EOG Resources, Inc. — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. EOG is an independent oil and gas producer operating in the U.S., Canada, Trinidad and other international markets. Its strategy emphasizes returns on capital, cost control and production growth, with a growing focus on U.S. crude oil and liquids-rich assets.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total net operating revenues | $3.357 billion | $2.807 billion |
| Operating income | $833 million | $560 million |
| Net income | $495 million | $324 million |
| Diluted EPS | $1.82 | $1.20 |
| Cash from operations | $1.425 billion | $1.078 billion |
| Cash and equivalents at period end | $1.108 billion | $294 million |
- Revenue rose 20% and net income rose 53% year over year. Operating margin was approximately 24.8%, versus 19.9%; net margin was approximately 14.7%, versus 11.5%.
- Production averaged 475.6 thousand barrels of oil equivalent per day, up 6% from 449.8 thousand. Crude oil and condensate volumes increased 33%; natural gas volumes declined 11%. Oil and NGLs accounted for about 52% of total production, versus 43% a year earlier.
- Wellhead revenues increased 26% to $2.362 billion. Higher oil volumes and prices drove growth, while lower NGL prices reduced NGL revenue. Natural gas revenue rose on higher prices despite lower volumes.
- Operating expenses increased 12% to $2.523 billion. DD&A rose to $846 million, while transportation costs rose to $184 million. Impairment expense fell to $54 million from $133 million.
- Capital expenditures and other property, plant and equipment expenditures totaled $1.746 billion. Cash from operations less these expenditures was approximately negative $321 million. Investing cash outflow was $1.160 billion, including $479 million of asset-sale proceeds.
- At March 31, current assets were $4.081 billion and current liabilities $3.075 billion (current ratio approximately 1.33). Total debt was approximately $6.312 billion; the reported debt-to-total-capitalization ratio was 31%, compared with 32% at year-end 2012.
Material changes and notable items
- Crude oil and condensate revenue rose 36%, reflecting higher production, particularly in the Eagle Ford and Permian Basin, and a 4% increase in the composite realized price to $105.61 per barrel. NGL revenue fell 15% as the composite price declined 25% to $31.78 per barrel.
- Mark-to-market commodity derivatives swung to a $105 million loss from a $134 million gain in Q1 2012. Settled derivatives generated a $67 million cash inflow, compared with $134 million.
- Asset disposition gains were $164 million, primarily from Canadian and Texas transactions. The Canadian sale included EOG’s interest in the planned Kitimat LNG terminal, proposed Pacific Trail Pipelines and about 28,500 undeveloped Horn River Basin acres.
- Net cash increased $232 million during the quarter. The company had no commercial-paper borrowings or revolving-credit-facility borrowings outstanding at March 31; its unsecured revolving facility totaled $2.0 billion.
- The quarterly dividend was increased from $0.17 to $0.1875 per share, effective with the April 2013 payment.
Outlook, risks and contingencies
- EOG estimated 2013 capital expenditures of $7.0–$7.2 billion, excluding acquisitions, focused mainly on U.S. crude oil and liquids-rich drilling. Management expected spending to exceed operating cash flow and planned non-core asset sales targeting $550 million; approximately $480 million of sale proceeds had been received in Q1.
- Management expected crude oil and NGL production to increase in 2013, both in volume and as a share of company production. First production from the U.K. Conwy/Corfe field was anticipated in early 2014. These are forward-looking expectations, not assurances.
- Commodity prices and demand, production and reserve performance, development costs, transportation capacity, regulation, financing access, counterparty credit and international political conditions are among the cited risks. Derivatives are marked to market through earnings and can cause material period-to-period volatility; counterparties also hold certain extension or entry options on contracts.
- Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect. Separately, an April 2013 North Dakota air-emissions consent agreement requires a $198,700 civil penalty; EOG stated it had self-reported the potential violations and implemented additional controls.
- The filing says Q1 results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Assess how much earnings growth reflects underlying production and realized prices versus asset-sale gains and non-cash derivative marks.
- Track delivery of the $7.0–$7.2 billion capital program, operating cash flow, and whether planned asset sales cover the projected funding gap.
- Monitor oil and NGL production growth, declining natural gas volumes, realized prices, and rising transportation and DD&A costs.
- Review derivative positions and counterparties’ embedded options, along with the potential for mark-to-market and settlement cash-flow volatility.
- Confirm debt refinancing plans for 2014 maturities, liquidity and the sustainability of the dividend as investment spending exceeds operating cash flow.