EOG Shines on Oil - Analyst Blog

By Zacks | February 14, 2013 AAA

EOG Resources Inc. (EOG) reported solid adjusted fourth-quarter as well as full-year 2012 results on the back of a striking improvement at its high margin organic crude oil production.

Quarterly adjusted earnings of $1.61 per share exceeded the Zacks Consensus Estimate of $1.37 by 17.5% and were 40% higher than the year-ago adjusted earnings level of $1.15.

Total revenue in the quarter increased 8.6% year over year to $3,011.8 million and comfortably exceeded the Zacks Consensus Estimate of $2,915.0 million.

Full-year adjusted earnings came in at $5.67 per share, up almost 50% from the year-earlier earnings of $3.79. The quarterly figure also surpassed our projection of $5.41.

Total revenue surged 15.4% to $11,682.6 million in 2012 from the year-ago level of $10,126.1 million in 2011. The reported figure also came above our expectation of $11,291.0 million.

Operational Performance

During the quarter, EOG's total volume expanded 3.2% from the year-earlier level to 41.9 million barrels of oil equivalent (MMBoe), or 455.1 thousand barrels of oil equivalent per day (MBoe/d). Full-year 2012 total production was 170.7 MMBoe or 466.4 MBoe/d, representing a 10.6% annualized growth.

Crude oil and condensate production in the quarter was 162.7 thousand barrels per day (MBbl/d), up approximately 20.3% from the year-ago level. Full-year crude oil and condensate production climbed 39.2% year over year. 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 14.0% from the year-ago quarter to 57.8 MBbl/d. On the other hand, natural gas volumes shrunk 8.2% to 1,408 million cubic feet per day (MMcf/d) from the year-earlier level of 1,533 MMcf/d.

Average price realization in the fourth quarter for crude oil and condensates increased approximately 2.4% year over year to $98.02 per barrel. Quarterly NGL prices were down 31.2% at $35.45 per barrel from the year-ago level of $51.53. Natural gas was sold at $3.23 per thousand cubic feet (Mcf), showing a deterioration of 5.0% year over year.

Liquidity Position

At the end of the fourth quarter, EOG had cash and cash equivalents of $876.4 million and long-term debt of $6,312.2 million (including current portion), representing a debt-to-capitalization ratio of 32.2%.

During the quarter, the company generated approximately $1,437.2 million in discretionary cash flow, compared with $1,297.6 million in the year-ago quarter.

Guidance

EOG set its full-year 2013 crude oil production growth target at 28%. Total liquid production is expected to surge 23% in 2013. On the strength of its high margin, domestic crude oil production, the company also expects its total company production to boost 4% on a year-over-year basis.

For the upcoming first quarter of 2013, total production is expected between 438.6 MBoe/d and 469.7 MBoe/d, with 52.5-56.9 MBbls/d of NGL and 1,313-1,391 MMcf/d of gas. For full-year 2013, EOG expects total volume between 462.5 MBoe/d and 507.1 MBoe/d, NGL in the 56.0-66.8 MBbl/d range and natural gas in the 1,287-1,370 MMcf/d range.

For the upcoming quarter as well as full year, the company expects crude oil and condensate volumes in the range of 167.3 MBbls/d to 181.0 MBbls/d and 192.0 MBbls/d to 212.0 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 aided by its deep focus on major oil and liquids rich plays, while holding its core natural gas and Combo acreage in the Barnett, Leonard and Wolfcamp plays for the long term.

The company has also updated its total capital expenditure budget between $7 billion to $7.2 billion for 2013. This compares with $7.6 billion capex in 2012.

Moreover, EOG Resource is keen on its asset divestiture program. This brings greater focus to the liquid-rich plays of both these companies. Through December 31, the company monetized approximately $1.3 billion worth of assets.

Recently, EOG Resources signed a purchase and sale agreement with the Canadian counterpart of Chevron Corporation (CVX). Per the agreement, EOG will divest its stake in the Kitimat LNG facility to Chevron. This divestiture is in sync with its strategy of concentrating on domestic onshore crude oil output, which has an immediate reinvestment prospect.

The company's liquids rich production growth profile as well as huge inventory of drilling opportunities remain 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.

The company retains a Zacks Rank #3, which is equivalent to a Hold rating for the period of one to three months. However, there are certain companies in the oil and gas industry like Cabot Oil & Gas Corporation (COG) and Range Resources Corporation (RRC) that offer value and are worth buying now. Cabot Oil sports a Zacks Rank #1 (Strong Buy), while Range Resources holds a Zacks Rank #2 (Buy).

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