01—Abstract
Summary
Summary of the 10-K filed February 24, 2011. Cited figures are marked; the original filing is the authoritative source.
EOG Resources' 2010 Form 10-K shows a company pivoting toward liquids-rich growth.
Net income available to common stockholders fell to $161 milliona ($0.63 diluted EPS) in 2010 from $547 million in 2009, even as net operating revenues rose 27% to $6.10 billion. The decline reflects a $743 million impairment charge (largely $280 million on Canadian shallow natural gas assets sold for about $344 million), a 61% effective tax rate, and higher DD&A ($1.94 billion, up from $1.55 billion). Wellhead revenues grew 44% to $4.88 billion, driven by a 36% higher composite crude oil price ($74.29/Bbl) and a 15% higher natural gas price ($3.93/Mcf), along with 3% higher natural gas volumes and 35% higher crude oil volumes.
Proved reserves rose 154 MMBoe to 1,950 MMBoe at year-end 2010, and about 62% of 2010 reserve additions were crude oil and NGLs. The company's growth is concentrated in the Eagle Ford, Bakken/Three Forks, and Barnett Combo plays. Management plans $6.4 to $6.6 billionb of 2011 capital expenditures, excluding acquisitions, and expects capital spending to exceed operating cash flow, which it plans to bridge partly through sales of non-core natural gas assets.
Total debt rose to $5.26 billionc, and the debt-to-capitalization ratio increased to 34% from 22%, reflecting heavy 2010 bond issuance. Investors should weigh strong reserve and production growth against weaker near-term earnings, rising leverage, and continued exposure to natural gas price volatility.
02—Key points
Key Highlights
- Net income available to common stockholders fell 71% to $161 million ($0.63 diluted EPS) from $547 million in 2009, driven by $743 million in impairments and a 61% effective tax rate.
- Net operating revenues rose 27% to $6.10 billion; wellhead revenues increased 44% to $4.88 billion on higher commodity prices and volumes.
- Composite crude oil price averaged $74.29/Bbl (up 36%), while crude oil volumes rose 35% to 74.7 MBbld, shifting the production mix toward liquids.
- Proved reserves grew 154 MMBoe to 1,950 MMBoe at year-end 2010, with roughly 62% of reserve additions in crude oil and NGLs.
- 2011 capital expenditure budget of $6.4 to $6.6 billion (excluding acquisitions) exceeds expected operating cash flow; EOG plans to expect production growth of 9.5% in 2011.
- Total debt increased $2.46 billion to $5.26 billion, and the debt-to-total-capitalization ratio rose to 34% from 22%, following 2010 senior note offerings totaling about $2.5 billion.
- Quarterly dividend raised to $0.16 per share from $0.155, effective with the April 2011 payment.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 24, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $6.10B$4.79B | +27.4% |
| Operating Expenses | $5.58B$3.82B | +46.1% |
| Operating Income | $523.32M$970.84M | −46.1% |
| Interest Expense | $205.89M$155.82M | +32.1% |
| Net Income | $160.65M$546.63M | −70.6% |
| EPS (Basic) | $0.32$1.10 | −70.9% |
| EPS (Diluted) | $0.32$1.08 | −71.0% |
| Shares Outstanding (Basic) | 501.75M497.99M | +0.8% |
| Shares Outstanding (Diluted) | 509.00M503.77M | +1.0% |
05—Questions
Frequently Asked Questions
Why did EOG's net income fall sharply in 2010 despite higher revenues?
Net income fell to $161 million from $547 million mainly because of higher operating costs and non-cash charges. Impairments rose to $743 million, including a $280 million writedown on Canadian shallow natural gas assets before their sale. DD&A increased to $1.94 billion, and taxes other than income rose to $317 million. The effective tax rate also rose to 61%, largely from state taxes and Trinidad earnings. Gains on property dispositions of $224 million partly offset these pressures.
What are EOG's main growth drivers for 2011?
EOG plans to focus on crude oil and liquids-rich plays, including the Eagle Ford (about 250 net wells planned), the Barnett Combo (about 262 net wells), the Bakken and Three Forks (Williston Basin), and the Permian Basin. Management expects total 2011 production to rise 9.5%, with total liquids up 49%. Natural gas drilling will be scaled back, with the Barnett gas program reduced to about 24 net wells.
How is EOG funding its capital program, and is there a financing risk?
EOG funds its program mainly through operating cash flow, commercial paper, revolving credit facilities, and debt and equity offerings. It expects 2011 capital spending to exceed operating cash flow, so it plans to sell certain non-core natural gas assets to cover the gap. Debt-to-capitalization rose to 34%, and the company has two $1.0 billion revolving credit facilities, with no borrowings outstanding at year-end 2010. Management describes this liquidity as ample, but higher leverage and any drop in commodity prices could strain cash flow.
How exposed is EOG to commodity price changes?
EOG is highly exposed to crude oil and natural gas prices. Based on its 2011 hedges and tax position, each $1.00/Bbl change in crude oil and NGL prices shifts net income by about $26 million, and each $0.10/Mcf change in natural gas prices shifts net income by about $19 million. The company uses swaps, collars, and basis swaps to hedge part of this risk, but hedging can limit upside. Risk factors also highlight potential impairments if prices fall sharply.
What is the status of EOG's international and LNG investments?
EOG operates in Trinidad, the U.K. North Sea, and China's Sichuan Basin. In Trinidad, it supplies natural gas under contracts with NGC, and in 2010 its average net production was 341 MMcfd of natural gas. In Canada, EOG acquired Galveston LNG for $210 million, giving it a 49% stake in the planned Kitimat LNG terminal, with a preliminary construction cost of about C$3 billion. Final investment decisions and regulatory approvals are still pending, and the Kitimat terminal is operated by an Apache affiliate.
06—Continue