01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' 2009 Form 10-K shows a year defined by a sharp commodity price decline that cut revenue and earnings while the company kept building its resource-play inventory.
Net operating revenues fell 33% to $4.79 billiona from $7.13 billion, and net income available to common stockholders dropped 78% to $547 million ($2.17 diluted EPS) from $2.44 billion. Wellhead natural gas prices fell 54% to $3.42/Mcf, while wellhead crude oil and condensate prices fell 38% to $54.46/Bbl. Results were cushioned by $1.28 billion in realized hedge gains, $390 million from a Rocky Mountain property exchange, and $146 million from the sale of California assets.
Impairments rose to $306 million, and operating income fell to $971 millionb from $3.77 billion. EOG is shifting its mix toward liquids. Crude oil and NGL volumes grew sharply, led by the Bakken, Barnett Shale Combo and Rocky Mountain plays.
Management expects 2010 production to rise about 13%c, with U.S. liquids growing faster than gas, and it plans to increase capital spending versus 2009 (the 2010 budget was not yet finalized). Proved reserves rose to 10.8 Tcfe at year-end 2009, but the company acknowledged that falling year-end gas prices caused roughly 786 Bcfe of negative price revisions. Proved undeveloped reserves more than tripled to 4.9 Tcfe under new SEC rules, which investors should weigh against execution risk.
Balance sheet capacity remains solid. Debt rose to $2.8 billiond, the debt-to-capitalization ratio was 22% (up from 17%), and $686 million of cash was on hand at year-end.
EOG issued $900 million of 5.625% notes due 2019 and has a $1.0 billion revolving credit facility that was undrawn. Operating cash flow fell to $2.92 billion from $4.63 billion, and dividends were raised to $0.155 per quarter for 2010.
02—Key points
Key Highlights
- Net income available to common stockholders fell 78% to $547 million ($2.17 diluted EPS) from $2.44 billion in 2008, as wellhead revenues dropped 45% to $3.40 billion.
- Hedging and asset sales cushioned the downturn: realized derivative gains of $1.28 billion, a $390 million pretax gain on a Rocky Mountain asset exchange, and a $146 million gain on the California asset sale.
- Total proved reserves reached 10.8 Tcfe (up 2.1 Tcfe year over year), but about 786 Bcfe of negative price revisions reflected lower year-end gas prices; proved undeveloped reserves rose to 4.9 Tcfe.
- Production grew to 773 Bcfe (2,118 MMcfed/day, +6%), with crude oil and NGL volumes up sharply (Bakken, Barnett Combo) and expected to rise further in 2010.
- EOG guides to about 13% production growth in 2010 and a larger 2010 capital budget than 2009, while keeping a below-average debt-to-capitalization ratio versus peers.
- Operating cash flow fell 37% to $2.92 billion, and the company issued $900 million of 5.625% senior notes due 2019; the $1.0 billion revolver was undrawn at year-end.
- Impairments rose to $306 million (including $94 million on proved properties), and the effective tax rate rose to 37.3%, both of which weigh on earnings quality.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $4.79B$7.13B | −32.8% |
| Operating Expenses | $3.82B$3.36B | +13.6% |
| Operating Income | $970.84M$3.77B | −74.2% |
| Interest Expense | $155.82M$94.29M | +65.3% |
| Net Income | $546.63M$2.44B | −77.6% |
| EPS (Basic) | $1.10$4.94 | −77.7% |
| EPS (Diluted) | $1.08$4.86 | −77.7% |
| Shares Outstanding (Basic) | 497.99M493.32M | +0.9% |
| Shares Outstanding (Diluted) | 503.77M501.08M | +0.5% |
05—Questions
Frequently Asked Questions
Why did EOG's earnings fall so sharply in 2009?
Natural gas is EOG's largest product, and the average wellhead gas price dropped 54% to $3.42/Mcf, while crude oil fell 38%. Wellhead revenue declined $2.8 billion. Operating income fell from $3.77 billion to $971 million, and net income fell to $547 million. Realized hedge gains and one-time property gains offset part of the decline.
How much of the 2009 result came from one-time gains?
Gains on property dispositions totaled $535 million, including $390 million from the Rocky Mountain asset exchange and $146 million from the California sale. Investors should treat these as non-recurring when judging underlying earnings power. Mark-to-market derivative gains of $432 million are also a large component, though most of that was realized hedge settlements.
What is the outlook for 2010 production and spending?
EOG expects total production to grow about 13% in 2010, with U.S. crude oil and NGL output up roughly 53% and 31% respectively. Capital spending is expected to increase from 2009's $3.8 billion in exploration and development expenditures, but the final budget had not been set when the report was filed. Future results depend heavily on natural gas prices, which the company says it cannot predict.
Is EOG's balance sheet under pressure?
Leverage rose but remains moderate. Debt grew to $2.8 billion, and the debt-to-capitalization ratio rose to 22% from 17%. Liquidity is supported by $686 million of cash and an undrawn $1.0 billion revolving credit facility. The main financial covenant caps debt-to-capitalization at 65%, far above the current level.
What are the main risks highlighted in the filing?
The key risks are sustained declines in natural gas and crude oil prices, which could trigger further impairments; reserve estimates that depend on price assumptions; drilling and execution risk on large unproved plays such as the Haynesville, Marcellus and Bakken; reliance on third-party gathering and transport; and foreign operations in Trinidad, the UK, Canada and China, along with currency exposure.
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