EOG Resources Inc. (EOG) reported second quarter earnings of 73 cents per share, compared with the Zacks Consensus Estimate of 43 cents per share and a year-ago profit of $2.52 per share.

The severe year-over-year downfall in earnings was due to a significant decrease in commodity-price realizations, partially offset by sound domestic volumes. Including one-time items, EOG posted a loss of 7 cents per share versus 71 cents per share in the year-earlier quarter.

Production

Total volumes during the quarter increased more than 8% year-over-year to 189 billion cubic feet equivalent (Bcfe) or 2,077 million cubic feet equivalent per day (MMcfe/d) (79% natural gas, 21% liquids). Natural gas volumes grew 4% year-over-year, led by an approximately 5% increase in Canadian volumes to 225 MMcf/d and nearly 23% increase in Trinidad volumes to 266 MMcf/d. The U.S. volume was essentially flat year-over-year.

The increase in Canada can be attributable to the British Columbia Horn River Basin production, while in Trinidad, volume growth was driven by increased contractual demand.

Crude oil and condensate production during the quarter was 48.9 thousand barrels per day (MBbl/d), up nearly 19% from the year-ago level. This was primarily driven by a 21% growth in domestic volumes, reflecting increased production in North Dakota. Natural gas liquids (NGL) volumes increased almost 53% from the year-ago quarter to 23.1 MBbl/d on the back of higher volumes from the Fort Worth Basin Barnett Shale.

Management guided towards third-quarter 2009 production in the range of 1,987 – 2,129 MMcfe/d. Full-year production guidance is between 2,050 MMcfe/d and 2,145 MMcfe/d.

Realizations

Average realized natural gas prices decreased roughly 67% year-over-year to $3.07 per Mcf. Prices decreased across all the geographical segments, with domestic realizations down nearly 68% year-over-year to $3.37 per Mcf. Average realized prices for crude oil and condensates decreased approximately 55% year-over-year to $52.47 per barrel.

Prices decreased across all the geographical segments, with domestic realizations down nearly 55% year-over-year to $52.82 per barrel. Quarterly NGL prices were $25.60 per barrel, down approximately 60% year-over-year.

Liquidity and capex

At the end of the quarter, EOG had cash and cash equivalents of $707 million and long-term debt of $2.8 billion, representing a net debt-to-capitalization ratio of approximately 23.2%. During the quarter, EOG generated approximately $787.4 million ($3.14 per share) in discretionary cash flow (DCF), compared to a DCF of $1.37 billion ($5.47 per share) in the year-ago quarter.

The company has set a full-year target of $2.90 billion (excluding acquisitions) for exploration and development activities. Additionally, the company has allocated $280 million for natural gas gathering, processing and other expenditures.

Outlook

We continue to believe that EOG remains better positioned than most of its peers to navigate the current downturn, given its growing resource-play focus and balance sheet strength. The company saw production growth of 15%, 11% and 9% in 2008, 2007 and 2006, respectively.

EOG’s deep inventory of natural gas prospects, horizontal drilling expertise and excellent drilling results make it a premier North American producer. Its operating track record is particularly exceptional in the Barnett Shale play. Through its growing Bakken play in North Dakota, EOG’s crude oil reserves and volumes are steadily increasing.

Given the company’s industry leading organic production-growth profile, strong inventory of drilling opportunities, attractive cost and return metrics, and impressive long-term growth prospects, we see EOG as a core holding in the large-cap E&P space. Therefore, we recommend an Outperform rating for EOG shares.
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