EOG Resources, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 1, 2011. Unaudited consolidated results. Dollar amounts below are in millions unless otherwise noted.
Business context
EOG is an independent oil and natural gas producer operating in the United States, Canada, Trinidad, the United Kingdom and China, with 2011 activity also in Argentina. Management emphasized capital returns, cost control and growth in crude oil and natural gas liquids, particularly through U.S. plays including Eagle Ford and the Fort Worth Basin.
Financial and operating performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenues | $2,885.7 | $1,582.1 | $7,353.1 | $4,310.7 |
| Operating income (loss) | $950.0 | $(11.7) | $1,810.7 | $348.7 |
| Net income (loss) | $540.9 | $(70.9) | $970.4 | $107.0 |
| Diluted EPS | $2.01 | $(0.28) | $3.66 | $0.42 |
| Operating cash flow | Not stated separately | Not stated separately | $3,341.5 | $2,085.7 |
| Production | 427.3 thousand Boe/day | 396.3 thousand Boe/day | 416.4 thousand Boe/day | 375.0 thousand Boe/day |
- Q3 revenue rose 82%; nine-month revenue rose 71%. Nine-month crude oil and condensate revenue increased 94%, and natural gas liquids revenue rose 71%; natural gas revenue declined 4%.
- Reported revenue included commodity derivative mark-to-market gains of $357.7 in Q3 and $480.5 for nine months, plus net asset-disposition gains of $207.5 and $443.0, respectively. These items materially affect comparisons with underlying production sales.
- Q3 composite realized prices were $87.49/Bbl for crude oil, $51.02/Bbl for NGLs and $3.95/Mcf for natural gas, excluding financial derivatives. Nine-month production mix shifted toward liquids: oil and NGLs were approximately 35% of total production versus 26% a year earlier.
- Nine-month operating cash flow was $3,341.5. Cash capital additions to oil and gas and other property, plant and equipment totaled approximately $5,167.6; cash proceeds from asset sales were $1,294.6. Management’s broader reported total expenditures were $5,418 for nine months.
- At September 30, cash was $1,386.7; current assets were $3,735.4 and current liabilities $2,666.3. Debt carrying value was approximately $5,227.7, including $220.0 current debt and $5,007.7 long-term debt. Management reported a 29% debt-to-total-capitalization ratio, down from 34% at year-end 2010.
- Dividends declared were $0.16 per share in Q3, versus $0.155 a year earlier. Nine-month dividends paid were $124.1.
Material changes and notable items
- Profit improved sharply from the prior-year Q3 loss and increased substantially for the nine-month period. Higher liquids production and prices, derivative gains and asset-sale gains contributed; these are partly offset by higher operating costs and DD&A.
- Nine-month operating expenses increased to $5,542.4 from $3,962.0. DD&A rose to $1,822.9, and lease and well expense to $680.7. Nine-month impairments were $531.4, including $391 of proved-property write-downs; the filing identifies Canadian shallow gas assets among the principal impairment-related properties.
- EOG received approximately $1.3 billion from asset sales during the first nine months, primarily properties and acreage in the Rocky Mountain area and Texas and certain midstream interests. Properties sold represented approximately 3% of daily production.
- EOG raised approximately $1.388 billion net from issuing 13.57 million shares in March 2011. The company reported no commercial paper or credit-facility borrowings outstanding at quarter-end.
Outlook, risks and contingencies
- Management estimated 2011 capital expenditures of $6.8–$7.0 billion, excluding acquisitions, and expected spending to exceed operating cash flow. The plan relied in part on the equity offering and asset sales; EOG said it had flexibility to adjust spending and pursue financing alternatives.
- Management expected 2011 oil and NGL production to increase both in volume and as a share of total production compared with 2010. It also planned to expand crude-by-rail deliveries to St. James, Louisiana, beginning in early 2012, and expected to begin using its Wisconsin sand in completions in late 2011. No specific full-year earnings or production target is provided in the supplied filing text.
- On October 11, 2011, after quarter-end, EOG entered a new $2.0 billion unsecured revolving credit facility, replacing two existing $1.0 billion facilities. It matures October 11, 2016, with extension options and a possible commitment increase to $3.0 billion, subject to conditions. Its debt-to-capitalization covenant limit is 65%.
- Key stated risks include commodity prices and demand, reserve and drilling outcomes, production and cost estimates, access to transportation and processing capacity, service costs, regulation and permitting, financing-market access, counterparties, foreign exchange and geopolitical conditions. Derivative gains are marked to market and can make reported earnings volatile.
- Ordinary-course suits and claims were not expected by management to have a material adverse effect. Separately, a Pennsylvania agency alleged that a December 2010 water spill at two EOG-operated wells polluted area waters; EOG was discussing the alleged violations and penalty and anticipated resolution in November or December 2011. The filing does not state a clear expected penalty amount.
- EOG reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and revenue growth reflects realized production economics versus mark-to-market derivative gains and asset-sale gains.
- Whether production growth, especially oil and NGL growth, can be sustained while unit lease and well costs and DD&A rise.
- How EOG will fund the expected 2011 capital-spending shortfall, and the timing and proceeds of planned asset sales.
- The outcome and financial exposure, if any, from the Pennsylvania spill proceeding and the status of other contingencies.
- Whether impairment charges, Canadian asset performance and the new credit facility’s covenant and extension terms affect future liquidity or capital allocation.