01—Abstract
Summary
Summary of the 10-K filed March 20, 2002. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' 2001 10-K shows a company that enjoyed a strong year on the revenue and cash flow side while absorbing rising costs and some one-time charges.
Net operating revenues rose to $1,655 milliona from $1,490 million, driven by a 9% increase in average wellhead natural gas prices and a $98 million mark-to-market gain on hedges, partially offset by a 16% decline in crude oil prices. Net income was $398.6 million, roughly flat versus 2000's $396.9 million, and diluted EPS was $3.30 versus $3.24. Net operating cash inflows reached $1,197 million, up about $230 million, which funded $1,163 million of exploration and development spending (including acquisitions) with $127 million of share repurchases and $29 million of dividends.
The headline numbers mask some margin pressure. Lease and well expenses rose to $0.44b per Mcfe from $0.35, DD&A increased $33 million on higher unit rates, dry hole costs more than quadrupled to $71 million, and impairments rose to $79 million. Management also recorded a $19.2 million charge tied to the Enron Corp. bankruptcy, mostly related to 2001 and 2002 derivative contracts.
Total operating costs per Mcfe climbed 9% to $1.97c. Proved natural gas reserves increased to 3,796 Bcf from 3,381 Bcf, with extensions and discoveries of 713 Bcf, though reserve growth was partly offset by downward revisions of 133 Bcf and a 340 Bcf production year. The balance sheet is conservatively positioned, with long-term debt of $856 million, a debt-to-total-capitalization ratio of 34% (down from 38%), and shareholders' equity of $1.64 billion.
The company disclosed a 2002 budget of $600 to $750 milliond for exploration and development, excluding acquisitions, and continued diversification efforts into Trinidad, Canada and other international areas. Investors should note the company's heavy dependence on natural gas prices, with a $0.10 per Mcf move affecting net income by about $15 million, and that much of the financial detail is incorporated by reference from the February 28, 2002 Form 8-K rather than set out in this filing.
02—Key points
Key Highlights
- Net operating revenues rose 11% to $1,654.9 million, supported by a 9% increase in average wellhead natural gas prices to $3.81 per Mcf composite and a $97.8 million mark-to-market gain on commodity derivatives.
- Net income was $398.6 million ($3.30 diluted EPS available to common), essentially flat versus 2000, as higher lease, DD&A, dry hole and impairment costs offset stronger revenue.
- Net operating cash inflows increased to $1,197.4 million from $967.4 million, while exploration and development expenditures rose to $1,163 million, including $244 million in acquisitions.
- Proved reserves grew to 3,796.5 Bcf of natural gas and 72.1 MMBbl of liquids, with 713 Bcf of extensions and discoveries offsetting 340 Bcf of production and 133 Bcf of downward revisions.
- A $19.2 million charge related to Enron Corp.'s December 2001 Chapter 11 filing affected results, though management believes the broader Enron exposure will not be materially adverse.
- Long-term debt was $856 million at year-end with a 34% debt-to-capitalization ratio, and the company repurchased $127 million of common stock during 2001.
- Management budgeted $600 to $750 million for 2002 exploration and development (excluding acquisitions), with growing investment outside North America, notably the Trinidad Oilbird and U(a) Block projects.
03—Questions
Frequently Asked Questions
How did EOG's profitability change in 2001 compared with 2000?
Net income was $398.6 million in 2001, nearly unchanged from $396.9 million in 2000. Revenue growth from higher natural gas prices and hedging gains was largely offset by higher lease and well costs, DD&A, dry hole expense, impairments, and a $19.2 million Enron-related charge. Diluted EPS rose slightly to $3.30 from $3.24, helped by a smaller share count.
How exposed is EOG to natural gas price movements?
Very exposed, since EOG is primarily a natural gas producer. Management estimated that each $0.10 per Mcf change in average wellhead gas prices would change net income by about $15 million ($0.13 per share) and current operating cash flow by about $23 million, based on volumes not already hedged. Each $1.00 per barrel change in crude oil prices would move net income by roughly $5 million.
What is the Enron relationship and what risks does it pose?
Enron Corp. was EOG's former majority shareholder. Following the 1999 Share Exchange, Enron's remaining stake was expected to fall below 2% after its mandatory exchangeable notes convert on July 31, 2002, and the company believes the notes are unlikely to be exchanged for shares given Enron's bankruptcy. EOG recorded $19.2 million in 2001 charges tied to Enron derivative contracts and an allowance against receivables, and says other Enron exposures are not expected to be materially adverse.
What are EOG's plans for 2002 and beyond?
EOG budgeted $600 to $750 million for 2002 exploration and development spending, excluding acquisitions, and plans to keep most spending in its North American core areas. It also intends to deploy a portion of its funds outside North America, leveraging success in Trinidad, where the Oilbird field is slated for production in late 2003 and a 1,850-ton-per-day ammonia plant is under development. Management says funding should come primarily from internally generated cash flow.
Are there material legal or regulatory risks disclosed in the filing?
The filing notes a False Claims Act lawsuit alleging underpayment of federal royalties on natural gas, in which EOG believes it has substantial defenses; if found liable, it could face treble damages. Other matters include MMS royalty valuation rule litigation, FERC regulatory reviews, and potentially responsible party designations under CERCLA. Management does not expect these to have a materially adverse effect on financial condition, though the legal proceedings disclosure is incorporated by reference from the 8-K.
04—Continue