EOG Resources, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited interim statements. EOG is an independent oil and gas producer operating in the U.S., Canada, Trinidad, the U.K., China and Argentina. Its strategy emphasizes returns on capital, low-cost reserves and production growth, with 2014 investment focused mainly on U.S. crude oil and liquids-rich plays.
Financial highlights
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net operating revenues | $4.188bn | $3.840bn | $8.271bn | $7.197bn |
| Operating income | $1.145bn | $1.092bn | $2.229bn | $1.925bn |
| Net income | $706m | $660m | $1.367bn | $1.154bn |
| Diluted EPS | $1.29 | $1.21 | $2.49 | $2.12 |
| Operating cash flow | — | — | $4.202bn | $3.316bn |
| Cash used in investing | — | — | $4.113bn | $2.887bn |
Q2 revenue increased 9%, operating income 5% and net income 7% year over year. First-half net income rose 18%. Derived operating margin was approximately 27.3% in Q2 2014 versus 28.4% in Q2 2013; the filing does not present this margin as a reported metric. First-half production averaged 577.3 thousand barrels of oil equivalent per day, up from 490.8 thousand; U.S. crude oil and condensate production was the main growth driver.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $1.230bn; current assets were $4.725bn and current liabilities $3.537bn.
- Long-term debt was $5.903bn, plus $6.6m current maturities. Debt-to-total-capitalization was 26%, down from 28% at year-end 2013. The $2.0bn revolving credit facility had no borrowings or letters of credit outstanding.
- First-half cash declined $88m to $1.230bn. Operating cash flow was below total expenditures of $4.290bn; the company funded investment alongside debt issuance and other financing sources.
- First-half dividends paid were $120m. The quarterly dividend rose to $0.125 per share in 2014; on August 5, the board announced a further increase to $0.1675, effective with the October 2014 payment.
Changes, outlook and notable items
- Wellhead revenues rose 27% in Q2 and 31% in the first half, reflecting higher crude oil and NGL volumes and stronger natural gas and NGL pricing. Composite crude oil prices were slightly lower year over year.
- Mark-to-market commodity derivative results swung to losses of $229m in Q2 and $385m in the first half, from gains of $191m and $87m in the respective 2013 periods. First-half cash settlements were net payments of $121m versus net receipts of $136m in 2013. Derivatives were not designated as accounting hedges; their fair value was a $333m net liability at June 30.
- Management estimated 2014 capital expenditures of $8.1bn–$8.3bn, excluding acquisitions, with most directed to U.S. crude oil and liquids-rich activity. It expected crude oil, condensate and NGL production to continue increasing in 2014, both in total and as a share of company production; no specific full-year production target is stated in this filing.
- First production from the Conwy field in the U.K. was anticipated in early 2015. EOG planned three net Trinidad development wells in 2014 and five additional China wells in the second half. An Argentina exploratory well was dry in Q2; further results remained under evaluation.
- In March, EOG issued $500m of 2.45% senior notes due 2020 and repaid $500m of notes maturing in 2014. The company also recorded $75m of proved-property impairment charges in the first half, including $56m based on an accepted third-party offer.
- Ordinary-course lawsuits and claims were pending; management believed their resolution would not materially adversely affect financial position, results or cash flow. Asset retirement obligations totaled $831m. Commodity-price, operational, regulatory, infrastructure, financing, counterparty and geopolitical risks could affect results; management cautioned that interim performance is not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether production growth and drilling efficiency deliver returns that justify the $8.1bn–$8.3bn 2014 capital budget.
- How much reported earnings and future cash flows are affected by commodity prices and derivative positions, including potential counterparty extension options and collateral requirements.
- Whether operating cash flow can sustainably fund investment and dividends without increased borrowing or asset sales.
- Progress on Conwy, China drilling and other international projects, as well as outcomes from ongoing exploration and impairment assessments.
- Developments in legal, environmental, regulatory and asset-retirement obligations; management reported no material adverse effect expected from current ordinary-course claims.