EOG Resources Reports A Strong Rebound In 3Q’16; Increases 2016 Capex And Production Guidance
Despite posting a solid improvement in its September quarter results, EOG Resources (NYSE:EOG), the US-based oil and gas producer, could not please its investors with its performance last week, causing its stock to drop 0.3% post the announcement of its results [1]. While the company exceeded the market revenue expectations by a decent margin, the exploration and production (E&P) company failed to meet the earnings estimate due to asset impairment charges booked during the quarter. Even after this, the company’s stock is almost 32% higher compared to what it was at the beginning of the year, which is a rare phenomenon for any oil and gas company in this current commodity downturn.
Source: Google Finance
Operational Highlight
Operationally, EOG Resources’ third quarter performance came in much stronger than the second quarter. The company’s production stood at 555 thousand barrels of oil equivalent per day (MBOED), which although lower than the same quarter of last year, was almost 1% higher than upper end of the company’s guidance for the quarter. This higher production, coupled with the recovery in natural gas prices, enabled the oil and gas producer to record third quarter revenue of $2.1 billion, which is close to 20% higher than the previous quarter.
Further, the Houston-based company’s cost control measures reaped positive results, enabling the company to bring down its cash operating cost to $$12.16 per BOE year-to-date, as opposed to $17.02 per BOE in 2014. Consequently, the company’s operating loss shrank to only $193 million, versus $6.2 billion in the same quarter of last year. Given the progress of these cost cutting initiatives, EOG has revised its completed well cost target for its key regions. For instance, in the Bakken region, the oil and gas producer has witnessed significant cost efficiencies and aims to record well costs of $4.8 million in 2016, almost 27% lower than its prioir guidance of $6.1 million. Also, in the Eagle Ford basin, EOG now expects its completed well costs to be around $4.5 million, lower than its previous target of $4.8 million.
EOG’s Completed Well Costs In Key Basins
Source: EOG Resources 3Q’16 Presentation
Yates Petroleum Deal
Apart from the strong operational performance, in September EOG Resources had announced a deal to acquire Yates Petroleum Corporation for roughly $2.5 billion in a stock and cash deal to expand its footprint in the Permian Basin, one of the most cost-effective oil fields in the US (For More Details Read: Why Is EOG Resources Acquiring Yates Petroleum Corp.?) The deal is likely to increase EOG’s position in the Permian and adjacent plays by more than 200,000 acres, and double its position in the Delaware Basin. Given that a sizeable portion of Yates’ acreage is adjacent to EOG’s existing leases in the basins, the deal is likely to be economically accretive to EOG even in the ongoing commodity slump.
Furthermore, the deal will augment EOG’s plans to improve its well productivity by building a strong inventory of premium locations. A premium drilling location, as defined by EOG, is a location that generates a direct after-tax rate of return of at least 30%, assuming crude oil prices to be at $40 per barrel. This deal will immediately add roughly 1,740 net premium drilling locations to the company’s existing 4,300 premium drilling locations. This 40% jump in EOG’s premium drilling locations will increase its drilling inventory to more than 10 years, providing the company a huge upside when the commodity markets recover.
EOG’s Premium Drilling Locations (Post Yates’ Deal)
Source: EOG Resources 3Q’16 Presentation
Guidance for 2016
In terms of guidance for the full year 2016, EOG announced notable changes to its production, cost and capital numbers in the third quarter earnings call. On the one hand, the E&P company raised its production guidance for 2016 to 559 MBOED (mid-point), representing an increase of nearly 3% from its previous guidance. On the other hand, the company has changed its targets for operating costs for the year, based on the progress of its cost cutting measures.
However, the highlight of the guidance change was the upward revision of EOG’s capital expenditure. It is the second major oil and gas company, after Anadarko Petroleum, that has increased its capital expenditure guidance for the year despite the uncertainty in the recovery of the commodities markets. This could mean that the company is confident about its future prospects and is willing to invest more, even in the volatile markets, reinforcing investor faith in the company. However, this move could backfire, and create a burden on EOG’s cash flows, if the company is unable to execute its strategy as planned and the commodity markets continue to disappoint in the coming quarters.
Thus, we believe that EOG Resources has displayed a strong performance in the third quarter on the back of the recovery in gas prices and its cost cutting initiatives. Further, the deal with Yates is likely to strengthen the company’s world class portfolio of assets and provide an incremental upside to the company in the future. However, execution of the company’s plans will play a crucial role in its ability to weather this commodity down cycle.
Have more questions about EOG Resources (NYSE:EOG)? See the links below:
- EOG Resources 3Q’16 Results To Show Improvement Driven By Higher Price Realizations
- Why Is EOG Resources Acquiring Yates Petroleum Corp.?
- Why Has EOG Resources’ Capital Efficiency Improved Despite The Commodity Downturn?
- Here’s Why We Are Bullish On EOG Resources
- EOG Resources’ 2Q’16 Earnings Improve On The Back Of Higher Price Realization And Production
- How Will EOG Resources’ Production Trend Over The Next Few Years?
- How Will EOG Resources’ Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- How Will EOG Resources’ Revenue Move If Crude Oil Prices Average At $50 Per Barrel Till 2018?
- EOG Resources Posted Weak 1Q’16 Results Driven By Ongoing Commodity Downturn
- Expect Another Weak Quarter From EOG Resources On The Back Of Depressed Commodity Prices
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for EOG Resources
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- EOG Resources Announces Third Quarter 2016 Results, 4th November 2016, www.eogresources.com [↩]