EOG Resources (EOG, Financial) has been performing decently on revenue growth, despite volatility in crude oil prices. The company is a quickly transforming to be successful in this low price environment, and posted first-quarter fiscal 2015 results. The company posted earnings of $0.03 per share, trumping consensus estimates of $0.01 per share. However, earnings declined from the year-ago figure of $1.40 per share as a result of weak commodity prices.
Average price realization for the crude and condensates declined 53% year-over-year to $$46.68 per barrel. In addition, NGL and natural gas prices and fell nearly 58% and 45% year-over-year, respectively. As a result, the total revenue during the reported quarter declined 43% year-over-year to clock $2,318.5 million, missing consensus estimates by over $245 million.
Navigating through low oil price environment
EOG is focusing on maximizing fiscal 2015 return on invested capital, or ROIC, and position the company to resume strong growth on recovery of the crude oil prices. In addition, the company is moving ahead with its plan to drill but defer completion until oil prices improve. The company plans to build and build an inventory of 350 incomplete wells in a bid to control costs. Bill Thomas, Chairman & CEO, said during the earnings call:
If oil prices recover and stabilize around $65 WTI, EOG can resume strong double-digit growth for the balance CapEx to discretionary cash flow program.
The second initiative is improving well productivity and operational efficiencies. For productivity enhancement the company is expanding use of high density completions and testing down spacing to maximize to NPV per section. Year-to-date, we have reduced total completed well costs by 10% in the Eagle Ford play.
The third initiative is safeguarding the balance sheet by meeting cash flow and CapEx expectations for the fiscal year. Bill Thomas, Chairman & CEO, said during earnings call:
Capital discipline and the strong balance sheet are key to our long-term strategy. This allows us to manage our company through a low commodity price environment, such as today's, in addition that strength allows EOG to continue to make smart long-term rate of return driven operational decisions, such as infrastructure investments and acreage additions that will pay dividends for years to come.
The fourth initiative is increasing acreage, taking advantage of the decline in oil prices, as competition is low and leasing costs are lower than what it used to be a year ago. The company is also evaluating tactical acquisition candidates.
Balance sheet concerns
EOG exited the first quarter with long-term debt of $6,393.7 million. This means that it will have to bear high interests costs and have difficulty in meeting its short-term financial needs. However, we should note that the company has cash and cash equivalents of $2,127.4 million and it generated approximately $1,099 million in discretionary cash flow.
The company has already pruned its capital spending plans aggressively for the fiscal year by 40% versus the prior fiscal, and hence cash flow position should improve further. Moreover, as the crude prices stage a comeback, the cash generation will improve further. So, EOG should be able to handle the weakness in balance sheet going forward.
Looking forward
During the second –quarter fiscal 2015, total production is expected to be in the band of 538 MBoe/d and 566.1 MBoe/d versus 589.5 Mboe/d during the first quarter. Of this 72–77 MBbls/d will be NGL and 1,027–1,283 MMcf/d will be gas.
For the full year the total production is expected to be in the range of 539.9 MBoe/d and 606.7 MBoe/d.
Wrapping up
According to an EIA report:
EIA projects the Brent crude oil price will average $61/b in 2015, $1/b higher that in last month's STEO, with prices rising from an average of $54/b in the first quarter to an average of $63/b for the remainder of the year. The Brent crude oil price is projected to average $70/b in 2016, $5/b lower than in last month's STEO, reflecting an increase in forecast OPEC crude oil production in 2016.
EOG is already executing well on cutting costs and increasing productivity. Also, the idea of building up inventory of 350 incomplete wells will fuel growth in the long-term when oil prices pick up. Hence, EOG is a good stock to buy.
