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EOG Resources Inc. (EOG - Analyst Report) reported solid adjusted third-quarter 2012 results on the back of a striking improvement in productivity at the Eagle Ford and Bakken plays as well as higher realized crude oil prices.

Quarterly adjusted earnings of $1.73 per share exceeded the Zacks Consensus Estimate of $1.12 and were above 83 cents earned in the year-earlier quarter.

Total revenue increased 2.4% year over year to $2,954.9 million and exceeded the Zacks Consensus Estimate of $2,785.0 million.

Operational Performance

During the quarter, EOG’s total volume expanded 12.5% from the year-earlier level to 44.2 million barrels of oil equivalent (MMBoe), or 480.3 thousand barrels of oil equivalent per day (MBoe/d).

Crude oil and condensate production was 169.3 thousand barrels per day (MBbl/d), up approximately 42.4% from the year-ago level. This was primarily driven by significant contributions from the company’s South Texas Eagle Ford; North Dakota Bakken and Three Forks; and Permian Basin Wolfcamp and Leonard plays.

Natural gas liquids (NGL) volumes increased 34.1% from the year-ago quarter to 59.0 MBbl/d. On the other hand, natural gas volumes shrunk 4.7% to 1,512 million cubic feet per day (MMcf/d) from the year-earlier level of 1,587 MMcf/d.

Average price realization for crude oil and condensates increased approximately 11.0% year over year to $97.13 per barrel. Quarterly NGL prices were down 39.0% to $31.11 per barrel from the year-ago level of $51.02. Natural gas was sold at $3.07 per thousand cubic feet (Mcf), showing a deterioration of roughly 22.3% year over year.

Liquidity Position

At the end of the third quarter, EOG had cash and cash equivalents of $1,112.6 million and long-term debt of $6,305.3 million, representing a debt-to-capitalization ratio of 31.4%, which it plans to keep below 30% in 2012.

During the quarter, the company generated approximately $1,610.6 million in discretionary cash flow, compared with $1,172.2 million in the year-ago quarter.

Guidance

Stellar drilling results during the first nine months of the year encouraged EOG to increase its full-year crude oil production growth target to 40% from 37% and total company production growth target to 10.6% from the earlier expectation of 9%. On the strength of its oil production success, the company has also raised its total liquids production growth target to 38% from 35%.

For the fourth quarter, total production is expected between 443.8 MBoe/d and 480.5 MBoe/d, with 57.6–64.0 MBbls/d of NGL and 1,372–1,465 MMcf/d of gas. For the full year, EOG expects total volume between 462.4 MBoe/d and 473.0 MBoe/d, NGL in the 55.2–57.4 MBbl/d range and natural gas in the 1,505–1,531 MMcf/d range.

For the upcoming quarter as well as full-year 2012, the company expects crude oil and condensate volumes in the range of 157.6 MBbls/d to 172.4 MBbls/d and 156.4 MBbls/d to 160.5 MBbls/d, respectively.

Outlook

The fourth-largest U.S. independent oil and gas exploration and production company, EOG remains proactive with its liquid ventures. It 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 has updated its total capital expenditure to $7,600 million for 2012.

Moreover, EOG Resources, not unlike its peer Chesapeake Energy Corporation (CHK - Analyst Report), is keen on its asset divestiture program. This brings greater focus to the liquid-rich plays of both these companies. Through September 30, the company monetized approximately $1,200 million worth of assets, which it expects to climb to approximately $1,300 million for 2012.

The company’s liquids rich production growth profile as well as huge inventory of drilling opportunities remains somewhat tempered by its natural gas weighted production and reserves base.

Unless the outlook for natural gas prices improves, we expect the stock to perform in line with the market as well as the sector in the coming quarters and maintain our long-term Neutral recommendation. The company retains a Zacks #2 Rank, which is equivalent to a Buy rating for the period of one to three months.

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