EOG Returns To Profitability In 1Q’17; Increased Its Premium Drilling Locations By 20%
In line with market expectations, EOG Resources (NYSE:EOG) posted a strong jump in its March quarter performance, returning to profitability after 6 consecutive quarters of losses due to the company’s effective cost reduction measures. In addition, the company exceeded revenue expectations for the quarter by a fair margin, backed by a significant rise in its oil production, and the rebound in commodity prices during the quarter. The company’s stock increased slightly following the announcement of the results. Going forward, we believe that the company’s focus on high margin premium drilling locations will drive its growth and value in the long term.
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Key Highlights of 1Q’17 Earnings
As expected, the spike in commodity prices in the last few months resulted in a sharp rise in EOG’s price realizations during the quarter. However, the highlight of the quarter was EOG’s record breaking crude oil production of 315,700 barrels per day (bpd), representing an increase of 18% over the same quarter of last year. This notable rise in the company’s oil production was driven by its premium drilling strategy and technical advances in its prolific plays across multiple basins, particularly the Permian Basin. However, this production growth was partially offset by the reduction in the company’s gas output during the quarter. That said, EOG still managed to increase its overall output by roughly 4%, which boosted its 1Q’17 revenue. EOG reported revenue of $2.61 billion for the first quarter of 2017, almost double the revenue posted a year ago.
On the cost side, EOG made strong headway in bringing down its cash costs during the quarter. The company reduced its completed well costs by 6% compared to the full year average of 2016 in the Eagle Ford, Delaware Basin, and Bakken using normalized lateral lengths. Although the company’s lease and well expenses on a per unit basis rose by nearly 4%, it managed to cut its transportation and general and administrative expenses. Accordingly, the company recorded an operating income (GAAP) of $108 million for the quarter as opposed to an operating loss of $638 million in the same quarter of 2016.
Based on the success of its cost reduction initiatives, EOG has further revised its cost targets in its three key plays. The company had reduced the completed well cost in Delaware Basin to $7.8 million, lowering it by 8% in 1Q’17 compared to the average in 2016. Now, the company expects to further bring this cost down to $7.6 million by the end of 2017.
Focus On Premium Drilling Locations
On the operational front, EOG realized positive results from its exploration and development activities in its major plays. The company increased its development activity in the Delaware Basin and the Eagle Ford region during the March quarter, which resulted in the addition of 700 and 500 new premium drilling locations in the two plays, respectively. At the end of the quarter, the company’s premium drilling locations rose to 7,200, 20% higher compared to the previous quarter. According to EOG, a premium drilling location is one which has the potential to deliver a direct after tax rate of return of (ATROR) of more than 30% at $40 crude oil and $2.50 natural gas prices. A jump in the company’s premium locations implies higher returns for its investors, even with the given volatility in the commodity markets.
Apart from this, EOG’s drilling activity in the Whirling Wind region resulted in an average lateral length of 7,100 feet per well and average 30-day initial production of 5,060 bpd, 700 bpd of NGLs, and 5.1 MMcfd of natural gas per well. These drilling results have exceeded industry records for 30-day initial production from Permian Basin horizontal oil wells. This has not only provided the company a huge upside potential for the long term, but has also reinforced investor confidence in the company and its high quality assets.
In terms of guidance, EOG continues to stick to its previous target of growing its oil production at an 18% growth rate in 2017 and at a compounded annual rate of 15%-25% over the next four years, assuming oil prices to be in the $50-$60 per barrel range. However, backed by its efforts to optimize its cost structure, the company expects to reduce its operating cash cost from $10.55 per boe in 2016 to $10.40 per boe in 2017. That said, the company reiterated its plan of spending $3.7-$4.1 billion on its capital needs in 2017, with a focus on exploration and development activities in the Eagle Ford, the Delaware Basin, the Bakken, the Powder River Basin, and the DJ Basin.
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