EOG Resources, Inc. — 2010 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. EOG explores for, develops, produces and markets oil and natural gas, with operations primarily in the United States and Canada, as well as Trinidad, the United Kingdom and China. Its strategy emphasized liquids-rich development and returns on capital. At year-end, estimated proved reserves were 1,950 million barrels of oil equivalent (MMBoe), up 154 MMBoe from 2009.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net operating revenues | $6.100 billion | $4.787 billion |
| Operating income | $523 million | $971 million |
| Net income | $161 million | $547 million |
| Diluted earnings per share | $0.63 | $2.17 |
| Cash from operating activities | $2.709 billion | $2.922 billion |
| Cash used in investing activities | $4.903 billion | $3.415 billion |
| Capital expenditures, as reported | $6.039 billion | $4.234 billion |
| Debt-to-total capitalization | 34% | 22% |
Operating margin was approximately 8.6% versus 20.3% in 2009; net margin was approximately 2.6% versus 11.4%. Operating cash flow less cash used in investing activities was negative $2.194 billion. At year-end, cash was $789 million, current assets were $2.527 billion and current liabilities were $2.220 billion (current ratio approximately 1.14). Debt was $5.260 billion principal amount, including $220 million current; stockholders’ equity was $10.232 billion.
Production averaged 386.4 thousand Boe per day, up from 352.9 thousand in 2009. Oil and condensate volumes rose 35% and natural gas liquids volumes 29%; natural gas volumes increased 3%. The liquids share of production rose to approximately 27% from 22%. Composite realized prices, excluding derivative effects, increased year over year: oil to $74.29 per barrel from $54.46, NGLs to $41.73 from $30.05, and natural gas to $3.93 per Mcf from $3.42.
Fourth-quarter 2010 revenue was $1.789 billion, operating income $175 million and net income $54 million, versus $1.761 billion, $654 million and $400 million, respectively, in fourth-quarter 2009.
Material changes and notable items
- Revenue increased 27%, led by higher oil, NGL and gas prices and higher oil and NGL volumes. However, earnings fell sharply as operating expenses increased, notably impairments and DD&A, and derivative gains were far lower than in 2009.
- Impairments totaled $743 million, versus $306 million in 2009. They included a $280 million pretax write-down of Canadian shallow-gas assets sold in the fourth quarter, and $170 million of additional North American gas-asset impairments in the fourth quarter.
- Derivative mark-to-market gains were $62 million, compared with $432 million in 2009; realized gains included in those totals were $7 million and $1.278 billion, respectively. Property-disposition gains were $224 million in 2010 versus $535 million in 2009.
- Cash operating activities declined $213 million despite higher wellhead revenues, reflecting mainly lower cash receipts from settled derivatives, higher operating costs, taxes and interest. Exploration and development expenditures rose to $5.386 billion.
- EOG sold Canadian shallow-gas assets for approximately $344 million and received approximately $329 million from other non-core property sales. It also paid $210 million to acquire Galveston LNG, which held a 49% interest in the proposed Kitimat LNG terminal and 24.5% in the proposed Pacific Trail Pipeline.
Outlook, risks and contingencies
- Management forecast 2011 production growth of 9.5%; liquids production growth of 49% (oil and condensate 55%, NGLs 34%); and a 5% decline in North American natural gas production.
- Planned 2011 capital expenditures were $6.4–$6.6 billion, excluding acquisitions, with spending weighted toward U.S. and Canadian oil plays. Management expected expenditures to exceed operating cash flow and planned non-core gas-asset sales to help cover the shortfall; debt and equity markets and credit facilities were also available financing options.
- Commodity price uncertainty is material. Including hedges, management estimated that each $1 per barrel change in oil and related NGL prices would change 2011 net income by approximately $26 million and operating cash flow by $38 million; each $0.10 per Mcf change in uncontracted gas prices would change net income by approximately $19 million and operating cash flow by $28 million.
- Key risks include oil and gas price volatility, drilling and reserve-estimation uncertainty, access to gathering and transport capacity, financing needs, counterparty and hedging exposure, foreign-country risks, and potential environmental, climate and hydraulic-fracturing regulation. EOG stated that environmental compliance had not materially adversely affected operations to date, but future regulation could raise costs or delay development.
- Contractual obligations totaled $11.687 billion, including $5.260 billion of debt and $3.315 billion of pipeline transportation commitments. Standby letters of credit and guarantees totaled approximately $657 million. Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect; the filing does not quantify a clear aggregate potential loss.
- The board raised the quarterly dividend from $0.155 to $0.16 per share, effective with the April 2011 payment. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether planned production growth and liquids-mix targets are being achieved, particularly in Eagle Ford, Bakken/Three Forks and Barnett Combo.
- How much of reported earnings and operating cash flow reflects recurring operations versus derivative marks, asset-sale gains and impairments; review the impairment assumptions and reserve revisions.
- How the 2011 capital-spending shortfall was funded, and the resulting debt, liquidity and borrowing-cost profile.
- Progress, regulatory approvals, construction economics and funding obligations for Kitimat LNG and the Pacific Trail Pipeline.
- Commodity-price hedge volumes, counterparties and exposure, alongside changes in environmental or hydraulic-fracturing requirements and any material legal or contingent liabilities.