EOG Resources, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. EOG is an independent oil and gas exploration, production and marketing company, with approximately 97% of proved reserves in the United States. This summary covers the full fiscal year; quarterly figures are noted separately where relevant.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Net operating revenues and other | $11.21 billion | $7.65 billion |
| Operating income (loss) | $926 million | $(1.23) billion |
| Net income (loss) | $2.58 billion; $4.46 diluted EPS | $(1.10) billion; $(1.98) diluted EPS |
| Cash provided by operating activities | $4.27 billion | $2.36 billion |
| Cash used in investing activities | $3.99 billion | $1.25 billion |
| Total expenditures | $4.61 billion | $6.55 billion |
| Year-end cash and cash equivalents | $834 million | $1.60 billion |
| Debt / debt-to-total capitalization | $6.39 billion / 28% | $6.99 billion / 33% |
| Total proved reserves | 2,527 MMBoe | 2,147 MMBoe |
- Revenue and production: Wellhead revenue rose 44% to $7.91 billion. Average production increased 9% to 608,900 Boe/d; crude oil and condensate averaged 336,700 bbl/d. U.S. crude oil, condensate and NGLs represented approximately 77% of U.S. production on an oil-equivalent basis.
- Prices: Composite realized prices, excluding derivatives, increased year over year: oil to $50.91/bbl from $41.76; NGLs to $22.61/bbl from $14.63; and natural gas to $2.29/Mcf from $1.73.
- Costs and margins: Operating expenses were $10.28 billion, including $479 million of impairments and $3.33 billion of marketing costs. Lease-and-well expense per Boe rose to $4.70 from $4.53; transportation cost per Boe fell to $3.33 from $3.73; oil-and-gas DD&A per Boe fell to $14.83 from $16.77. The filing does not provide a single consolidated gross-margin measure.
- Cash generation and investment: Operating cash flow increased $1.91 billion year over year, principally reflecting higher wellhead revenue. Investing cash outflow grew as asset-sale proceeds declined and oil-and-gas property spending increased. Operating cash flow less investing cash outflow was approximately $278 million in 2017, before financing and other cash-flow items.
- Debt and liquidity: EOG repaid $600 million of notes at maturity and had no year-end commercial paper borrowings. Its $2.0 billion unsecured revolving credit facility was undrawn at year-end; cash was $834 million. The company reported compliance with its 65% maximum debt-to-capitalization covenant. Debt maturities include $350 million in 2018, $900 million in 2019 and $1.0 billion in 2020.
Material changes versus 2016
- Revenue increased 47%, and EOG returned to operating profitability and net income after losses in 2016. Higher prices and production drove wellhead revenue growth; higher gathering, processing and marketing revenue also contributed, but was largely offset by related marketing costs.
- The 2017 net income figure was substantially affected by tax reform: EOG recorded a $1.92 billion income tax benefit, including an approximately $2.2 billion benefit from remeasuring U.S. deferred taxes after the federal corporate rate fell from 35% to 21%. The reported effective tax rate was approximately negative 291%; the benefit is not equivalent to recurring operating earnings.
- Capital expenditures were lower than in 2016, when the Yates acquisition accounted for substantial spending. 2017 total expenditures included $282 million of non-cash property exchanges; 2016 included major Yates transaction costs.
- Proved reserves rose by 380 MMBoe. Additions from drilling and technical evaluation totaled 421 MMBoe; price changes and improved well performance contributed to positive revisions.
- 2017 impairments totaled $479 million, down from $620 million in 2016 and far below the $6.61 billion recorded in 2015. Asset dispositions produced a $99 million net loss in 2017, versus a $206 million net gain in 2016.
Outlook, risks and unusual items
- 2018 outlook: EOG expected total and crude oil production to increase from 2017. Planned capital expenditures were approximately $5.4–$5.8 billion, excluding acquisitions, focused mainly on U.S. crude oil drilling in the Eagle Ford, Delaware Basin and Rocky Mountain area. Planned net completions included approximately 260 Eagle Ford wells and 230 Permian Basin wells.
- Tax reform: Certain TCJA accounting remained provisional at filing. EOG estimated approximately $798 million of AMT credits to carry forward and an approximately $179 million deemed-repatriation tax payable over eight years; amounts could change with further analysis and IRS guidance.
- Commodity exposure: Prices remain volatile and materially affect earnings, cash flow, reserves and asset values. At February 20, 2018, EOG reported approximately 34% of forecast 2018 crude oil production hedged at about $60.04/bbl and 12% of forecast natural gas production hedged at about $2.96/MMBtu, subject to the filing’s stated contract exclusions. EOG estimated that a $1/bbl change in oil price, combined with the related NGL change, would change 2018 operating cash flow by about $106 million; a $0.10/Mcf natural gas price change would change it by about $29 million.
- Other risks: Key exposures include drilling and operating hazards, commodity-price swings, access to gathering and transportation, service-cost and labor availability, reserve-estimation uncertainty, environmental and hydraulic-fracturing regulation, climate-related rules, weather, foreign operations, counterparty and cybersecurity risks, and access to financing.
- Contingencies and unusual items: EOG paid a final $90,375 penalty under a North Dakota air-pollution consent decree; the company said the matter was not material. Management stated that other ordinary-course legal claims were not expected to have a material adverse effect. EOG also disclosed $5.72 billion in minimum operating, transportation, drilling, fracturing and other commitments, in addition to debt and interest obligations.
- Shareholder returns: The 2017 dividend was $0.1675 per quarter. In February 2018, the board raised it 10% to $0.1850 per quarter, beginning with the April 2018 payment. EOG did not repurchase shares under its authorized repurchase program in 2017.
Most important facts for investors to verify
- Separate recurring operating performance from the large, primarily non-cash tax benefit that drove much of 2017 net income; review the final tax accounting and cash-tax implications.
- Assess whether forecast production growth and the $5.4–$5.8 billion 2018 capital program can be funded from operating cash flow without materially increasing debt.
- Track realized commodity prices, hedging coverage and basis differentials, including the portion of production exposed to market prices.
- Review reserve additions, development costs and the conversion schedule for proved undeveloped reserves, including 67 MMBoe of proved undeveloped reserves associated with year-end drilled-but-uncompleted wells.
- Monitor debt maturities, liquidity, and the substantial transportation and service commitments alongside cash balances and operating cash generation.
- Evaluate the effect of impairment assumptions, regulatory and environmental developments, and continuing facility issues—including the U.K. Conwy production restart reported in early 2018.