EOG Resources, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results; comparisons are with Q1 2018 unless stated otherwise. EOG is an independent oil and gas producer, operating primarily in the United States, with operations in Trinidad and China.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue and other | $4.059 billion | $3.681 billion | +10% |
| Operating income | $877 million | $875 million | Approximately flat |
| Net income | $635 million | $639 million | -0.5% |
| Diluted EPS | $1.10 | $1.10 | Flat |
| Operating cash flow | $1.608 billion | $1.552 billion | +4% |
| Cash and cash equivalents, March 31 | $1.136 billion | $816 million at March 31, 2018 | — |
| Total debt, March 31 | $6.081 billion | $6.083 billion at December 31, 2018 | Nearly unchanged |
Approximate operating margin was 21.6% versus 23.8%; net margin was 15.7% versus 17.3%, calculated from reported revenue and income. Net cash used in investing was $1.891 billion, including $1.939 billion of oil and gas property additions. Operating cash flow less reported investing cash outflow was negative $283 million. Cash declined $420 million during the quarter. Dividends paid were $128 million.
Total production was 773.6 thousand barrels of oil equivalent per day, up 17% from 659.9 thousand. Crude oil and condensate production rose 20% to 435.9 thousand barrels per day; NGL production increased 19% to 119.8 thousand barrels per day. Composite realized crude oil price fell 13% to $56.09 per barrel and NGL price fell 17% to $20.28; composite natural gas price increased 1% to $2.85 per Mcf.
Current assets were $4.908 billion and current liabilities $4.301 billion, an approximate current ratio of 1.14. Debt comprised $915 million current and $5.166 billion long-term. EOG reported a 23% debt-to-total-capitalization ratio, down from 24% at year-end 2018. The $2.0 billion revolving credit facility had no borrowings or letters of credit outstanding; EOG was compliant with its debt covenant.
Changes versus the prior comparable period
- Revenue growth reflected higher production and gathering, processing and marketing activity. Wellhead revenue increased 5%; gathering, processing and marketing revenue rose 17%, while related marketing costs also increased. Marketing revenue less marketing costs improved $20 million.
- Higher volumes were partly offset by lower crude and NGL prices. U.S. crude production increases were primarily from the Permian Basin and Eagle Ford.
- Operating income was nearly flat despite higher revenue. DD&A rose $131 million, mainly with increased U.S. production; operating expenses overall increased $375 million.
- Net income was slightly lower, in part because the effective tax rate increased to 23% from 21%. Net derivative mark-to-market losses narrowed to $21 million from $60 million.
- Operating cash flow increased modestly, but investing cash outflow rose $435 million, primarily reflecting increased oil and gas property additions. Exploration and development expenditures, including acquisitions, were $2.037 billion versus $1.411 billion.
Outlook, commentary, risks and unusual items
- Management expects 2019 total production and crude oil production to increase compared with 2018. Anticipated 2019 capital expenditures are approximately $6.1 billion to $6.5 billion, excluding acquisitions and non-cash transactions; most spending is planned for U.S. crude oil drilling.
- Management cited a strong prospect inventory, continued efforts to improve drilling, completion and operating efficiency, and flexibility to adjust spending. The filing does not provide a specific earnings or commodity-price forecast.
- Commodity prices remain volatile. EOG stated that future prices and their effects on cash flow and results cannot be predicted. Risk factors also include production and reserve execution, transportation and processing capacity, service costs, regulation, weather, counterparties and access to capital.
- EOG reported $21 million of net cash received from derivative settlements in Q1. Disclosed 2019 positions included crude oil swaps at $60 per barrel for 25,000 barrels per day through year-end as of quarter-end, plus natural gas swaps and oil basis swaps. These instruments can affect reported earnings and cash flows; they are not designated as accounting hedges.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet. At March 31, operating lease liabilities totaled approximately $925 million; additional leases of $752 million were expected to commence in 2019–2021. This adoption changed reported balance-sheet amounts, while prior-period results were not restated.
- After quarter-end, the board increased the quarterly dividend from $0.22 to $0.2875 per share, effective for the July 2019 payment. Ordinary-course lawsuits and claims were disclosed; management did not expect them, individually or collectively, to materially adversely affect financial position, results or cash flow.
- Q1 included $303 million of cash property acquisitions in the U.S. and $72 million of total impairment expense. Management attributed higher unproved-property amortization primarily to revised estimates of acreage not expected to be developed before lease expiration.
Key facts for investors to verify
- Whether production growth and realized prices support the full-year production outlook and planned $6.1–$6.5 billion capital budget.
- How commodity prices, marketing margins and derivative settlements affect future cash generation; distinguish mark-to-market results from cash settlements.
- Whether operating cash flow can fund elevated investment and dividends without reducing liquidity or increasing debt.
- The continuing impact of lease obligations and the timing and costs of the additional leases disclosed as expected to commence.
- Developments in impairment estimates, ordinary-course contingencies and the disclosed operational, regulatory and market risks.