Stellar 1Q for EOG

EOG Resources Inc. (EOG - Analyst Report), the fourth-largest U.S. independent oil and gas exploration and production company, has reported stellar adjusted first-quarter 2012 results on the back of a striking improvement in productivity from individual wells. Quarterly adjusted earnings were in line with the Zacks Consensus Estimate of $1.17 per share and above 68 cents earned in the year-earlier quarter.

Total revenue in the quarter shot up nearly 48% year over year to $2,806.7 million, and exceeded the Zacks Consensus Estimate of $2,365.0 million. Management pointed out that approximately 85% of its North American wellhead revenue came from liquids in the first quarter.

Operational Performance

During the quarter, total volume expanded 11.1% from the year-earlier level to 40.9 million barrels of oil equivalent (MMBoe), or 449.8 thousand barrels of oil equivalent per day (MBoe/d).

Crude oil and condensate production was 140.8 thousand barrels per day (MBbl/d), up 49.1% from the year-ago level. This was primarily driven by significant contributions from the company’s four big crude oil and liquids plays: the South Texas Eagle Ford, the North Dakota Bakken, the Fort Worth Barnett Combo and the Permian Basin Wolfcamp and Leonard.

Natural gas liquids (NGL) volumes increased 44.3% from the year-ago quarter to 51.1 MBbl/d. On the other hand, natural gas volumes shrunk 7.7% to 1,547 million cubic feet per day (MMcf/d) from the year-earlier level of 1,676 MMcf/d.

Average price realization for crude oil and condensates increased approximately 15.4% year over year to $101.12 per barrel. However, quarterly NGL prices were down 8.6% at $42.62 per barrel from the year-ago level of $46.65. Natural gas was sold at $2.61 per thousand cubic feet (Mcf), showing a deterioration of roughly 32.6% year over year.

Liquidity Position

At the end of the first quarter, EOG had cash and cash equivalents of $294.1 million and long-term debt of $5,010.5 million, representing a debt-to-capitalization ratio of 27.8%, which it plans to keep below 30% in 2012.

During the quarter, the company generated approximately $1,316.3 million in discretionary cash flow, compared with $946.6 million in the year-ago quarter.

Guidance

Stellar first quarter performance in the company’s big four plays encouraged EOG to increase its full year total company liquids production growth target to 33% from 30% and total company production growth target to 7% from the earlier expectation of 5.5%.

Earlier, the company had expected its natural gas production for 2012 to decline 11% from 2011, reflecting additional producing property sales and a further de-emphasis on natural gas drilling in a weak price environment in North America.

For the second quarter, total production is expected between 420.9 MBoe/d and 470.6 MBoe/d, with 45.8–57.1 MBbls/d of NGL and 1,432–1,524 MMcf/d of gas. For the full year, EOG expects total volume between 430.3 MBoe/d and 477.1 MBoe/d, NGL in the 50.7–60.9 MBbl/d range and natural gas in the 1,440–1,527 MMcf/d range.

For the upcoming quarter as well as full-year 2012, the company expects crude oil and condensate volumes to fall in the range of 136.4 MBbls/d to 159.5 MBbls/d and 139.6 MBbls/d to 161.7 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 $7,400 million to $7,575 million for 2012, 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 on the liquid-rich plays, like its peer company Chesapeake Energy Corporation (CHK - Analyst Report). Through May 1, the company monetized approximately $565 million worth of assets, which it expects to be approximately $1,200 million for 2012.

Although we view EOG as a favorable long-term story, risk-reward pay-off for the company is still uncertain for 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 maintain our long-term Neutral recommendation for the EOG stock. The company currently retains a Zacks #3 Rank (short-term Hold rating).