EOG Resources, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results. Amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
EOG is an independent oil and gas producer operating primarily in the United States, with operations in Trinidad, the United Kingdom, China and Canada. Its strategy emphasizes returns on capital, cost control and development of internally generated prospects. The Yates Entities acquisition closed on October 4, 2016, after quarter-end, and is not included in these results.
Financial and operating metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net operating revenues | $2,119 | $2,172 | $5,249 | $6,961 |
| Operating loss | $(193) | $(6,223) | $(1,120) | $(6,356) |
| Net loss | $(190) | $(4,076) | $(954) | $(4,240) |
| Net loss per diluted share | $(0.35) | $(7.47) | $(1.74) | $(7.77) |
| Impairments | $178 | $6,307 | $322 | $6,445 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $1,554 | $2,979 |
Q3 operating and net loss margins were approximately negative 9% of revenue; nine-month margins were approximately negative 21% and negative 18%, respectively. The large prior-year impairment charges materially affect the year-over-year loss comparison.
- Revenue and production: Q3 revenue declined 2%; nine-month revenue declined 25%. Nine-month total production averaged 552.1 thousand barrels of oil equivalent per day, down from 573.1 thousand. Composite realized wellhead crude oil price fell 21% to $39.46/bbl and natural gas price fell 34% to $1.62/Mcf; NGL price declined 11% to $13.34/bbl.
- Cash flow and investment: Nine-month investing cash outflow was $1,264; cash capital additions to oil and gas and other property totaled $1,842. Cash flow from operations was therefore below those additions by about $288. Total reported expenditures were $1,942, compared with $4,312 a year earlier. Cash rose to $1,049 from $719 at year-end 2015.
- Liquidity and debt: Current assets were $2,738 and current liabilities $1,733 (current ratio approximately 1.6). Long-term debt was $6,980, plus $7 current debt; management reported debt-to-total-capitalization of 37%, versus 34% at year-end 2015. EOG had no borrowings or letters of credit under its $2.0 billion revolving credit agreement.
- Shareholder return: Dividends declared were $0.1675 per share in Q3, unchanged from Q3 2015. Nine-month dividends paid totaled $277.
Material changes versus prior period
- Q3 and nine-month losses were substantially smaller than in 2015, mainly because 2015 included exceptionally large impairment charges. 2016 still recorded $178 of Q3 and $322 of nine-month impairments.
- Nine-month wellhead revenues fell $1,272, reflecting lower commodity prices and reduced oil and gas volumes. Operating cash flow declined $1,425; lower revenues and a $683 unfavorable year-over-year change in derivative settlement cash flows were principal factors.
- Cost reductions partly offset weaker revenue: nine-month lease and well expense fell $248 and transportation expense fell $71. DD&A rose $147, primarily from higher U.S. unit rates following reserve revisions associated with lower prices.
- EOG issued $1,000 of senior notes in January, repaid $400 of notes at maturity, and had $6,990 aggregate principal amount of senior notes outstanding at quarter-end. Asset-sale proceeds were $458 in the first nine months; net asset-disposition gains were $102.
Outlook, commentary, risks and unusual items
- Management expected 2016 crude oil and condensate and natural gas production to decline slightly versus 2015. The 2016 capital expenditure budget was approximately $2.6–$2.8 billion, excluding acquisitions; spending remained adjustable with market conditions.
- Management cited drilling and completion efficiencies and lower service costs. It expected to drill and complete one net Trinidad well in Q4 2016 and initiate natural gas sales by year-end.
- On October 4, EOG acquired the Yates Entities for total consideration of $2.4 billion, including approximately 25 million EOG shares and $16 million cash; EOG also repaid about $164 million of their debt, offset by $64 million of acquired cash. The assets included producing properties and acreage in the Delaware and Powder River basins. Purchase accounting was incomplete when the filing was issued.
- Commodity prices remain volatile. EOG identified risks including prices and demand, production and reserve performance, access to transportation and services, regulation and taxes, acquisition integration, financing access, counterparties, foreign exchange and political conditions. Derivatives were not designated as accounting hedges; their fair-value changes affected earnings. EOG reported a net derivative asset of $5 at September 30.
- 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. A second-quarter tax settlement resulted in $43 of additional Trinidad taxes. Management reported $36 of increased unrecognized tax benefits and deferred tax assets.
Important facts for investors to verify
- How the Yates acquisition’s final purchase-price allocation, financing effects and post-close production influence leverage, cash flow and per-share results.
- Whether commodity prices, production volumes and derivative settlements support management’s production and capital-spending expectations.
- Whether cash generation can fund planned capital expenditures and dividends while maintaining the stated balance-sheet objectives.
- The sensitivity of DD&A, impairments and asset values to reserve revisions and commodity-price assumptions.
- Developments in tax matters, legal contingencies, and acquisition integration; the filing states that acquisition accounting was incomplete.