EOG Resources, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; dollar figures below are in billions unless otherwise noted. EOG is an independent oil and gas producer, with operations principally in the United States and also in Trinidad and other international markets.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue and other | $4.782 | $2.645 | $12.701 | $7.868 |
| Operating income | $1.507 | $0.215 | $3.346 | $0.450 |
| Net income | $1.191 | $0.101 | $2.526 | $0.152 |
| Diluted EPS | $2.05 | $0.17 | $4.35 | $0.26 |
| Operating margin | 31.5% | 8.1% | 26.3% | 5.7% |
| Net margin | 24.9% | 3.8% | 19.9% | 1.9% |
Q3 revenue rose 81%, and nine-month revenue rose 61%. Growth reflected higher realized commodity prices and production, as well as increased gathering, processing and marketing activity. Q3 total production was 748.8 thousand barrels of oil equivalent per day, up from 598.1 thousand; nine-month production averaged 704.0 thousand, up from 591.0 thousand. For the first nine months, composite realized crude oil and condensate prices increased 39% to $67.38 per barrel, NGL prices increased 33% to $27.71 per barrel, and natural gas prices increased 21% to $2.75 per Mcf.
Operating income and earnings also benefited from $116 million of Q3 net gains on asset dispositions, versus an $8 million loss a year earlier. For the nine months, disposition gains were $95 million, versus a $34 million loss. Derivative mark-to-market results were a headwind: losses were $52 million in Q3 and $298 million for the nine months, compared with losses of $7 million and gains of $65 million, respectively, in 2017.
Cash flow, capital spending and liquidity
- Nine-month operating cash flow was $5.683 billion, up from $2.938 billion. Investing cash outflow was $4.878 billion, including $4.572 billion of oil and gas property additions; financing cash outflow was $363 million.
- Cash increased to $1.274 billion at September 30 from $834 million at December 31, 2017. Current assets were $4.817 billion and current liabilities $4.425 billion.
- Reported current and long-term debt totaled approximately $6.435 billion, compared with $6.387 billion at year-end; cash less reported debt was approximately $5.161 billion. Management reported debt-to-total capitalization of 26%, down from 28% at year-end. The $350 million 6.875% notes due 2018 were repaid at maturity on October 1.
- EOG reported no borrowings under its $2.0 billion revolving credit agreement at September 30; the facility was scheduled to mature in July 2020, subject to extension options.
- Nine-month total expenditures were $5.202 billion. The 2018 budget for exploration, development and other property, plant and equipment expenditures was approximately $5.8–$6.0 billion, excluding acquisitions and noncash transactions.
- The quarterly dividend was increased from $0.185 to $0.22 per share, effective with the October 2018 payment. Dividends declared were $0.22 per share in Q3, versus $0.1675 a year earlier.
Material changes, outlook and risks
- Management expected 2018 total and crude oil production to increase from 2017, and said most planned 2018 spending would support U.S. crude oil activities. EOG cited drilling and completion efficiencies and a strong prospect inventory, while retaining flexibility to adjust spending.
- Revenue accounting standard ASC 606 was adopted January 1, 2018. It changed presentation of certain processing fees, increasing reported revenue and expenses by $62 million in Q3 and $163 million year to date, with no effect on operating income, net income or cash flow.
- The nine-month effective tax rate declined to 20% from 39% in 2017, largely reflecting the lower U.S. federal tax rate and tax-reform adjustments. EOG finalized certain 2017 federal tax amounts; the deemed repatriation tax estimate fell from $179 million to $40 million. State tax-reform amounts remained provisional, with finalization expected in Q4 2018.
- EOG signed an agreement to sell its U.K. subsidiary, expected to close in Q4 2018. Assets held for sale were $235 million, with related liabilities of $65 million at quarter-end.
- Commodity prices, production and execution, transportation and processing capacity and costs, regulation, capital access, counterparty credit, foreign exchange and the outcome of planned asset sales are among the stated risks. EOG uses derivatives but does not designate them as accounting hedges; their fair value was a net liability of $126 million at quarter-end. Derivative agreements may require collateral or accelerated settlement under specified circumstances.
- Various ordinary-course lawsuits and claims were pending; management believed their resolution would not materially adversely affect EOG. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether production growth and realized prices persist, and how commodity-market volatility affects cash generation.
- Whether the $5.8–$6.0 billion spending plan and production outlook are achieved while preserving balance-sheet strength.
- How much reported earnings and cash flow are affected by derivative losses and settlements, asset-disposition gains, and working-capital movements.
- Completion and proceeds of the planned U.K. sale, and final state tax-reform accounting.
- The amount and balance-sheet effect of operating lease liabilities expected upon adoption of the new lease standard on January 1, 2019; the filing said the impact was not yet quantifiable but expected to significantly increase assets and liabilities.