01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' 2007 10-K shows a company that grew volumes sharply while net income fell.
Net income available to common stockholders was $1,083 milliona, down 16% from $1,289 million in 2006, even though net operating revenues rose 7% to $4,191 million. Natural gas deliveries rose 10% to 1,470 MMcfd, driven mainly by Texas (Barnett Shale), the Rocky Mountains and Kansas. Higher depreciation, depletion and amortization ($1,066 million, up 30%), lease and well costs, and transportation costs compressed margins.
Year-end total proved reserves were 7,745 Bcfe, up roughly 944 Bcfe from 2006, with about 67% in the United States, 17% in Canada and 16% in Trinidad. Balance sheet and capital allocation remained conservative. Debt rose to $1,185 millionb, and the debt-to-total-capitalization ratio moved from 12% to 14%.
EOG issued $600 millionc of 5.875% senior notes due 2017 and repurchased preferred stock. The 2008 budget is about $4.4 billion in total capital expenditures excluding acquisitions, with management guiding to roughly 15% production growth. The company also agreed to sell most of its Appalachian shallow gas assets to EXCO Resources for about $395 million, closed February 20, 2008, and raised its quarterly dividend to $0.12 per share.
Investors should weigh the growth outlook against commodity and execution risk. EOG is heavily weighted to natural gas, and each $0.10d/Mcf change in wellhead gas prices moves 2008 net income by roughly $20 million. Its Trinidad and North Sea assets carry foreign currency and fiscal exposure, and the company faces intense competition for acreage and rigs.
02—Key points
Key Highlights
- Net income available to common stockholders fell 16% to $1,083 million ($4.37 diluted EPS) despite a 7% rise in net operating revenues to $4,191 million.
- Natural gas deliveries grew 10% to 1,470 MMcfd, led by Texas, the Rocky Mountains and Kansas; total company production rose to about 1,729 MMcfed.
- Year-end 2007 proved reserves reached 7,745 Bcfe (about 86% natural gas), an increase of roughly 944 Bcfe from 2006.
- DD&A rose to $1,066 million ($1.69 per Mcfe) and total per-unit operating costs rose to $3.12 per Mcfe from $2.66, pressuring margins.
- The 2008 total capital expenditure budget is about $4.4 billion excluding acquisitions, with planned production growth of about 15%.
- Debt increased to $1,185 million (debt-to-capitalization 14%) after a $600 million 5.875% senior notes issuance; the Appalachian asset sale to EXCO for about $395 million closed February 20, 2008.
- The quarterly dividend was raised to $0.12 per share on February 7, 2008, up from $0.09.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Revenue | $4.24B |
| Operating Expenses | $2.59B |
| Operating Income | $1.65B |
| Interest Expense | $76.10M |
| Net Income | $1.09B |
| EPS (Basic) | $2.23 |
| EPS (Diluted) | $2.19 |
| Shares Outstanding (Basic) | 486.94M |
| Shares Outstanding (Diluted) | 495.27M |
05—Questions
Frequently Asked Questions
Why did net income decline in 2007 even though revenue grew?
Net operating revenues rose $278 million to $4,191 million, but operating expenses rose $533 million to $2,542 million. The largest increases were DD&A (up $248 million on higher production and higher-cost properties), lease and well costs (up $107 million), transportation (up $60 million), and G&A (up $40 million). Income tax expense also fell with pretax income, and the effective tax rate rose to 33%.
How exposed is EOG to natural gas prices?
Very exposed. EOG is primarily a natural gas producer. Including 2008 hedges, each $0.10 per Mcf change in wellhead gas price changes net income and operating cash flow by about $20 million, and each $1.00 per barrel change in crude oil price changes them by about $10 million. Most natural gas is sold at market prices, and the company used price swaps for 2008 and 2009, not collars.
What are EOG's main growth plans for 2008?
The company plans to drill over 400 net wells in the Fort Worth Basin (Barnett Shale), grow Bakken oil production with 49 net wells, drill at least 600 net wells in Western Canada, and advance Trinidad gas projects (Block 4(a) with first deliveries expected in early 2010). Management expects total production to rise about 15% over 2007 levels on a $4.1 billion exploration and development budget, excluding acquisitions.
How strong is EOG's balance sheet?
Management describes the balance sheet as strong. Debt-to-capitalization was 14% at year-end 2007 versus 12% in 2006, and the debt covenant ceiling is 65%. Stockholders' equity was $6,990 million. Year-end cash was $54 million, and the company had no commercial paper outstanding. The $1.0 billion revolving credit facility was undrawn, and about $88 million remained available under the shelf registration.
What risks should investors consider most closely?
Key risks include commodity price declines, dependence on third-party pipelines and processing, hurricane and weather exposure in the Gulf of Mexico, and the risk that reserve estimates prove inaccurate. Other risks include the subprime-driven credit environment, which could raise borrowing costs, and foreign currency translation: about 15% of 2007 revenues came from non-U.S. dollar functional-currency subsidiaries. Canadian royalty regime changes take effect in January 2009.
06—Continue