EOG Resources, Inc. — 2019 Q2 Form 10-Q
Business context and reporting period. EOG is an independent oil and gas producer, with operations primarily in the United States and additional operations in Trinidad and China. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenues and other | $4.698B | $4.238B | $8.756B | $7.919B |
| Operating income | $1.131B | $965M | $2.007B | $1.840B |
| Net income | $848M | $697M | $1.483B | $1.335B |
| Diluted EPS | $1.46 | $1.20 | $2.56 | $2.30 |
Q2 operating margin was approximately 24.1% versus 22.8% a year earlier; net margin was approximately 18.0% versus 16.4%. Six-month operating and net margins were approximately 22.9% and 16.9%, respectively, compared with 23.2% and 16.9% in 2018.
- Cash flow and investment: Six-month operating cash flow was $4.294B, up from $3.494B. Investing cash outflow was $3.524B; financing cash outflow was $1.166B. Cash declined to $1.160B from $1.556B at year-end 2018. Cash flow from operations less cash additions to oil and gas and other property, plant and equipment was approximately $731M; this simple calculation is not a company-defined cash-flow measure.
- Debt and liquidity: Current and long-term debt totaled approximately $5.179B at June 30, including a $900M note repaid at maturity during the quarter. EOG reported a 20% debt-to-total-capitalization ratio, down from 24% at year-end. A new $2.0B unsecured revolving facility, maturing in 2024, had no borrowings or letters of credit outstanding at quarter-end. EOG was in compliance with its 65% debt-to-capital covenant.
- Dividends: The board raised the quarterly dividend from $0.22 to $0.2875 per share, effective with the July 2019 payment. Six-month dividends paid were $255M.
Material changes versus prior period
- Q2 revenue rose 11%, while net income rose 22%. Six-month revenue increased 11% and net income increased 11%.
- Production growth more than offset lower realized commodity prices. Q2 total oil-equivalent output increased to 812.8 thousand barrels per day from 702.2 thousand; six-month output rose to 793.3 thousand from 681.2 thousand. Six-month crude oil and condensate production increased 19%.
- Lower prices weighed on wellhead sales: Q2 composite crude oil price fell 10%, NGL price fell 44%, and natural gas price fell 19%. Six-month composite prices declined 11%, 32%, and 9%, respectively.
- Mark-to-market derivative results swung to a $177M gain in Q2 from a $186M loss, and to a $157M gain for the first half from a $246M loss. These non-cash valuation changes materially affected reported revenue and earnings; cash settlements were much smaller.
- Six-month operating expenses increased $669M, including higher DD&A, lease and well costs, and impairment charges. DD&A rose with higher production; impairments were $184M versus $116M.
Outlook, commentary and risks
- Management expects 2019 total production and crude oil production to increase compared with 2018, but does not provide a numerical production target in this filing.
- 2019 capital expenditure budget is approximately $6.1B–$6.5B, excluding acquisitions and non-cash transactions; spending is expected to focus mainly on U.S. crude oil drilling. First-half total expenditures were $3.765B.
- Management cites continued focus on operating and completion efficiencies and describes its prospect inventory as particularly strong. Trinidad planned three net wells for the second half of 2019.
- Commodity prices are volatile and may affect cash generation and results. Other disclosed risks include production and reserve execution, infrastructure access and costs, regulation and environmental requirements, counterparties, financing access, geopolitical conditions, weather, and cybersecurity.
- EOG uses commodity derivatives to manage price exposure and accounts for them at fair value, not as accounting hedges. At June 30, derivative contracts were a net asset of $135M; crude oil swaps covered 150,000 barrels per day at $62.50 per barrel for July–December 2019, and natural gas swaps covered 250,000 MMBtu per day at $2.90 through October, subject to the disclosed contract periods.
- Operating lease accounting adoption increased reported assets and liabilities; the filing states prior-period results were unchanged. Various ordinary-course legal claims are pending; management does not expect them, individually or in aggregate, to materially affect financial position, results, or cash flow.
Most important facts for investors to verify
- How much of earnings growth reflects production gains versus derivative fair-value movements, and how those derivatives settle in cash.
- Whether higher production can be sustained at prices and unit costs that support the $6.1B–$6.5B capital program and positive cash generation.
- Realized commodity prices, regional differentials, and the coverage and terms of remaining crude oil and natural gas hedges.
- Debt repayment plans, liquidity needs, and the effect of operating lease commitments and leases expected to commence after quarter-end.
- Future impairment charges, reserve performance, and any material developments in legal, regulatory, environmental, or other contingencies.