EOG Resources, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. Amounts below are U.S. dollars unless otherwise noted.
Business context
EOG explores for, develops, produces and markets crude oil, natural gas liquids (NGLs) and natural gas, primarily in the United States, with operations in Trinidad, China and Canada. Its strategy emphasizes returns on capital, cost control, reserve recovery and funding investment while maintaining a strong balance sheet. Approximately 98% of year-end proved reserves, on an oil-equivalent basis, were in the United States.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenues and other | $17.380 billion | $17.275 billion |
| Operating income | $3.699 billion | $4.469 billion |
| Net income | $2.735 billion | $3.419 billion |
| Diluted earnings per share | $4.71 | $5.89 |
| Net cash provided by operating activities | $8.163 billion | $7.769 billion |
| Net cash used in investing activities | $6.177 billion | $6.170 billion |
| Cash and cash equivalents at year-end | $2.028 billion | $1.556 billion |
| Total debt, as reported in selected financial data | $5.175 billion | $6.083 billion |
Operating margin was approximately 21.3% in 2019 versus 25.9% in 2018; net margin was approximately 15.7% versus 19.8%. Operating cash flow increased despite lower net income, supported in part by derivative settlements, lower cash income taxes and working-capital movements. Total expenditures were $6.900 billion, including $6.628 billion for exploration and development and asset-retirement costs. Dividends paid were $588 million.
- Total production rose 14% to 818 thousand barrels of oil equivalent per day (MBoed), from 719 MBoed. U.S. production rose to 768 MBoed from 665 MBoed.
- Crude oil and condensate production increased 14% to 456 thousand barrels per day; NGL production rose 16% to 134 thousand barrels per day; natural gas deliveries rose 12% to 1,366 million cubic feet per day.
- Composite realized crude oil and condensate price fell 11% to $57.72 per barrel; NGL price fell 40% to $16.03 per barrel; natural gas price fell 18% to $2.38 per Mcf.
- Wellhead revenues declined 3% to $11.581 billion. Higher oil and gas volumes partly offset lower commodity prices. Total reported revenue increased slightly, also reflecting gathering, processing and marketing revenue and a swing to $180 million of mark-to-market derivative gains from $166 million of losses in 2018.
- Operating expenses increased to $13.681 billion from $12.806 billion. DD&A rose $315 million as production increased; impairment charges rose to $518 million from $347 million, including write-downs of legacy natural-gas assets.
- Year-end proved reserves increased 401 million Boe to 3.329 billion Boe. Reserve additions from drilling and technical evaluation were 750 million Boe; revisions were negative 60 million Boe, including effects of lower prices used in the year-end estimates.
Material changes and balance sheet
Net income fell 20% from 2018, largely reflecting weaker commodity prices and higher impairments, despite production growth. Debt declined after EOG repaid $900 million of notes at maturity in June. The debt-to-total-capitalization ratio improved to 19% from 24%. EOG had no year-end borrowings under its $2.0 billion revolving credit facility, which matures in 2024 and can be extended subject to conditions.
Current assets were $5.273 billion and current liabilities were $4.487 billion at year-end. EOG adopted lease accounting in 2019, recognizing operating lease right-of-use assets and liabilities; the filing reports $773 million of operating lease assets and $799 million of operating lease liabilities. Debt maturities included $1.0 billion in 2020 and $750 million in 2021.
For the fourth quarter, unaudited net income was $637 million, or $1.10 per diluted share, versus $893 million, or $1.54 per diluted share, in fourth-quarter 2018. Quarterly revenue and other was $4.320 billion versus $4.575 billion.
Outlook, risks and unusual items
- 2020 plan: Capital expenditures were estimated at $6.3–$6.7 billion, excluding acquisitions and non-cash exchanges. EOG expected both total and crude-oil production to increase from 2019 and planned to focus U.S. investment on the Delaware Basin, Eagle Ford and Rocky Mountain area. These were expectations stated in the filing, not guarantees.
- Commodity exposure: Management described prices as volatile and not reliably predictable. Its stated 2020 sensitivity was approximately $117 million in net income and $152 million in pretax operating cash flow for each $1 per barrel change in crude oil price, together with the estimated NGL price change; natural-gas sensitivity was approximately $31 million and $40 million, respectively, for each $0.10 per Mcf change.
- Hedging: EOG uses commodity derivatives, with changes in fair value recognized in earnings rather than hedge accounting. Contracts can reduce downside exposure but may limit gains from higher prices and involve counterparty risk.
- Commitments: Contractual obligations totaled $15.068 billion at year-end, including $6.034 billion of transportation and storage commitments, $850 million of operating lease payments and $5.140 billion of debt principal. Fixed-volume sales commitments extended through 2024 and beyond and were expected to be met from future production.
- Risks: Key exposures include oil, NGL and gas price declines; drilling and reserve-estimation uncertainty; access to gathering, processing and transport capacity; environmental, climate and hydraulic-fracturing regulation; operational incidents and extreme weather; cybersecurity threats; and international political and regulatory risks.
- Contingencies and controls: EOG disclosed ordinary-course lawsuits and claims, including contract, personal-injury, property-damage and title matters; management did not expect them, individually or collectively, to materially adversely affect the company. The auditor gave unqualified opinions on the financial statements and internal control, and identified reserve estimates and related depletion and impairment as a critical audit matter.
- Other notable items: EOG recorded $124 million in net gains on asset dispositions. The $2.2 billion tax benefit recorded in 2017 from U.S. tax reform did not recur; the 2019 effective tax rate was 23%, versus 19% in 2018. The board raised the quarterly dividend to $0.375 per share in February 2020, effective with the April 2020 payment.
Investor verification points
- Reconcile production growth with lower realized prices and the decline in net income and operating margin.
- Review derivative volumes, settlement cash flows, mark-to-market accounting and the portion of 2020 production left exposed to market prices.
- Assess the quality and economics of the 750 million Boe of reserve additions, negative revisions, and the assumptions underlying reserve estimates and impairment testing.
- Evaluate whether the $6.3–$6.7 billion 2020 capital plan, production-growth expectations and dividend increase are supportable under lower-price scenarios.
- Examine debt maturities, the $15.068 billion contractual-obligation total, transportation commitments and lease liabilities for their effect on future liquidity.
- Check subsequent filings for changes to guidance, commodity conditions, legal contingencies, regulatory developments or the status of operational and cybersecurity risks.