EOG Resources, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Comparisons are with the three months ended March 31, 2019 unless noted.
Business context and reporting period
EOG is an independent oil and natural gas producer operating principally in the United States, with operations in Trinidad and China. The quarter was marked by COVID-19-related demand disruption and increased oil supply following Saudi Arabia’s actions after OPEC and Russia failed to agree on production limits. Management reduced planned activity and capital spending in response.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total operating revenues and other | $4.718 billion | $4.059 billion |
| Operating income | $57.6 million | $876.5 million |
| Net income | $9.8 million | $635.4 million |
| Diluted earnings per share | $0.02 | $1.10 |
| Net cash provided by operating activities | $2.585 billion | $1.608 billion |
| Net cash used in investing activities | $1.531 billion | $1.891 billion |
| Cash and cash equivalents, period-end | $2.907 billion | $1.136 billion |
- Operating margin was approximately 1.2%, down from approximately 21.6%; net margin was approximately 0.2%, down from approximately 15.7%.
- Revenue rose 16%, primarily because of a $1.206 billion mark-to-market derivative gain, versus a $20.6 million loss a year earlier. Wellhead revenue declined 12% to $2.436 billion; gathering, processing and marketing revenue declined 19% to $1.039 billion.
- Net cash from operations increased $977 million, substantially reflecting a favorable $1.420 billion working-capital change and higher derivative settlement receipts. Cash received from derivative settlements was $84 million; the much larger reported derivative gain was mark-to-market.
- Reported operating expenses included $1.573 billion of impairments, compared with $72.4 million a year earlier. The impairment charge included $1.456 billion for proved properties, leasehold costs and other assets amid falling commodity prices, and $60 million related to the planned exit from Canada’s Horn River Basin.
- Total production was 874.1 thousand barrels of oil equivalent per day, up from 773.6 thousand. Crude oil and condensate production rose 11% to 483.3 thousand barrels per day, while composite realized prices fell 16% to $46.96 per barrel. NGL production rose 35% to 161.3 thousand barrels per day, but realized prices fell 46% to $10.94 per barrel. Natural gas production rose 5% to 1,378 million cubic feet per day; its composite realized price fell 41% to $1.67 per Mcf.
- Q1 exploration and development expenditures were $1.634 billion, down from $2.037 billion. Total expenditures, including other property and equipment, were $1.826 billion, compared with $2.102 billion.
Liquidity, debt and capital returns
- At March 31, cash was $2.907 billion, including $762 million of derivative collateral deposits; the full $2.0 billion revolving credit facility was available and undrawn. Management reported a 20% debt-to-total-capitalization ratio and compliance with the facility’s 65% covenant limit.
- Balance-sheet current and long-term debt totaled approximately $5.222 billion. On April 1, EOG repaid $500 million of notes at maturity. On April 14, it issued $750 million of 4.375% notes due 2030 and $750 million of 4.950% notes due 2050, receiving approximately $1.48 billion net proceeds. Management expected to repay another $500 million of notes due June 1 with cash on hand.
- The board raised the quarterly dividend from $0.2875 to $0.375 per share, effective with the April 30 payment. Q1 dividends declared were $0.375 per share; dividends paid totaled $167 million.
Outlook, commentary and risks
- Updated 2020 capital expenditure guidance was approximately $3.3 billion to $3.7 billion, excluding acquisitions and non-cash transactions. EOG expected full-year crude oil production to be below 2019 levels after delaying new-well startups and shutting in or curtailing production. It gave no specific production-volume target in the filing.
- Management said it would retain flexibility to reduce capital and operating costs further or curtail additional production, while seeking to preserve liquidity and support the dividend.
- Commodity prices remained highly uncertain. Average Q1 NYMEX prices were $46.08 per barrel for crude oil and $1.98 per MMBtu for natural gas. The average crude oil price for April 1–30 fell to $16.70 per barrel. Management cited pandemic effects, supply decisions by producing nations, and the uncertain outlook for demand and prices.
- EOG’s derivative contracts are not designated as accounting hedges, so fair-value changes affect reported earnings. At March 31, derivative contracts were a net asset of $933 million. Derivative valuation, counterparty performance and collateral terms are relevant risks.
- The company began exiting its Canadian operations. Ordinary-course lawsuits and claims were disclosed; management did not expect their resolution to have a material adverse effect. The filing reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects realized commodity economics versus mark-to-market gains and working-capital movements.
- Whether commodity prices, production curtailments and the revised $3.3–$3.7 billion capital plan affect future cash generation and the ability to sustain the dividend.
- Cash availability excluding derivative collateral, and the effect of note repayments, new debt issuance and upcoming maturities on liquidity and leverage.
- The assumptions and recoverability underlying the significant Q1 impairments, and the timing and costs of the Canadian exit.
- Subsequent production, prices, derivative positions and counterparty collateral exposure, given the rapidly changing market conditions described in the filing.