EOG Resources Inc. (EOG), a major independent oil and gas exploration and production company, reported weaker-than-expected second-quarter results. Quarterly earnings were 18 cents per share, much below both the Zacks Consensus Estimate of 25 cents and the year-ago profit of 73 cents.
Despite an increase in production volumes and higher commodity prices, earnings missed mainly due to higher operating expenses. While EOG’s results came in below our expectations, the company maintained its quarterly dividend of 15.5 cents per share (62 cents annualized).
Total revenue increased approximately 58% to $1.36 billion, compared with the Zacks Consensus Estimate of $1.21 billion. EOG is gaining momentum by building a large North American shale acreage position.
This is the first time in EOG’s history when revenues generated from crude oil, condensate and natural gas liquids production exceeded those from natural gas. This reflects the company’s growing interest on oil.
Operational Performance
Total volumes during the quarter increased 6.8% from the year-earlier level to 201.8 billion cubic feet equivalent (Bcfe), or 2,217 million cubic feet equivalent per day (MMcfe/d), 73% of which was natural gas and 27% liquids. Natural gas volumes declined slightly from the year-earlier level.
Crude oil and condensate production during the quarter was 69.7 thousand barrels per day (MBbl/d), up approximately 43% from the year-ago level. This was primarily driven by a significant growth in North American volumes. Natural gas liquids (NGL) volumes increased almost 23% from the year-ago quarter to 28.4 MBbl/d.
Average realized natural gas prices increased roughly 22% year over year to $3.73 per Mcf. Domestic price realizations increased nearly 22% year over year to $4.12 per Mcf. Average realized prices for crude oil and condensates increased 39% year over year $72.69. Quarterly, NGL prices increased 58% to $40.38 per barrel.
Liquidity Position
At the end of the quarter, EOG had cash and cash equivalents of $650 million and long-term debt of $3.7 billion, representing a debt-to-capitalization ratio of 27%. During the quarter, EOG generated approximately $656.2 million ($2.58 per share) in discretionary cash flow (DCF), compared with a DCF of $787.4 million ($3.14 per share) in the year-ago quarter.
Outlook
EOG has raised this year’s capital expenditure budget by $500 million to pursue more oil centric horizontal drilling in the shale plays. The company plans to sell more non-core natural gas properties in North America to fund the excess capex.
EOG maintained its full-year target of organic production growth of 13%. Given our positive medium to long-term outlook for oil, we believe EOG’s oil-centric drilling initiatives could act as a favorable catalyst for the company’s growth story.
While we are confident about a favorable long-term, risk-reward pay off for the company based on its solid assets base and recent drilling initiatives, our near-term view remains Neutral due to its natural gas weighted production and reserves base as well as cost overruns.
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