EOG Resources, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. EOG is an independent oil and gas producer operating primarily in the United States, with operations in Trinidad and China. Results reflect the COVID-19-related demand and commodity-price downturn, production curtailments, and reduced capital activity.
Key financial results
- Q3 revenue: $2.245 billion, down 48% from $4.303 billion in Q3 2019. Nine-month revenue was $8.067 billion, down 38% from $13.060 billion.
- Profitability: Q3 operating loss was $3 million and net loss was $42 million ($0.07 per diluted share), versus net income of $615 million ($1.06 per diluted share) a year earlier. Nine-month operating loss was $1.032 billion and net loss was $942 million ($1.63 per diluted share), versus net income of $2.098 billion ($3.63 per diluted share) in 2019.
- Major unusual expense: Nine-month impairment charges were $1.957 billion, compared with $290 million in 2019. The charges included write-downs of proved properties and other assets amid lower commodity prices, impairments of sand and crude-by-rail assets, and charges associated with exiting Canada’s Horn River Basin.
- Commodity derivatives: EOG recorded nine-month mark-to-market gains of $1.075 billion, versus $243 million in 2019, and received $999 million in net cash from derivative settlements, versus $140 million. These items materially affected reported results and cash generation.
- Cash flow and investment: Nine-month operating cash flow was $3.887 billion, down from $6.356 billion. Cash additions to oil and gas properties and other property, plant and equipment totaled $2.624 billion; operating cash flow less those additions was approximately $1.263 billion. Investing cash outflow was $2.711 billion.
- Liquidity and debt: Cash and equivalents were $3.066 billion at September 30, up from $2.028 billion at year-end 2019. Current and long-term debt totaled approximately $5.721 billion; the company reported a 22% debt-to-total-capitalization ratio, versus 19% at year-end. Its $2.0 billion revolving credit facility was undrawn, and EOG said $2.0 billion was available. EOG complied with the facility’s financial covenant.
- Margins and costs: Q3 operating margin was negative, compared with positive operating income of $828 million in Q3 2019. EOG reported selected Q3 costs of $21.38 per Boe, excluding gathering and processing, exploration, dry-hole costs, impairments, marketing costs, and taxes other than income; the comparable 2019 figure was $21.87. Nine-month comparable costs were $21.73 per Boe versus $22.17.
- Dividends: The quarterly dividend was raised from $0.2875 to $0.375 per share in 2020. Nine-month dividends paid were $601 million, versus $421 million in 2019.
Changes versus the prior comparable periods
- Q3 crude oil and condensate production fell 19% to 377.6 MBbl/d; the composite realized price fell 29% to $40.15 per barrel. Total production declined 14% to 716.0 MBoE/d.
- For the first nine months, crude oil and condensate production fell 12% to 397.3 MBbl/d and the composite price declined 35% to $37.44 per barrel. Total production fell 9% to 737.8 MBoE/d.
- Q3 crude oil and natural gas revenues fell substantially; NGL revenue rose 12% as higher prices offset slightly lower volumes. Nine-month oil, NGL, and gas revenues all declined.
- Capital spending was sharply reduced: nine-month total expenditures were $3.006 billion, down from $5.394 billion. Lower operating cash flow was partly offset by reduced spending, derivative settlement receipts, and lower cash operating costs.
- Debt issuance of $1.5 billion in April funded repayment of two $500 million notes due in 2020 and general corporate purposes. EOG also reclassified $750 million of notes due in 2021 to current debt, stating it intended and was able to repay them at maturity with cash on hand.
Outlook, management commentary, and risks
- EOG estimated full-year 2020 capital expenditures of approximately $3.4 billion to $3.6 billion, excluding acquisitions and non-cash transactions. It expected full-year crude oil production to be below 2019 levels and said it would adjust capital allocation and production plans as market conditions changed.
- Management cited COVID-19, global demand, OPEC+ actions, and volatile commodity prices as key uncertainties. Prices improved from their March-April 2020 lows but remained below 2019 averages during the period.
- EOG curtailed production and delayed bringing on new wells in Q2; it resumed bringing completed wells online in Q3 and largely restored previously shut-in legacy production.
- Risk factors include prolonged or renewed pandemic effects, commodity-price volatility, operational and supply-chain disruptions, customer or counterparty payment risk, access to transportation and infrastructure, and regulatory or policy changes following the U.S. elections, including potential changes to permitting, emissions rules, royalties, and taxes.
- Contingencies include ordinary-course lawsuits and claims; management said their resolution was not expected to have a material adverse effect. EOG also said unrecognized tax benefits could change within the next 12 months following a scheduled federal appeals conference.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices, demand, and production volumes recover, and how those changes affect operating cash flow.
- The assumptions behind the $1.957 billion of nine-month impairments and the possibility of further write-downs.
- How much of reported revenue and cash generation reflects derivative accounting gains and settlements, and the company’s future hedge exposure.
- Whether the 2020 capital-spending range and production outlook are achieved, and the implications for future production and cash generation.
- Repayment plans for the $750 million of notes due in 2021, together with debt levels, liquidity, and the sustainability of the dividend.
- Potential effects of COVID-19, U.S. policy or regulatory changes, and the pending tax matter on operations and financial results.