EOG Resources Inc. (EOG), a major independent oil and gas exploration and production company, has reported stellar adjusted second-quarter 2011 results on the back of almost 50% crude oil production growth. Quarterly adjusted earnings of $1.11 per share topped the Zacks Consensus Estimate of 79 cents and showed a substantial improvement from 18 cents earned in the year-earlier quarter.
Total revenue registered a substantial jump of 89.3% year over year to $2,570.3 million, and exceeded the Zacks Consensus Estimate of $1,958 million.
Operational Performance
During the quarter, total volume grew 11.6% from the year-earlier level to 37.5 million barrels of oil equivalent (MMBoe), or 412.6 thousand barrels of oil equivalent per day (MBoe/d).
Crude oil and condensate production was 104.5 thousand barrels per day (MBbl/d), up approximately 49.9% from the year-ago level. This was primarily driven by significant contribution from the South Texas Eagle Ford play followed by the Fort Worth Barnett Shale Combo. Additionally, contribution from newer crude oil and liquids-rich plays such as Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp and New Mexico Leonard were significant.
Natural gas liquids (NGL) volumes increased 37.7% from the year-ago quarter to 39.1 MBbl/d. On the other hand, natural gas volumes plunged marginally to 1,615 million cubic feet per day (MMcf/d) from the year-earlier level of 1,629 MMcf/d.
Average price realization for crude oil and condensates increased approximately 37.3% year over year to $99.77 per barrel. Quarterly NGL prices jumped almost 30% to $51.65 per barrel from the year-ago level of 40.38. Natural gas was sold at $4.08 per Mcf, showing an improvement of roughly 9.4% year over year.
Liquidity Position
At the end of the quarter, EOG had cash and cash equivalents of $1,577.4 million and total debt of $5,226.3 million, representing a debt-to-capitalization ratio of 30.2% (versus 30.7% in the preceding quarter), which the company plans to keep at 30% or below for both 2011 and 2012.
During the quarter, the company generated approximately $1,152.1 million in discretionary cash flow, compared with $656.2 million in the year-ago quarter.
Guidance
For 2011, the company appears on track to achieve its targeted 9.5% total company organic production growth. EOG expects its crude oil and condensate production to boost 52%, while total company crude oil, condensate and natural gas liquids production to rise 47% on an annualized basis.
For the third quarter, total production is expected between 405.4 MBoe/d and 434.0 MBoe/d, with 39.2–44.6 MBbls/d of NGL and 1,524–1,588 MMcf/d of gas. For the full year, EOG expects total volume between 413.7 MBoe/d and 432.0 MBoe/d, NGL in the 39.3–41.9 MBbl/d range and natural gas in the 1,590–1,636 MMcf/d range.
For the third quarter as well as full-year 2011, the company expects Crude Oil and Condensate volumes to fall in the range of 112.2 MBbls/d to 124.7 MBbls/d and 109.4 MBbls/d to 117.4 MBbls/d, respectively.
Outlook
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 South Texas Eagle Ford play, Fort Worth Barnett Shale Combo, as well as Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp and New Mexico Leonard. The company expects its exploration and production expenditures to range from $6,800 million to $7,000 million for 2011, including exploration, development and production facilities as well as midstream expenditures.
Moreover, the company remains busy with its asset divestiture program in order to focus mainly on the liquid-rich plays. During the reported quarter, the company monetized approximately $684 million worth of assets that mainly included natural gas properties and midstream assets. Through the first half of 2011, total cash proceeds from assets sales were $944 million and EOG anticipates property sales of approximately $1.6 billion, or $600 million (higher than the original $1 billion target) for the full year.
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 long-term drivers. 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 Chesapeake Energy Corporation (CHK) and Apache Corp. (APA).
