01—Abstract
Summary
Summary of the 10-K filed March 23, 2001. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' 2000 10-K shows a record year driven by the natural gas price spike.
Net income available to common rose to $385.9 milliona ($3.30 basic per share) from $568.6 million in 1999, which was inflated by a $575 million tax-free gain on the Enron Share Exchange; on an as-adjusted basis, 1999 net income was about $57.6 million. Net operating revenues more than doubled to $1,490 million, driven by average composite natural gas prices of $3.49/Mcf (vs. $2.01 in 1999) and crude oil at $29.57/Bbl (vs. $17.12). Operating cash flow reached $967 million and discretionary cash flow about $1,007 million, which funded $687 million of exploration and development spending, $273 million of share repurchases, and $131 million of debt reduction.
Total long-term debt fell to $859 millionb, and the debt-to-capitalization ratio dropped to 38% from 47%. Production was roughly flat in total volume (1,101 MMcfe/d vs. 1,099 in 1999), but per-share production grew sharply as share count fell to 116.9 million from 119.1 million at year-end 1999 (and from about 160 million in 1996). Proved reserves rose about 6% to 3,821 Bcfe, and EOG replaced 152% of production at a finding cost of $1.07/Mcfe.
The stock rose 211% in 2000, and EOG joined the S&P 500 in November. Investors should weigh several risks. Results are heavily tied to natural gas prices: management cites a sensitivity of $19 millionc in net income per $0.10/Mcf change.
The filing also notes that natural gas prices declined significantly after December 31, 2000, so the standardized measure of $7.9 billiond would be substantially lower if calculated in early 2001. Other items include unhedged gas exposure for 2001, pending shareholder lawsuits over the Enron Share Exchange, and the Trinidad and Canadian operations, which make up a significant share of reserves. The 2001 budget of $700-800 million excludes acquisitions, and the dividend was raised to $0.16 per share in early 2001.
02—Key points
Key Highlights
- Record 2000 results: net income available to common of $385.9 million ($3.30 basic EPS), versus $568.6 million in 1999 that included a $575 million non-recurring Enron Share Exchange gain
- Net operating revenues rose 77% to $1.49 billion, led by a 74% increase in average composite natural gas prices to $3.49/Mcf
- Operating cash flow of $967 million and discretionary cash flow of about $1.0 billion, against $687 million of exploration and development spending
- Balance sheet deleveraging: long-term debt cut $131 million to $859 million, and debt-to-total-capitalization fell from 47% to 38%
- Share count reduced to 116.9 million through $273 million of buybacks; the quarterly dividend was increased to $0.135 for 2000 and to $0.16 annualized in early 2001
- Proved reserves grew about 6% to 3,821 Bcfe, with 152% reserve replacement at a $1.07/Mcfe finding cost
- Material commodity sensitivity: each $0.10/Mcf change in wellhead gas prices moves net income by about $19 million ($0.16 per share), and gas prices fell sharply after year-end 2000
03—Questions
Frequently Asked Questions
How much of EOG's 2000 earnings growth reflects operations versus one-time items?
The 1999 comparison is distorted by a $575 million tax-free Share Exchange gain with Enron, so reported net income fell year over year even though operations improved sharply. On an as-adjusted basis, net income rose from about $57.6 million in 1999 to $385.9 million in 2000, driven mainly by higher natural gas and crude oil prices and by the discretionary cash flow they generated.
How exposed is EOG to natural gas price changes?
Very exposed. EOG is primarily a natural gas producer and remained largely unhedged for 2000, which benefited earnings. At year-end 2000 it estimated that each $0.10/Mcf change in average 2001 wellhead gas prices would move net income by about $19 million ($0.16 per share) and operating cash flow by about $19 million. Only a small amount of 2001 crude oil was swapped (0.7 MMBbl), and the filing notes that gas prices declined significantly after December 31, 2000.
What did EOG do with its cash flow in 2000?
Most went back into the business and into shareholder returns. Exploration and development spending totaled $687 million, including $102 million of producing property acquisitions. The company repurchased $273 million of stock, paid down $131 million of debt, and paid $26 million in dividends. Management said it prioritizes organic exploration over large acquisitions, citing a 66% after-tax return on the drilling program versus 16% on acquisitions.
What are the main legal and operational risks disclosed?
Two stockholder lawsuits filed in July 1999 seek to rescind the Enron Share Exchange or obtain damages; EOG and its co-defendants call them without merit. An arbitration over a Trinidad royalty-to-working-interest conversion is pending, and the company does not expect a material effect. Regulatory matters include MMS royalty valuation rules under litigation and FERC Order 637 appeals. Operations outside North America, especially Trinidad, carry expropriation, tax, and political risks, and about 29% of reserves are located in Trinidad.
What is the outlook for 2001?
EOG budgeted $700-800 million of exploration and development spending for 2001, excluding acquisitions, and planned to fund it primarily from internal cash flow. It expects to drill about 375 shallow gas wells in Canada, more than 90 wells in the Permian Basin, and over 150 wells in the Mid-Continent. Management expects continued natural gas market tightness and plans to add international exposure, particularly in Trinidad. The company also raised its quarterly dividend to $0.04 in early 2001, which is $0.16 annualized.
04—Continue