EOG Resources, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the same 2014 periods. EOG is an independent oil and gas producer focused on returns, cost control and internally generated drilling prospects. Its U.S. production mix remained liquids-heavy: oil and NGLs were approximately 71% of U.S. production in the first half, versus 69% a year earlier. EOG sold substantially all Canadian operations in late 2014.
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net operating revenues | $2.470B | $4.188B | $4.788B | $8.271B |
| Operating income (loss) | $39.6M | $1.145B | $(133.4)M | $2.229B |
| Net income (loss) | $5.3M | $706.4M | $(164.5)M | $1.367B |
| Diluted EPS | $0.01 | $1.29 | $(0.30) | $2.49 |
| Cash from operating activities | — | $1.848B | $4.202B |
Q2 operating and net margins were approximately 1.6% and 0.2%, respectively, down from 27.3% and 16.9% in Q2 2014. Revenue fell 41% in Q2 and 42% in the first half. Lower commodity prices were the primary driver: Q2 composite realized wellhead prices, excluding derivatives, were $57.45/barrel for oil (down 44%), $15.54/barrel for NGLs (down 55%) and $2.40/Mcf for gas (down 41%). Q2 total production was 560.5 thousand Boe/day, down from 591.0 thousand; first-half production was 574.9 thousand Boe/day versus 577.3 thousand.
First-half investing cash use was $2.867B, including $2.813B of property and equipment additions; total expenditures including asset retirement costs were $2.931B. Operating cash flow was therefore below total expenditures by about $1.083B. Cash declined $720M to $1.367B from year-end 2014. At June 30, total debt was approximately $6.400B and the debt-to-total-capitalization ratio was 27%, versus 25% at year-end. EOG had no commercial paper or revolving-credit borrowings outstanding, and its $2.0B revolving facility was undrawn. Current assets were $3.738B and current liabilities $2.278B.
Material changes and notable items
- First-half oil and condensate volumes increased 5% to 288.6 thousand barrels/day, largely from the Eagle Ford and Permian; sharply lower prices more than offset volume growth.
- Derivative mark-to-market results improved to a $28M gain in the first half from a $385M loss in 2014. Cash received from derivative settlements was $561M, compared with $121M of payments in the prior-year period. The contracts are not designated as accounting hedges, so mark-to-market changes affect reported earnings.
- Q2 impairments were $69M, up $29M year over year, primarily from increased amortization of U.S. unproved-property costs amid lower commodity prices. First-half impairments totaled $138M.
- EOG issued $1.0B of senior notes in March and repaid $500M of notes at maturity in June. On July 21, after quarter-end, it replaced its $2.0B revolving agreement with a new facility maturing in 2020, with potential commitment increases up to $3.0B subject to conditions.
- Quarterly dividends declared rose to $0.1675/share from $0.1250. EOG made no purchases under its board-authorized repurchase program in Q2.
Outlook, risks and contingencies
Management estimated 2015 capital expenditures of approximately $4.7B–$4.9B, excluding acquisitions, with most directed to U.S. oil drilling. The program was designed for capital discipline and primarily to be funded from internally generated cash and cash on hand; spending could be adjusted as conditions warrant. EOG expected 2015 oil, condensate and NGL production to be relatively flat versus 2014 and planned to build an inventory of uncompleted wells pending a commodity-price recovery. First production from the U.K. Conwy field was anticipated in Q4 2015. Management was evaluating options for its Argentina investment.
Key risks include commodity-price and demand volatility, execution and reserve-recovery uncertainty, access to transportation and services, financing availability, regulatory and environmental requirements, counterparty credit, foreign exchange and political risks. EOG reported ordinary-course lawsuits and claims; management did not expect their resolution, individually or collectively, to materially adversely affect financial position, results or cash flow. The filing notes that forward-looking statements are not guarantees. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Check realized commodity prices, production volumes and derivative settlement cash flows, distinguishing cash settlements from noncash mark-to-market gains or losses.
- Assess whether the $4.7B–$4.9B capital plan and production outlook remain supportable if prices stay weak, including the impact on cash generation and liquidity.
- Review debt maturities, the new revolving facility’s terms and covenant compliance; the filing classifies $400M of 2016 notes as long-term based on intent and ability to refinance.
- Monitor impairment assumptions, unproved-property lease expirations and reserve revisions, which affect future charges and DD&A.
- Follow the Conwy start-up, Argentina investment review, and any changes in litigation, regulatory or environmental contingencies.