commodity prices and production, including contributions from the 2016 Yates acquisition.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total operating revenues and other | $2.645 billion | $2.119 billion | $7.868 billion | $5.249 billion |
| Operating income (loss) | $215 million | ($193 million) | $450 million | ($1.120 billion) |
| Net income (loss) | $101 million | ($190 million) | $152 million | ($954 million) |
| Diluted earnings (loss) per share | $0.17 | ($0.35) | $0.26 | ($1.74) |
| Operating cash flow | Not separately presented | Not separately presented | $2.938 billion | $1.554 billion |
- Q3 operating margin was approximately 8.1%; nine-month operating margin was approximately 5.7%. These are calculated from reported operating income and total operating revenues and other.
- Q3 production averaged 598,100 barrels of oil equivalent per day (boe/d), up from 555,200; nine-month production averaged 591,000 boe/d, up from 552,100.
- For the first nine months, crude oil and condensate production rose 20% to 326,100 barrels per day, while the composite realized crude price rose 23% to $48.60/bbl. NGL prices rose 56% to $20.87/bbl and natural gas prices rose 41% to $2.28/Mcf; natural gas volumes declined 9%.
- Cash and equivalents were $846 million at September 30, down from $1.600 billion at year-end 2016. Current assets were $2.764 billion versus current liabilities of $2.180 billion.
- Debt was approximately $6.387 billion, including the current portion; the debt-to-total-capitalization ratio was 31%, versus 33% at year-end 2016. EOG repaid $600 million of notes at maturity and had no borrowings or letters of credit under its $2 billion revolving facility.
- Nine-month investing cash outflow was $2.755 billion, including $3.068 billion of cash additions to oil and gas and other property, plant and equipment, partly offset by $192 million of asset-sale proceeds. Financing cash outflow was $933 million, including debt repayment and $289 million of dividends. Cash declined $754 million over the period.
Material changes versus prior period
- Q3 revenue increased 25%; wellhead revenue rose 27%, reflecting higher oil and NGL prices and greater oil production. Nine-month revenue increased 50%, and wellhead revenue increased 45%.
- Profitability recovered from losses in 2016. Higher prices and production contributed, while 2016 results included larger impairments and asset-sale gains. Q3 2017 had an $8 million net asset-disposition loss versus a $108 million gain in Q3 2016; nine-month periods recorded a $34 million loss versus a $102 million gain.
- Nine-month operating expenses increased $1.049 billion, principally alongside higher activity and volumes; per-unit costs disclosed for selected categories declined to $27.08/boe from $29.42/boe. Impairments were $326 million, broadly similar to $322 million in 2016.
- Nine-month capital expenditures and related exploration and development spending rose materially: total expenditures were $3.449 billion versus $1.942 billion. The increase included higher drilling, facilities and leasehold acquisitions.
Outlook, risks and unusual items
- Management estimated 2017 capital expenditures of approximately $3.7–$4.1 billion, excluding acquisitions, and expected total production and crude oil production to increase versus 2016. Spending remained adjustable with market conditions.
- Hurricane Harvey deferred some Eagle Ford production in Q3. U.K. Conwy production had been offline since Q2 due to operational issues; further downtime was expected, with production anticipated to resume in Q1 2018.
- Commodity prices remain volatile. Derivatives are accounted for mark-to-market and are not designated as accounting hedges. At September 30, outstanding commodity derivatives had a net liability fair value of about $1 million. Natural-gas options and swaps limit price exposure on specified volumes.
- The filing identifies oil and gas prices, production and reserve execution, transportation and processing capacity, regulation, weather, financing access, counterparties and geopolitical conditions among material risks.
- EOG expected to pay less than $100,000 under a North Dakota air-pollution consent decree after anticipated reductions and an environmental-project offset; management did not expect a material financial effect. Management also said pending ordinary-course claims were not expected to have a material adverse effect.
- EOG recognized a nine-month net income-tax provision of $96 million, compared with a $409 million benefit in 2016; the effective tax rate increased to 39%, in part because of foreign losses for which tax benefits were not recognized and changes in state tax apportionment.
Important facts for investors to verify
- Whether production growth and realized prices continue to support positive earnings and operating cash flow as commodity prices change.
- Whether the $3.7–$4.1 billion capital budget is met and how the elevated investment pace affects cash, debt and returns.
- The timing and impact of the Conwy restart, and recovery of Eagle Ford volumes deferred by Hurricane Harvey.
- The composition and sustainability of reported revenue growth, particularly the large gathering, processing and marketing revenues and associated costs.
- Future impairment charges, asset dispositions, tax rates and derivative gains or losses, which affected period-to-period comparisons.