EOG Resources, Inc. — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2011, compared with the three months ended March 31, 2010. EOG is an independent oil and gas producer with operations in the United States, Canada, Trinidad, the United Kingdom and China. Unless noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net operating revenues | $1.897 billion | $1.371 billion; up 38% |
| Operating income | $272 million | $220 million; up 24% |
| Net income | $134 million | $118 million; up 14% |
| Diluted EPS | $0.52 | $0.46 |
| Operating margin | 14.4% | 16.0% |
| Net margin | 7.1% | 8.6% |
| Cash from operating activities | $957 million | $620 million |
| Cash used in investing activities | $1.428 billion | $1.040 billion |
| Cash and cash equivalents | $1.668 billion at March 31 | $789 million at December 31, 2010 |
| Total debt | $5.225 billion | $5.223 billion at December 31, 2010 |
| Debt-to-total capitalization | 31% | 34% at December 31, 2010 |
Revenue growth was led by crude oil and condensate: sales rose 86% to $757 million, reflecting higher production and prices. Natural gas liquids revenue rose 44% to $149 million, primarily on higher volumes. Natural gas revenue fell 14% to $584 million as lower prices more than offset modest volume growth. Production averaged 409.1 thousand barrels of oil equivalent per day, up from 358.5 thousand; oil, condensate and liquids rose to approximately 32% of company production from 25%.
Cash from operations less investing cash outflows was negative $470 million, versus negative $419 million in Q1 2010. Cash increased chiefly because of the stock offering: financing activities provided $1.350 billion, including $1.388 billion of net proceeds from common stock issuance. The current ratio was approximately 1.44 at March 31, 2011, compared with 1.14 at December 31, 2010. EOG reported no outstanding borrowings under its revolving credit agreements or commercial paper at quarter-end. Interest expense increased to $50 million from $25 million.
Material changes versus prior comparable period
- Operating cash flow increased $337 million, supported by higher wellhead revenue, favorable working-capital movements and lower cash income taxes.
- Operating expenses rose to $1.625 billion from $1.151 billion. DD&A increased to $568 million from $432 million; impairment expense was $89 million versus $70 million. Lease and well expense and marketing costs also increased.
- Operating margin and net margin declined despite higher income, reflecting the growth in operating costs and revenue mix. The filing reports total cost per Boe, excluding specified cost categories, of $27.11 versus $24.57.
- Crude oil and condensate volumes rose 48%; natural gas liquids volumes rose 44%; natural gas volumes rose 3%. Composite realized prices increased 20% for oil and condensate, were nearly flat for liquids, and fell 17% for natural gas.
- Derivative mark-to-market results shifted to a $67 million loss from an $8 million gain. Asset-disposition gains were $72 million, compared with a $1 million loss in Q1 2010.
Outlook, management commentary, risks and unusual items
- Management forecast 2011 exploration, development and other property, plant and equipment expenditures of $6.4–$6.6 billion, excluding acquisitions. First-quarter expenditures were $1.745 billion. Management expected full-year capital expenditures to exceed operating cash flow and planned to fund the anticipated shortfall partly through asset sales and financing flexibility.
- The majority of planned spending was directed to U.S. and Canadian oil drilling, with some natural gas spending to hold acreage. Management expected oil, condensate and natural gas liquids production to continue increasing in 2011, both in volume and as a share of production.
- After quarter-end, EOG received $387 million from sales of natural gas assets, primarily in Texas. First-quarter asset-sale proceeds were approximately $260 million.
- EOG sold 13.57 million shares at $105.50 per share on March 7, receiving approximately $1.39 billion net. The quarterly dividend was raised from $0.155 to $0.16 per share, effective for the April 2011 payment.
- Commodity derivative contracts produced a $67 million noncash mark-to-market loss in Q1. At March 31, derivative balances included a $98 million crude-oil-swap liability and $53 million of natural-gas-swap assets. Subsequent trades increased reported hedge volumes; these contracts can materially affect reported results and realized exposure.
- A $47 million pretax impairment followed an accepted offer to sell properties carried at $115 million for fair value of $67 million. Total reported impairments were $89 million.
- Four projects had $57 million of exploratory well costs capitalized for more than one year, including projects in the U.K., China and British Columbia. Their outcomes depend on continued evaluation, infrastructure arrangements and regulatory approvals; management provided project-specific expected milestones.
- Ordinary-course lawsuits and claims were pending; management said their resolution was not expected to have a material adverse effect. The filing identifies commodity prices, drilling and reserve-recovery results, service and transportation availability and cost, regulation, financing access, counterparty credit, foreign exchange and political conditions among forward-looking risks.
Important facts for investors to verify
- Whether production growth, particularly in U.S. liquids plays, is sustainable and delivers returns that justify the elevated capital program.
- How the $6.4–$6.6 billion 2011 spending plan will be funded, including the timing and proceeds of planned asset sales and the effect on debt and equity.
- The underlying earnings trend apart from derivative mark-to-market movements and the $72 million of property-disposition gains.
- Realized oil and gas prices, derivative positions and settlements, and the potential impact of counterparties’ exercise options on swap volumes.
- Progress, approvals and impairment exposure for suspended exploratory wells and the Kitimat LNG and pipeline project; EOG’s resulting interests in the LNG terminal and pipeline were each 30%.