EOG Resources, Inc. (EOG, Financial) reported second quarter 2014 net income of $706.4 million, or $1.29 per share. This compares to second quarter 2013 net income of $659.7 million, or $1.21 per share. Adjusted non-GAAP net income for the second quarter 2014 was $796.0 million, or $1.45 per share, and adjusted non-GAAP net income for the same period last year was $573.8 million, or $1.05 per share.
Consistent with some analysts' practice of matching realizations to settlement months and making other adjustments in order to exclude one-time items, adjusted non-GAAP net income for the second quarter 2014 excluded a previously disclosed non-cash net loss of $229.3 million ($147.0 million after-tax, or $0.27 per share) on the mark-to-market of financial commodity derivative contracts and net gains on asset dispositions of $3.9 million ($1.7 million net of tax, or $0.01 per share). During the second quarter, the net cash outflow related to settlements of financial commodity derivative contracts was $86.9 million ($55.7 million after-tax, or $0.10 per share).Â
For the first half of 2014, EOG posted strong financial metrics driven by reinvestment of capital into high rate-of-return drilling opportunities. Discretionary cash flow increased 22 percent and adjusted EBITDA advanced 24 percent. In addition, adjusted non-GAAP earnings per share increased 46 percent, compared to the first half of 2013.Â
Dividend Increase
The board of directors increased the cash dividend on the common stock by 34 percent. The board declared a quarterly dividend of $0.1675 per share on the common stock to be paid on October 31. The indicated annual rate of $0.67 per share represents the 16th increase in 15 years.
"EOG's bottom line is a reflection of our top quality drilling operations and return focused capital investments," said William R. "Bill" Thomas, Chairman and Chief Executive Officer. "Because EOG has demonstrated its ability to sustain crude oil growth and reinvest cash flows in high return assets, we've increased the common stock dividend for the second time this year, enhancing long-term value for our stockholders."
Operational Highlights
In the U.S., crude oil and condensate production increased 33 percent in the second quarter year over year. Production gains from the South Texas Eagle Ford and North Dakota Bakken led EOG's U.S. crude oil production growth. Driven by the South Texas Eagle Ford and the Permian Basin, natural gas liquids (NGLs) production increased 22 percent year over year. Natural gas production slightly increased due to EOG's Trinidad operations and strong associated gas production in the U.S. Overall, total company production increased 17 percent.
Delaware Basin
EOG expanded its inventory of crude oil plays with successful drilling results in the Second Bone Spring Sand, which underlies its extensive Leonard Shale acreage position in Lea and Eddy counties, New Mexico. Through the application of advanced completion techniques, EOG saw robust results from two recent wells. The Mars 3 State #1H, in which EOG has 67 percent working interest, had 1,270 barrels of oil per day (Bopd) with 150 barrels per day (Bpd) of NGLs and 1.1 million cubic feet per day (MMcfd) of natural gas. EOG has 100 percent working interest in the Jolly Roger 16 State #1H, which had an initial production rate of 1,450 Bopd with 210 Bpd of NGLs and 1.5 MMcfd of natural gas. While EOG estimates the play may be prospective over the majority of its 73,000 net Leonard acres, evaluation and confirmation is ongoing. Across the Second Bone Spring Sand, EOG's production mix is estimated to be approximately 70 percent crude oil with average estimated gross reserves per well of 500 thousand barrels of oil equivalent. There are plans to drill several more wells in the Second Bone Spring Sand in 2014 and increase activity in 2015.
In the West Texas and southeast New Mexico Leonard Shale play, EOG continues to enhance completions and test well spacing both within and across zones to maximize recovery of the hydrocarbons in place.
Over the last 12 months, EOG has systematically tightened spacing from 660 to 300 feet between wells to test production interference between Leonard 'A' wells. In Lea County, EOG completed a 500-foot spacing test by drilling the Dragon 36 State #05H, #06H, #07H and #08H. The wells were turned to production at initial rates of 1,100, 1,500, 1,270 and 1,360 Bopd, respectively. EOG has 100 percent working interest in these Leonard 'A' zone wells that had associated NGL production of 200, 195, 235 and 235 Bpd and 1.1, 1.1, 1.3 and 1.3 MMcfd of natural gas, respectively.
Eagle Ford
EOG's South Texas Eagle Ford crude oil play again contributed significantly to total company second quarter crude oil production growth. Associated NGL and natural gas production also contributed to total company growth. Maintaining a robust drilling and completion program across its Eagle Ford acreage, EOG is further improving individual well results by modifying completion techniques and reducing drilling days.
In Karnes County, the McCoy Unit #1H and #2H began production at 5,290 and 5,415 Bopd with 475 and 415 Bpd of NGLs and 2.7 and 2.4 MMcfd of natural gas, respectively. EOG has 90 percent working interest in these wells. The Wolf Unit #6H, #7H, #8H and #9H, in which EOG has 100 percent working interest, began sales at rates ranging from 3,160 to 3,600 Bopd with 310 to 390 Bpd of NGLs and 1.8 to 2.3 MMcfd of natural gas.
Northeast of Karnes in DeWitt County, the Justiss Unit #11H, #12H and #13H had initial production rates of 4,000, 3,900 and 4,130 Bopd with 690, 650 and 750 Bpd of NGLs and 4.0, 3.8 and 4.3 MMcfd of natural gas, respectively. EOG has 100 percent working interest in these three wells.
In Gonzales County, EOG recorded a number of wells with robust initial production including the Boothe Unit #11H and #16H, which had rates of 4,570 and 3,245 Bopd with 580 and 500 Bpd of NGLs and 3.4 and 2.9 MMcfd of natural gas, respectively. The Zimmerman Unit #14H began sales at 3,800 Bopd with 350 Bpd of NGLs and 2.0 MMcfd of natural gas. EOG has 100 percent working interest in these three wells.
Southwest of Gonzales in LaSalle County, the Naylor Jones Unit 127 #1H, #2H and #3H had initial production rates ranging from 2,200 to 2,500 Bopd with 220 to 250 Bpd of NGLs and 1.3 to 1.5 MMcfd of natural gas. EOG has 100 percent, 100 percent and 75 percent working interest in these wells, respectively.
North Dakota Bakken
In the North Dakota Bakken, EOG is concentrating activity on its Core acreage in Mountrail County. Well productivity is improving markedly due to continued refinements in completion designs. Three Core wells, the Wayzetta 43-0311H, 44-0311H and 45-0311H, were completed during the second quarter at 1,505, 2,410 and 2,690 Bopd, respectively. EOG has 75 percent working interest in these wells. EOG continues to drill and evaluate production data from various spacing patterns in order to maximize the value of this asset. In addition, EOG plans to drill several Three Forks wells to test various benches of this play on both its Core and Antelope Extension acreage during the remainder of 2014.
Wyoming
In the Wyoming DJ Basin, EOG is simultaneously developing the stacked Codell and Niobrara formations from multi-well pad locations in Laramie County, Wyoming. During the second quarter, the Jubilee 586-1705H, the second well completed from a multi-well pad, began production from the Codell at an initial rate of 1,145 Bopd with 445 Mcfd of rich natural gas. EOG has 75 percent working interest in the well. A number of wells are targeted to begin production in August through year-end. EOG plans to test well spacing patterns and various completion techniques in both the Codell and Niobrara formations. EOG has increased its acreage position in the Codell by 13,000 net acres to 85,000 net acres.
In the Wyoming Powder River Basin, EOG is maintaining a steady drilling program with denser pad drilling operations. In the Parkman play, the Mary's Draw 404-21H and 468-34H, which were drilled from the same pad, had initial production rates of 1,045 and 980 Bopd with 305 and 330 Mcfd of rich natural gas, respectively. EOG has 99 percent and 100 percent working interest in the wells, respectively.
Crude Oil and Natural Gas Hedging Activity
For the period August 1 through December 31, 2014, EOG has crude oil financial price swap contracts in place for 194,000 Bopd at a weighted average price of $96.19 per barrel. For the calendar year 2015, EOG has no crude oil financial derivative contracts in place, excluding unexercised options.
For September 1 through December 31, 2014, EOG has natural gas financial price swap contracts in place for 330,000 million British thermal units per day (MMBtud) at a weighted average price of $4.55 per million British thermal units (MMBtu), excluding unexercised options.
For January 1 through December 31, 2015, EOG has natural gas financial price swap contracts in place for 175,000 MMBtud at a weighted average price of$4.51 per MMBtu, excluding unexercised options.
Cash Flow and Capital Structure
At June 30, 2014, EOG's total debt outstanding was $5,910 million for a debt-to-total capitalization ratio of 26 percent. Taking into account cash on the balance sheet of $1.2 billion, EOG's net debt was $4,680 million for a net debt-to-total capitalization ratio of 22 percent.Â
EOG is targeting 29 percent total company crude oil production growth in 2014. Total company production is expected to rise 14 percent, an increase from the previous 12 percent estimate. Capital expenditures are anticipated to range from $8.1 billion to $8.3 billion for 2014, unchanged from prior estimates.
