EOG Resources, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 27, 2017. EOG explores, develops, produces and markets oil, natural gas liquids (NGLs) and natural gas, primarily in the United States. This is an annual filing; it also provides separate fourth-quarter results.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net operating revenues | $7.651 billion | $8.757 billion |
| Operating income (loss) | $(1.225) billion | $(6.686) billion |
| Net income (loss) | $(1.097) billion | $(4.525) billion |
| Net loss per diluted share | $(1.98) | $(8.29) |
| Cash provided by operating activities | $2.359 billion | $3.595 billion |
| Capital expenditures, including acquisitions | $6.554 billion | $5.216 billion |
| Cash and cash equivalents at year-end | $1.600 billion | $719 million |
| Total debt at year-end | $6.986 billion | $6.655 billion |
Revenue declined 13%, primarily because lower realized commodity prices more than offset higher NGL volumes. Composite realized prices fell 12% for crude oil and condensate, 25% for natural gas and were roughly flat for NGLs. Production averaged 560 thousand barrels of oil equivalent per day, down from 572 thousand in 2015; oil and NGLs represented about 73% of U.S. production.
Reported losses included $620 million of impairment charges in 2016, compared with $6.614 billion in 2015, when large proved-property impairments reflected the commodity-price downturn. The 2016 charges included $116 million for proved properties, $291 million for unproved properties, $61 million for obsolete inventory and $138 million for firm commitment contracts associated with divested Haynesville assets. The filing does not present a single comparable operating-margin measure.
Year-end total assets were $29.459 billion and stockholders’ equity was $13.982 billion. Debt-to-total capitalization was 33%, versus 34% a year earlier. EOG had no commercial paper outstanding at year-end and no borrowings under its $2.0 billion revolving credit facility. The $600 million notes due 2017 were classified as long-term based on management’s intent and ability to replace them with other long-term debt. Current and long-term debt maturities and other contractual commitments remain significant.
Material changes and developments
- On October 4, 2016, EOG completed the Yates Entities acquisition for approximately $2.4 billion in total consideration, primarily issuing about 25 million shares. The transaction added acreage in the Delaware Basin, Powder River Basin and other Western areas. Yates results were consolidated from the closing date; the acquired entities contributed $71 million in revenue and $8 million in operating income in 2016.
- Operating cash flow fell $1.236 billion year over year, reflecting lower wellhead revenue and less cash received from derivative settlements, partly offset by lower cash operating costs.
- EOG received $1.119 billion in proceeds from asset sales and recognized a net $206 million gain on dispositions. It sold its Argentina assets and divested Haynesville and Barnett properties during 2016.
- Net proved reserves increased 29 million Boe to 2.147 billion Boe. Crude oil and NGL reserves rose, while natural gas reserves declined. Reserve revisions and sales were affected by commodity prices and asset dispositions.
- The standardized measure of discounted future net cash flows for proved reserves was $8.812 billion, down from $9.621 billion in 2015; this standardized measure is not presented by EOG as a current-value estimate.
Outlook, risks and contingencies
For 2017, EOG forecast capital expenditures of approximately $3.7 billion to $4.1 billion, excluding acquisitions, with spending focused mainly on U.S. oil drilling. Management expected total production and crude oil production to increase from 2016 and planned to continue reducing costs and improving well performance. Key activity areas included the Eagle Ford, Delaware Basin and Rocky Mountain region. These are forward-looking expectations, not guarantees.
At February 20, 2017, EOG reported 2017 crude oil swaps covering approximately 35,000 barrels per day at a weighted average $50.04 per barrel for the first half; its broader outlook stated approximately 5% of forecast crude production hedged. It also reported natural gas swaps and options/collars; management estimated approximately 30% of forecast gas production hedged at about $3.07 per MMBtu. Commodity price sensitivity was estimated at about $77 million of net income and $96 million of operating cash flow for each $1-per-barrel change in oil price, and $12 million and $15 million, respectively, for each $0.10-per-Mcf change in gas price, subject to stated assumptions.
- Principal risks: volatile oil, gas and NGL prices; reserve-estimation uncertainty; drilling and operating hazards; access to gathering, processing and transportation capacity; dependence on customers and counterparties; financing and refinancing conditions; and competition for acreage, services and personnel.
- Regulatory and environmental exposure: environmental, emissions and hydraulic-fracturing rules could increase costs, restrict operations or delay development. EOG noted uncertainty about future climate and federal regulatory policy.
- Commitments and legal matters: contractual obligations totaled $13.138 billion at year-end, including $3.428 billion for transportation and storage services. Various ordinary-course lawsuits and claims were pending; management did not expect their resolution, individually or collectively, to materially adversely affect the company.
- Unusual and accounting items: the Yates purchase-price allocation was preliminary, and management excluded Yates internal controls from its year-end controls assessment. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management reported its controls effective, subject to the Yates exclusion.
EOG declared dividends of $0.67 per share for 2016 and stated it intended to continue quarterly dividends, while noting future amounts depend on financial condition, cash flows and investment opportunities. No shares were repurchased under the board-authorized program in 2016.
Important facts for investors to verify
- Whether commodity prices, realized differentials and hedge settlements support the 2017 production, cash-flow and capital-spending outlook.
- Progress integrating Yates assets and personnel, and the final purchase-price allocation, acquired reserves and expected returns.
- Debt refinancing plans for the $600 million 2017 maturity, liquidity availability and capacity to fund capital spending, dividends and contractual commitments.
- Reserve changes, especially the impact of price assumptions, development costs and performance in the Delaware Basin and other core plays.
- Whether asset-sale proceeds, impairment assumptions and remaining divestiture-related obligations are consistent with the filing’s estimates.