EOG Resources, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. The interim financial statements are unaudited.
Business context and reporting period
EOG is an independent oil and natural gas producer focused on returns on capital, cost control and internally generated drilling opportunities. Its principal operations are in the United States, with additional operations in Trinidad, the United Kingdom and China. The 2016 Yates Entities acquisition contributed to production and operating activity in the comparison period.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total net operating revenues and other | $2,612 | $1,776 | $5,223 | $3,130 |
| Operating income (loss) | $128 | $(288) | $236 | $(926) |
| Net income (loss) | $23 | $(293) | $52 | $(764) |
| Diluted earnings (loss) per share | $0.04 | $(0.53) | $0.09 | $(1.40) |
| Net cash from operating activities | Not separately presented for the quarter | $1,976 | $795 |
Approximate operating margins were 4.9% for Q2 and 4.5% for the first half of 2017; approximate net margins were 0.9% and 1.0%, respectively. Revenue includes gathering, processing and marketing activity, which has substantial associated costs.
- Production and pricing: Q2 total oil-equivalent production averaged 603.9 thousand barrels per day, up from 551.1 thousand. Composite oil price rose 9% to $47.46 per barrel; NGL price rose 28% to $18.65 per barrel; and natural gas price rose 56% to $2.25 per Mcf. First-half oil-equivalent production averaged 587.4 thousand barrels per day, versus 550.4 thousand.
- Cash flow and investment: First-half cash from operations was $1,976, compared with $795 in 2016. Investing activities used $1,719, including $1,885 of oil and gas property additions, partly offset by asset-sale proceeds. Cash dividends paid were $193; cash increased $50 to $1,649.
- Margins and costs: First-half operating expenses increased to $4,987 from $4,056. Reported selected costs per Boe (excluding gathering and processing, exploration, impairments, marketing and certain taxes) declined to $27.33 from $29.53. Impairment expense was $272 for the half year, including $161 of proved-property, other property and other-asset impairments.
- Liquidity and debt: At June 30, cash was $1,649; current assets were $3,383 and current liabilities $2,722 (current ratio approximately 1.24x). Current and long-term debt totaled approximately $6,987. EOG had no revolving-credit borrowings or commercial paper outstanding and had a $2.0 billion revolving credit facility available. The company reclassified $600 of 5.875% notes due 2017 to current debt, intending to repay them with cash in Q3. Debt-to-total capitalization was 33%, unchanged from year-end 2016.
Material changes versus the prior comparable period
- Q2 revenue rose 47%, and first-half revenue rose 67%; the increase reflected higher wellhead prices and oil production, as well as higher gross gathering, processing and marketing revenues.
- EOG returned to profitability in both the quarter and first half, compared with substantial losses in 2016. The prior-year losses included a different commodity-price and impairment environment.
- First-half oil and gas property additions were $1,885, compared with $1,144 in 2016; total reported expenditures were $2,245 versus $1,267. First-half operating cash flow also increased significantly.
- First-half natural gas deliveries fell 11% to 1,077 MMcfd, primarily reflecting asset sales in the United States and lower Trinidad deliveries. Oil production growth was partly associated with the Permian and Rocky Mountain areas and the Yates acquisition.
Outlook, management commentary, risks and unusual items
- Management expected 2017 total production and crude oil production to increase versus 2016. The 2017 exploration, development and other property, plant and equipment spending estimate was $3.7–$4.1 billion, excluding acquisitions, with most spending directed to U.S. crude oil drilling.
- Management described EOG’s prospect inventory as strong and emphasized flexibility to adjust capital spending. In Trinidad, EOG expected to drill and complete three additional net wells during the remainder of 2017; in China, it expected to complete four wells and drill a fifth. Conwy production in the U.K. was offline in Q2, with further downtime expected in the second half.
- Commodity prices remain volatile and materially affect cash generation. Other stated risks include development and reserve-recovery execution, access to transportation and services, regulation and permitting, counterparties, financing access, weather, currency and geopolitical conditions. Derivatives are marked to market rather than designated as accounting hedges; their fair value was a net asset of $8 at June 30.
- The six-month impairment charge included $138 related to proved oil and gas properties and other property, plant and equipment for which an accepted third-party offer informed fair value, and $23 related to a commodity-price write-down of other assets. Asset dispositions generated $175 of proceeds and a net loss of $26 in the first half.
- On July 31, 2017, EOG executed a consent decree concerning alleged North Dakota air-pollution violations. It expected a penalty of approximately $100,000 after anticipated reductions and an environmental-project offset, and said related costs were not expected to be material.
- Management said ordinary-course lawsuits and claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether production growth and the $3.7–$4.1 billion spending plan were achieved, and how realized returns compared with management’s capital-allocation objectives.
- The planned Q3 repayment of $600 million of notes, subsequent debt levels, and liquidity after capital spending and dividends.
- Whether commodity prices, derivative mark-to-market movements, and marketing margins support recurring earnings and operating cash flow.
- The extent and causes of impairment charges, asset-sale proceeds and further asset dispositions, including any revisions to acquired Yates asset valuations.
- Operational progress and downtime in Trinidad, China and the U.K., and any material developments in the North Dakota consent decree or other contingencies.