EOG’s 30% Revenue Decline In 2020 Is Bad, But It Could Have Been Much Worse

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EOG Resources

In the recent earnings report, EOG Resources (NYSE: EOG) guided for a 10-15% production cut for FY2020 on the backdrop of low crude oil demand. Despite the sharp fall in crude oil prices in recent months, the company reported a 16% (y-o-y) growth in revenues for the quarter, primarily due to $1.2 billion in gains from commodity derivative contracts. The company hedges 40-50% of its total production volumes against market price volatility by entering into fixed-price swap contracts. Trefis expects EOG Resources’ revenues to decline by 30% to $12 billion for the full year 2020 – a figure that would have been substantially lower if not for its sizable hedge position until September.

 

A Quick Look At EOG Resources’ Revenues

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EOG Resources’ five revenue components generated $17.4 billion in total revenues for the full-year 2019.

  • Crude Oil & Condensate: $9.6 billion in FY2019 (55% of Total Revenue). The company drills and recovers crude oil from a range of sources, largely shale formations in the Permian Basin.
  • Natural Gas Liquids (NGL): $0.8 billion in FY2019 (5% of Total Revenue). The company has NGL operations across the world, including North America, and the
  • Natural Gas: $1.2 billion in FY2019 (7% of Total Revenue). The company drills and recovers natural gas from a range of reserves across North America, Trinidad & Tobago, and other international regions.
  • Gathering, Processing & Marketing: $5.4 billion in FY2019 (30% of Total Revenue). It includes revenues from transportation services provided to third-party producers.
  • Gains & Other Income: $0.4 billion in FY2019 (3% of Total Revenue). It includes revenues from asset sales, derivative contracts, and other sources.

 

Number of operated rigs expected to reduce from 36 to 6 for the rest of the year

  • The OPEC and allies initiated the planned production cut of 9.7 MMBD for two months on May 1 to support falling oil prices.
  • Per EIA, the global crude oil demand is likely to fall by 8% to 92.59 MMBD in 2020.
  • While the Texas Railroad Commission has not imposed mandatory production cuts on shale oil producers, major oil companies such as EOG Resources and ConocoPhillips have voluntarily lowered production volumes in view of a prolonged global recession.
  • EOG Resources has reduced the number of operated rigs by 1/6th and the number of planned wells by 40% for the rest of the year.
  • Thus, the company expects to curtail crude oil production by 30% and the total capital expenditure plan by a staggering 60% during the second quarter.

 

EIA projects WTI benchmark to remain below $40 in 2020 but EOG to realize higher prices from hedges

  • Due to the ongoing demand slump and delays in production cut decisions, the WTI benchmark has observed lesser gains than OPEC Basket since May 1.
  • In the latest forecast, EIA expects WTI benchmark prices to remain below $40 for the full year and has cautioned over further demand destruction and compliance amongst OPEC+ members during the latter half of the year.
  • Per quarterly filings, EOG Resources has a swap contract for 265 MBD of crude oil at a weighted average price of $51.36 per barrel for May and June.
  • Thus, the company is expected to realize higher revenues from crude oil sales than the overall market, as nearly 90% of its production volumes will benefit from the short-term derivative contracts.

While EOG Resources’ Revenues are expected to contract by 30%, ConocoPhillips’ Revenues are likely to be slashed by nearly half in FY2020.

 

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