EOG Resources, Inc. — Second-Quarter 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. EOG is an independent oil and natural gas company. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net operating revenues | $1.776 billion | $2.470 billion | $3.130 billion | $4.788 billion |
| Operating income (loss) | $(288) million | $40 million | $(926) million | $(133) million |
| Net income (loss) | $(293) million | $5 million | $(764) million | $(164) million |
| Diluted EPS | $(0.53) | $0.01 | $(1.40) | $(0.30) |
| Operating cash flow | Not separately presented | Not separately presented | $795 million | $1.848 billion |
| Capital expenditures | Not separately presented | Not separately presented | $1.267 billion | $2.931 billion |
- Q2 wellhead revenues fell 28% to $1.327 billion. The composite realized oil price declined 24% to $43.65 per barrel and the natural gas price fell 40% to $1.44 per Mcf; total production was 551.1 thousand barrels of oil equivalent per day, down about 2%.
- For the first half, wellhead revenues declined 33% to $2.322 billion, reflecting lower prices and a 4% decline in total production to 550.4 thousand barrels of oil equivalent per day. The composite oil price fell 28% to $37.23 per barrel and natural gas price fell 40% to $1.47 per Mcf.
- First-half operating cash flow decreased $1.053 billion year over year, mainly from weaker wellhead revenue and lower cash received from derivative settlements. Cash used in investing was $881 million; financing provided $136 million. Cash increased $61 million to $780 million.
- At June 30, total assets were $25.831 billion, current assets $2.450 billion and current liabilities $1.712 billion. Long-term debt was $6.979 billion, with $6.6 million current; EOG reported a 37% debt-to-total-capitalization ratio, versus 34% at year-end 2015. No commercial paper or revolving-credit borrowings were outstanding at quarter-end; the revolving facility is $2.0 billion.
- The quarterly dividend declared was unchanged at $0.1675 per share. EOG reported no separate gross or operating margin measure.
Material changes and notable items
- Lower commodity prices were the principal revenue pressure. First-half oil and gas production was lower, while NGL volumes increased; U.S. production declines were partly offset by Permian Basin growth and higher Trinidad gas deliveries.
- Cost reductions helped offset the downturn: first-half lease and well expense declined $192 million and transportation expense declined $68 million year over year. However, G&A rose $31 million, largely due to voluntary-retirement-related employee costs; net interest expense rose $26 million.
- First-half derivative settlement cash receipts were only $3 million, compared with $561 million in the prior-year period. Mark-to-market derivative results were a $39 million loss versus a $28 million gain. The balance-sheet derivative liability was approximately $1 million.
- EOG issued $1.0 billion of senior notes in January, with maturities in 2026 and 2036, and repaid $400 million of notes at maturity in February. The new notes increased interest expense and debt outstanding.
- Asset-sale proceeds were approximately $253 million in the first half, primarily from producing properties and acreage in the Permian Basin and Oklahoma. Certain U.S. properties were classified as held for sale at quarter-end, with $92 million of assets and $23 million of related liabilities.
- Income tax benefits were $88 million for Q2 and $327 million for the first half. A Trinidad tax settlement increased Q2 tax expense by $43 million and affected the reported effective tax rates.
Outlook, commentary and risks
- Management expected 2016 oil and condensate and natural gas production to decline modestly from 2015, based on its drilling plan and the low-price environment. It forecast 2016 capital expenditures of approximately $2.4–$2.6 billion, excluding acquisitions, with most spending directed to U.S. crude oil drilling.
- Management cited drilling and completion efficiencies, lower service costs and operating-cost reductions. It said it retained flexibility to adjust spending and financing and described its prospect inventory as strong.
- Key uncertainties include volatile oil, NGL and natural gas prices; production and reserve performance; access to transportation and other infrastructure; costs and availability of services and capital; regulatory and environmental requirements; foreign exchange; and counterparty and geopolitical risks.
- Natural gas hedges included swaps for 60,000 MMBtu per day at $2.49 for August 2016, plus options extending into 2017 and 2018. EOG noted that derivative agreements may require collateral or accelerated settlement following specified credit events.
- Management said pending ordinary-course lawsuits and claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Investor verification points
- Track realized commodity prices, production volumes and the extent to which Permian growth offsets declines elsewhere.
- Compare actual full-year capital spending and production with management’s $2.4–$2.6 billion budget and modest-production-decline outlook.
- Assess cash generation against investment needs, dividends and debt service, including the effect of reduced derivative settlement receipts.
- Review debt and liquidity, including the higher debt-to-capitalization ratio and the terms and availability of the $2.0 billion revolver.
- Monitor property-sale completion and proceeds, the Trinidad tax settlement, and any changes in impairment, reserve or litigation exposures.