01—Abstract
Summary
Summary of the 10-K filed February 23, 2006. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' FY2005 10-K shows a company riding a strong commodity cycle: net income available to common rose 104% to $1,252 milliona on revenues of $3,620 million (up 59% year over year), driven primarily by a 36% higher composite natural gas price ($6.62/Mcf) and 17% higher gas deliveries (1,216 MMcfd).
Production reached 1,433 MMcfe per day, and total proved reserves grew 548 Bcfe to 6.2 Tcfe, with about 88% of U.S. and Canadian reserves in natural gas. Operating cash flow was $2.37 billionb, which covered the $1.86 billion exploration and development program, debt was cut by $93 million to $985 million, and the debt-to-capitalization ratio fell from 27% to 19%. The balance sheet strengthened materially, with shareholders' equity up roughly 47% to $4.3 billion and cash rising to $644 million at year-end.
Management guided to a roughly $2.5 billionc 2006 capital budget, plans to fund it largely from operating cash flow, and raised the quarterly dividend to $0.06 per share. Growth is concentrated in the Barnett Shale, where production is near 100 MMcfd and the company plans about 210 gross wells in 2006, and in international gas supply to Trinidad, where contracts tie EOG to ammonia, methanol, and LNG demand.
Investors should weigh the earnings' sensitivity to gas prices: management estimates each $0.10d/Mcf change in 2006 wellhead gas prices moves net income by about $24 million, and hedging is limited to collars and swaps that run only through October 2006. Other considerations include rising per-unit costs (total per-unit costs of $2.70/Mcfe versus $2.41 in 2004), a 36% effective tax rate, and Trinidad and Canada operating risks, along with a large 2006 rig commitment of about $183 million.
02—Key points
Key Highlights
- Net income available to common of $1,252 million for 2005, up 104% from $614 million in 2004, on revenues of $3.62 billion.
- Composite average wellhead natural gas price rose 36% to $6.62/Mcf; natural gas deliveries grew 17% to 1,216 MMcfd.
- Total proved reserves reached 6.2 Tcfe (up 548 Bcfe, about 9.7%), with 90% natural gas-weighted reserves located 56% in the U.S., 22% in Canada, 21% in Trinidad and 1% in the UK North Sea.
- Operating cash flow of $2.37 billion funded a $1.86 billion exploration and development program and $93 million of debt reduction.
- Debt-to-total-capitalization ratio improved to 19% from 27%, and shareholders' equity increased to $4.3 billion from $2.9 billion.
- 2006 exploration and development budget is approximately $2.5 billion, with the Barnett Shale (about 210 gross wells planned) as a key growth driver.
- Quarterly dividend raised to $0.06 per share from $0.04 (announced February 1, 2006), and the company recorded a 2-for-1 stock split effective March 1, 2005.
03—Questions
Frequently Asked Questions
How much of EOG's 2005 earnings growth came from higher prices versus higher volumes?
Most of the increase came from price. Wellhead natural gas revenue rose $1,097 million, of which $763 million was from higher composite prices and $315 million from higher deliveries (plus a $19 million Trinidad adjustment). Crude oil and condensate revenue rose $168 million, with $151 million from price.
How exposed is EOG's 2006 earnings to commodity price moves, and how is it hedged?
Management estimates that, on an unhedged basis, each $0.10/Mcf change in wellhead gas prices changes 2006 net income and operating cash flow by about $24 million, and each $1.00/Bbl change in crude prices by about $6 million. EOG's hedges are primarily collars and swaps covering 2006 volumes, with no contracts extending beyond October 2006 and no crude oil hedges as of February 22, 2006.
Can EOG fund its 2006 capital program from internal cash flow?
Management believes operations and capital activity can essentially be funded from operating cash flow at current assumptions. The company also has a $600 million revolving credit facility, approximately $688 million of shelf registration capacity, and a commercial paper program that was undrawn at year-end 2005.
What are the main risks tied to EOG's Trinidad and international operations?
Trinidad generated about 259 MMcfe per day in 2005 and is governed by long-term contracts with NGC that are partly priced off ammonia, methanol and Henry Hub indices. Risks include expropriation, changes in taxes and royalties, contract renegotiation, political instability and currency exposure. Trinidad's 2005 supplemental petroleum tax was also retroactively increased, and the Canadian dollar's strength raised EOG's Canadian costs.
What does the 2005 cash flow and cost structure suggest about EOG's margins?
Total per-unit costs rose to $2.70/Mcfe from $2.41, led by lease and well costs ($0.71 vs. $0.60), DD&A ($1.25 vs. $1.12) and taxes other than income ($0.38 vs. $0.30). Cash flow still expanded strongly because realized prices rose faster than unit costs, and the effective tax rate increased to 36% from 33%.
04—Continue