EOG Resources, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited results; comparisons are with the corresponding 2009 periods. EOG is an independent oil and natural gas producer operating in the United States, Canada, Trinidad, the United Kingdom and China. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net operating revenues | $1.582 billion | $1.007 billion | $4.311 billion | $3.026 billion |
| Operating income (loss) | $(11.7) million | $35.3 million | $348.7 million | $316.7 million |
| Net income (loss) | $(70.9) million | $4.2 million | $107.0 million | $146.2 million |
| Diluted EPS | $(0.28) | $0.02 | $0.42 | $0.58 |
| Net cash provided by operating activities | Not presented quarterly in the supplied filing text | $2.086 billion | $2.094 billion |
Q3 revenue increased 57%, led by higher oil, condensate and NGL volumes and prices, along with higher natural gas prices. Total production rose 12% to 2,378 MMcfe/d; crude oil and condensate production increased 30%, and NGL production increased 32%. Composite realized wellhead prices, before derivative effects, were $3.80/Mcf for gas, $70.96/barrel for oil and condensate, and $36.66/barrel for NGLs. For the first nine months, total production rose 6%; oil and condensate and NGLs grew while natural gas volumes were flat.
Q3 operating loss and net loss chiefly reflect $352.9 million of impairment charges, including a $280 million write-down of Canadian shallow gas assets held for sale. Nine-month operating income rose modestly, but net income fell 27%, in part because 2009 included substantially larger commodity-derivative gains. Approximate operating margin was -0.7% in Q3 and 8.1% for the nine-month period; approximate net margin was -4.5% and 2.5%, respectively.
Cash flow, capital spending and liquidity
- Nine-month operating cash flow was essentially flat year over year at $2.086 billion. Cash used in investing was $3.625 billion, chiefly reflecting oil and gas property additions; total reported expenditures were $4.194 billion.
- Cash declined by $657.9 million from year-end 2009 to $27.8 million. Current assets were $1.534 billion against current liabilities of $1.938 billion at September 30, 2010.
- Long-term debt on the balance sheet was $3.769 billion, versus $2.760 billion at December 31, 2009; debt-to-total capitalization increased to 27% from 22%. EOG reported $34 million of commercial paper outstanding and no borrowings or letters of credit under its two $1 billion revolving credit agreements.
- EOG issued $1 billion of senior notes in May 2010: $500 million at 2.95% due 2015 and $500 million at 4.40% due 2020. Net proceeds were approximately $990 million. Nine-month dividends paid were $114 million; declared dividends were $0.155 per share in Q3.
Changes, outlook and risks
- Capital plan: The 2010 exploration, development and other property, plant and equipment budget was approximately $5.7 billion, excluding acquisitions. Management expected capital expenditures to exceed operating cash generation in both 2010 and 2011, with asset sales intended to help fund the shortfall. EOG cited a maximum targeted debt-to-capitalization range of 30%–35%.
- Asset sale and impairment: After quarter-end, EOG agreed to sell certain Canadian shallow natural gas assets for approximately $320 million, with closing expected in Q4 2010. The assets represented about 4% of 2009 production and 3% of year-end 2009 proved reserves. Closing and final proceeds remain subject to customary adjustments.
- Growth projects: EOG expected significant oil production from its Eagle Ford acreage beginning in 2011. A proposed purchase of an interest in the Kitimat LNG terminal and Pacific Trail pipeline remained conditional on commercial and regulatory milestones; stated preliminary project costs were approximately C$3 billion and C$1 billion, respectively.
- Derivatives and unusual items: Q3 mark-to-market commodity-derivative gains were $61 million; nine-month gains were $106 million, compared with $406 million in the prior-year period. These contracts are not designated as accounting hedges, so fair-value changes affect reported earnings. EOG also reported $64.8 million of Q3 gains on property dispositions. Commodity prices, basis differentials, production, counterparties and derivative settlements can affect results and cash flows.
- Contingencies and project uncertainty: Ordinary-course legal claims were not expected by management to have a material adverse effect. Separately, the Pennsylvania Fish and Boat Commission alleged water-pollution violations following a June 2010 well-control incident; EOG was discussing the matter and anticipated resolution in December 2010 or January 2011. Five exploratory wells had costs capitalized for more than a year; associated projects remained under evaluation.
- Other risks: EOG identified exposure to oil and gas price and demand changes, drilling and reserve uncertainty, transportation and service availability and cost, regulation, foreign exchange, financing access, and counterparty performance. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Canadian asset sales closed on schedule and at proceeds consistent with the approximately $320 million estimate, and whether further impairments or production impacts followed.
- How EOG funded the expected 2010–2011 capital-spending shortfall, and whether debt and liquidity remained within management’s stated targets.
- Whether operating cash flow and production growth supported the investment program, particularly as derivative cash settlements differed sharply from 2009.
- Progress, costs and commercial or regulatory approvals for Eagle Ford development, Kitimat LNG and the pipeline proposal; also the resolution and financial impact, if any, of the Pennsylvania proceeding.