Another Stellar Quarter For EOG Resources; Aims To Become A Premium-Only Driller Soon
Beating the precedence set by its peers, EOG Resources (NYSE:EOG), one of the largest oil and gas producers in the US, posted a stellar performance for the December quarter and full year 2016, [1] exceeding the market estimate for revenue as well as earnings by a huge margin. This has caused the company’s stock price to surge to over $100 per share, almost 4% higher, since the announcement of the results. The major driver of the company’s extraordinary performance has been its shift towards premium drilling, which generates a much higher return compared to the normal drilling locations. This, coupled with the oil and gas company’s efforts to control its operating costs, enabled it to sustain industry leading margins and returns. Going forward, the independent producer will continue to focus on building its premium drilling inventory, and restricting its drilling and operating costs to further enhance its profitability.
Key Highlights Of 4Q’16 Results
With the rebound in commodity prices in the last few months, EOG’s liquids production as well as price realizations for the fourth quarter rose notably, allowing the company to beat the revenue estimate for the quarter. The oil and gas company saw a 9% jump in its liquids output and more than a 21% increase in the price realization during the quarter. As a result, the company’s 4Q’16 revenue came in at $2.4 billion, 34% higher compared to the same quarter last year. However, on a full year basis, the US-based company’s revenue was sizeably lower compared to 2015, largely due to lower production and depressed commodity prices compared to the previous year.
That said, EOG managed to drastically improve its operating income by controlling its operating costs over the last few quarters. In 2016, the oil and gas producer reduced its cash operating costs to $10.55 per barrel of oil equivalent (boe), 15% lower compared to the prior year. Consequently, the company reported an operating loss of $1.2 billion for the year, significantly lower than a loss of $6.6 billion booked in the last year.
EOG Resources’ Cash Operating Costs
The Way Forward
With the Yates acquisition in the later half of 2016, EOG has a total of roughly 6,000 net premium well locations that can deliver a direct after tax rate of return (ATROR) of more than 30%, assuming oil prices of $40 per barrel. Going forward, the company aims to transform into a premium-only driller and expects to deliver an 18% oil production growth in 2017, at $50 per barrel oil and $3 per mcf gas. In terms of costs, the E&P company will continue to bring down the well costs in its key basins in order to improve its profits. Further, EOG has budgeted $3.7-$4.1 billion for its capital spending in 2017, of which more than 80% will be directed towards exploration and development activities. This reinforces the fact that the company expects commodity prices to recover in the coming quarters. Besides, the oil and gas player targets to meet its capital spending needs and dividend payments from its discretionary cash flows during the year.
EOG’s Completed Well Costs By Basin
Over the long term, EOG expects its oil production to grow at a compounded annual rate of 15%-25% over the next four years, assuming crude oil prices to remain in the range of $50-$60 per barrel. This growth will be driven by EOG’s major basins – the Eagle Ford, the Delaware Basin, the Bakken, the Powder River Basin, and the DJ Basin. Further, it will continue to enhance its premium drilling inventory by either converting its existing locations into premium locations by using longer laterals, and innovative technology, or is increasing its exploring activities in its key basins. Lastly, the oil and gas producer will continue to optimize its balance sheet by divesting its non-core and non-strategic assets, and will be dedicated towards returning value to its stakeholders in the form of dividends.
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Notes:- EOG Resources Announces December Quarter 2016 Results, 27th February 2017, www.eogresources.com [↩]