EOG Resources, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. EOG is an independent oil and gas producer focused on drilling and developing North American crude-oil and liquids-rich acreage. The filing reflects the two-for-one stock split paid March 31, 2014; share and per-share figures have been restated.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total net operating revenues | $5.119 billion | $3.541 billion | $13.390 billion | $10.738 billion |
| Operating income | $1.786 billion | $770 million | $4.015 billion | $2.695 billion |
| Net income | $1.104 billion | $462 million | $2.471 billion | $1.617 billion |
| Diluted EPS | $2.01 | $0.85 | $4.51 | $2.96 |
| Net cash provided by operating activities | Not provided for the quarter | $6.539 billion | $5.328 billion |
- Q3 operating margin was approximately 34.9%, versus 21.7% a year earlier; net margin was approximately 21.6%, versus 13.1%. These margins reflect substantial mark-to-market derivative gains in 2014.
- Q3 revenue rose 45%. Wellhead revenue increased 15%, while net mark-to-market commodity derivative results swung to a $469 million gain from a $293 million loss. Gathering, processing and marketing revenue rose, but associated revenue less marketing costs declined $13 million due mainly to lower crude marketing margins.
- Q3 production reached 614.1 thousand barrels of oil equivalent per day, up 17% year over year. Crude oil and condensate volume rose 27%; its composite realized price fell 10% to $97.13 per barrel. For the first nine months, production rose 17% and composite crude price declined 6%.
- For the first nine months, operating cash flow increased 23% to $6.539 billion. Investing used $6.131 billion, including $5.653 billion in oil and gas property additions; the difference between operating and investing cash flows was approximately $408 million. Cash increased $163 million to $1.481 billion.
- At September 30, total debt was approximately $5.910 billion, including $5.903 billion of long-term debt and $6.6 million current. Debt-to-total capitalization was 25%, down from 28% at year-end 2013. EOG had no borrowings or letters of credit under its $2.0 billion revolving credit agreement. Current assets were $4.885 billion and current liabilities $3.379 billion.
- Cash dividends declared per share were $0.1675 for Q3 versus $0.0938 a year earlier. In August, the board raised the quarterly dividend from $0.125 to $0.1675 per share, effective with the October 2014 payment.
Material changes and management outlook
- Growth was led by U.S. crude production from the Eagle Ford, Bakken and Permian Basin. Crude oil and NGL represented approximately 69% of North American production for the first nine months, compared with 62% in 2013. Management expected 2014 crude and condensate and NGL production to increase in both volume and share of company production versus 2013.
- 2014 exploration, development and other property, plant and equipment expenditures were estimated at $8.1 billion to $8.3 billion, excluding acquisitions. Spending was primarily directed to U.S. crude oil and, to a lesser extent, liquids-rich drilling. EOG said it could adjust the budget and had financing flexibility.
- International plans included anticipated Conwy field first production in Q2 2015, additional Trinidad development-well activity in Q4 2014, and a five-well China drilling program beginning in Q4 2014. EOG continued evaluating its Argentina exploration results.
- Derivative accounting creates earnings volatility: EOG does not designate its financial commodity derivatives as accounting hedges. At September 30, crude oil and natural gas derivatives were a net asset of $139 million. Contracts covered portions of 2014 and 2015 production, with some volumes subject to counterparties’ extension or exercise options.
Risks, contingencies and unusual items
- Key disclosed risks include oil, gas and NGL price and demand fluctuations; reserve and drilling results; access to transport and processing capacity; service and equipment availability and cost; regulation and taxes; counterparty and financing risk; and geopolitical, weather, foreign-exchange and operational risks.
- Q3 impairment expense was $56 million; first-nine-month impairment expense was $208 million. Separately, the filing reports $84 million of pretax impairments of proved properties and other assets for the nine-month period, including $58 million based on an accepted third-party offer.
- Asset retirement obligations increased to $907 million from $762 million at year-end 2013. EOG reported ordinary-course lawsuits and claims, but management believed their resolution would not have a material adverse effect.
- Cash capital spending and accrued capital expenditures differ: accrued capital expenditures were $960 million at September 30, versus $743 million a year earlier. The filing states operating results for the interim periods are not necessarily indicative of full-year results.
Investor verification priorities
- Separate recurring operating performance from the $469 million Q3 mark-to-market derivative gain and assess cash settlements, contract terms and counterparty options.
- Verify production growth, realized prices and unit operating costs across the Eagle Ford, Bakken and Permian, including the effect of crude-price declines.
- Track delivery against the $8.1–$8.3 billion 2014 spending estimate, operating cash generation and liquidity, including accrued capital expenditures and the planned funding of future investment.
- Review debt maturities and the company’s stated intent and ability to refinance or replace the $500 million of 2.95% notes due 2015 classified as long-term.
- Monitor execution and timing of Conwy, Trinidad and China projects, and further developments in Argentina, impairments and asset-retirement obligations.