EOG Resources, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. EOG is an independent oil and gas producer operating primarily in the United States, with operations in Trinidad and China; it began exiting Canada in March 2020. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Operating revenues and other | $1,103 | $4,698 | $5,821 | $8,756 |
| Operating income (loss) | $(1,087) | $1,131 | $(1,029) | $2,007 |
| Net income (loss) | $(909) | $848 | $(900) | $1,483 |
| Diluted earnings (loss) per share | $(1.57) | $1.46 | $(1.55) | $2.56 |
| Net cash provided by operating activities | Not stated separately | Not stated separately | $2,673 | $4,294 |
Q2 operating margin was approximately negative 98.5%, compared with positive 24.1% a year earlier; the loss included substantial impairment charges. First-half operating margin was approximately negative 17.7%, versus positive 22.9% in 2019. First-half impairments were $1,878, up from $184, including $1,160 for proved oil and gas properties, $219 for sand and crude-by-rail assets, and charges associated with exiting Canada.
Q2 wellhead oil, NGL and natural gas revenues fell 72% year over year to $850. EOG’s composite realized oil price was $20.40 per barrel versus $60.99, while oil production fell 27% to 331,100 barrels per day. Composite NGL and natural gas prices also declined, to $10.20 per barrel and $1.36 per Mcf, respectively. For the first half, total production averaged 748,800 Boe per day, down from 793,300.
First-half net cash from operations declined $1,621 year over year. Investing activities used $2,376, including $1,990 for oil and gas properties and $147 for other property and equipment. Cash and cash equivalents increased to $2,417 from $2,028 at year-end 2019. The first-half cash-flow improvement from derivative settlements and working-capital changes partly offset weaker wellhead revenues.
Balance sheet, debt and liquidity
- At June 30, cash was $2,417; total debt on the balance sheet was approximately $5,724, including $5,703 long-term and $21 current. Debt-to-total capitalization was 22%, versus 19% at December 31, 2019.
- EOG reported $2,000 of unused capacity under its revolving credit facility and stated it was in compliance with the facility’s 65% debt-to-capitalization covenant.
- In April, EOG issued $750 of 4.375% notes due 2030 and $750 of 4.950% notes due 2050, receiving net proceeds of about $1,480. It repaid $500 of notes at maturity in April and another $500 in June.
- The quarterly dividend was increased from $0.2875 to $0.375 per share beginning with the April payment. First-half dividends paid were $384.
Changes, outlook and risks
- The COVID-19 downturn and the early-2020 oil price shock materially reduced commodity prices and demand. EOG cut activity, delayed production from most newly completed wells in Q2, and shut in or curtailed some existing output.
- Management estimated 2020 capital expenditures of $3.4–$3.6 billion, excluding acquisitions and non-cash transactions, and expected full-year oil production below 2019 levels. EOG said it would monitor conditions, adjust volumes, and seek to preserve liquidity while supporting the dividend; it anticipated increasing production as prices improved.
- First-half mark-to-market derivative gains were $1,079, versus $157 in 2019, while cash received from derivative settlements was $724, versus $31. Q2 instead recorded a $126 mark-to-market loss but received $639 in derivative settlement cash. These accounting gains and losses are volatile and should be distinguished from realized cash settlements.
- Commodity-price assumptions drove significant property impairments. EOG also disclosed a $209 net fair-value asset for commodity derivatives at June 30 and described counterparty collateral and credit protections.
- Management cited ongoing uncertainty around the pandemic, commodity prices, OPEC+ supply decisions, customer and counterparty credit, operating disruptions and supply chains. Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect. Subsequent to Q2, EOG announced commercial quantities of proved reserves at one Trinidad exploratory well.
Most important facts for investors to verify
- Whether oil and gas prices, production curtailments and the stated 2020 capital budget develop as management expected, and the resulting cash-flow and dividend coverage.
- The assumptions and valuation sensitivity underlying the $1,878 of first-half impairments, including reserve estimates and anticipated commodity prices.
- The timing and actual cash outcomes of derivative settlements, and the effect of hedging on realized prices and reported results.
- Debt levels, refinancing costs, liquidity availability and covenant compliance if weak market conditions persist.
- The costs and execution of the Canada exit, and the operational and commercial progress of the Trinidad discovery.