EOG Resources Inc. (EOG), a major independent oil and gas exploration and production company, reported better-than-expected adjusted fourth-quarter 2010 results. Quarterly earnings of 36 cents per share topped the Zacks Consensus Estimate of 25 cents. However, earnings fell short of 92 cents earned in the year-earlier quarter.
Despite volume expansion and higher commodity prices, steeper operating expenses resulted in the annual earnings decline. The company also increased its quarterly dividend to 16 cents per share (64 cents annualized).
Full-year 2010 profit plunged 61% to $1.16 per share from the year-ago level of $3.00. However, full-year earnings surpassed the Zacks Consensus Estimate of $1.07.
Total revenue increased nearly 2% year over year to $1.79 billion, and exceeded the Zacks Consensus Estimate of $1.481 billion. Revenue also improved 27% year over year to $6.99 billion in 2010, beating the Zacks Consensus Estimate of $5.62 billion.
Operational Performance
During the quarter, total volumes grew 19% from the year-earlier level to 38.7 million barrels of oil equivalent (MMBoe), or 420.6 thousand barrels of oil equivalent per day (MBoe/d). Full-year 2010 production grew 9.5% year over year to 141.1 MMBoe, or 386.4 MBoe/d.
Crude oil and condensate production was 87.8 thousand barrels per day (MBbl/d), up approximately 44% from the year-ago level. This was primarily driven by significant growth in North American volumes, specially the North Dakota Bakken/ Three Forks, the Fort Worth Barnett Combo and the South Texas Eagle Ford plays. Natural gas liquids (NGL) volumes increased more than 49% from the year-ago quarter to 36.5 MBbl/d. Moreover, natural gas volumes surged almost 11% year over year to 1,778 million cubic feet per day (MMcf/d).
Average realized natural gas prices decreased roughly 7.5% year over year to $3.59 per Mcf. Domestic price realizations decreased 10% year over year to $3.78 per Mcf. Average realized prices for crude oil and condensates increased nearly 18% year over year $79.55 per barrel. Quarterly NGL prices increased 9% to $43.97 per barrel.
Liquidity Position
At the end of the quarter, EOG had cash and cash equivalents of $788.9 million and total debt of $5.22 billion, representing a debt-to-capitalization ratio of 33.8% (versus 27% in the preceding quarter), which the company plans to keep below 35% for both 2011 and 2012.
During the quarter, the company generated approximately $826.6 million ($3.25 per share) in discretionary cash flow (DCF), compared with DCF of $868.3 million ($3.43 per share) in the year-ago quarter.
Outlook
EOG’s growing emphasis on liquids is reflected through its growth in production volume, which is gaining traction. EOG expects its total production to grow 9.5% on an annualized basis. Production growth will be driven by a 49% increase in liquids volumes, comprising 55% growth in oil volumes and 34% growth in NGLs. However, North American natural gas volumes are expected to decrease 5% from 2010, due to the asset sale program as well as a weak natural gas pricing environment.
EOG’s increasing interest in oil is appreciable in a favorable price environment, which will be further augmented by its deep focus on major oil and liquids rich plays, such as Eagleford, Bakken and Barnet Combo, as well as Niobrara and the newly liquid-rich play, Wolfcamp. The company expects its exploration and production expenditures to range from $6.4 to $6.6 billion for 2011, which includes exploration, development and production facilities as well as midstream expenditures.
The company plans to sell more natural gas and midstream assets (worth $1 billion) in 2011.
Although we view EOG as a favorable long-term story, risk-reward pay-off for the company is still uncertain over the near term, due to its natural gas weighted production and reserves base as well as cost overruns. EOG’s large portfolio of high-return projects and strong technical competence are the key drivers of its success over the long term. Hence, we retain our long-term Neutral recommendation for the EOG stock. The company currently retains a Zacks #3 Rank (short-term Hold rating), in line with its peers Anadarko Petroleum Corp. (APC) and Apache Corp. (APA).
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