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EOG Resources Third Quarter 2020 Results; Touts New South TX Gas Play

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   |    Monday,November 09,2020

EOG Resources, Inc. reported its Q3 2020 results.

EOG reported a third quarter 2020 net loss of $42 million, or $0.07 per share, compared with third quarter 2019 net income of $615 million, or $1.06 per share.

Highlights:

• Identified 21 Tcf Net Resource Potential and 1,250 Net Premium Locations in New South Texas Natural Gas Play
• Added a Total of 1,400 Net Premium Locations to Drilling Inventory Which Now Totals 11,500 Locations
• Generated $1.2 Billion Net Cash Provided by Operating Activities and Significant Free Cash Flow
• Capital Expenditures 23% Below Target and Crude Oil Production 2% Above Target
• Per-Unit Cash Operating Costs Below Targets
• Introduced Three-Year Outlook with 70-80% Cash Flow Reinvestment

Adjusted non-GAAP net income for the third quarter 2020 was $252 million, or $0.43 per share, compared with adjusted non-GAAP net income of $654 million, or $1.13 per share, for the same prior year period.

Third Quarter 2020 Review

EOG continued to respond aggressively to adverse market conditions by sharply lowering operating and capital costs as well as deferring production volumes to future periods. Reductions to operating costs were offset by lower commodity prices and production volumes, resulting in lower earnings in the third quarter 2020 compared with the same prior year period. Realized crude oil prices were $40.15 per barrel in the third quarter, down 29 percent from the same prior year period, while natural gas prices declined 21 percent, to $1.68 per thousand cubic feet. These declines were partially offset by an increase in natural gas liquids prices in the third quarter to $14.34 per barrel, up 13 percent compared with the same prior year period.

Compared with the third quarter 2019, total company crude oil volumes were 19 percent lower, at 377,600 barrels of oil per day (Bopd). Natural gas liquids production was one percent lower and natural gas volumes were 13 percent lower, contributing to 14 percent lower total company daily production. EOG continued to return shut-in wells to production during the third quarter, and nearly all shut-in wells were back on production by the end of September. On average, 28,000 Bopd was shut-in during the third quarter. EOG also began initial production from approximately 100 net new wells in the third quarter, after deferring such activity earlier in the year in response to lower oil prices.

Lease and well costs declined 24 percent on a per-unit basis compared with the same prior year period, driving an overall reduction in per-unit operating costs. Most of the lease and well cost savings were based on sustainable efficiency improvements in well-site maintenance, equipment repair, managing offset completions and other production operations.

Net cash provided by operating activities was $1.2 billion. Excluding changes in working capital and certain other items, EOG generated $1.3 billion of discretionary cash flow. The company incurred total expenditures of $646 million, including $499 million of capital expenditures before acquisitions, non-cash transactions and asset retirement costs, resulting in $762 million of free cash flow. Please refer to the attached tables for the reconciliation of non-GAAP measures to GAAP measures.

William R. "Bill" Thomas, Chairman and Chief Executive Officer, said:  "Our operational execution continues to be excellent. I'm grateful to all EOG employees during these unusual times. We continue to exceed expectations by optimizing production volumes and reducing costs while maintaining our strong safety and environmental performance.

"Notably, we are not playing defense in the current challenging environment. In fact, the opposite is true: we are aggressively moving EOG forward, advancing new plays, identifying innovative solutions to lower costs and improve well productivity, sharpening our technological edge and further demonstrating our commitment to sustainability. All of this is driven from the bottom up by a decentralized organization and a unique culture. This year more than ever, we are focused on investing in our people and enhancing our culture to sustain our competitive advantage and enable EOG to play an increasingly vital role in meeting the long-term global energy needs."

New South Texas Natural Gas Play and Premium Inventory Update

EOG has made a large natural gas resource play discovery on its Dorado prospect located in Webb County, Texas. A total of 21 trillion cubic feet (Tcf) of estimated net resource potential is contained in 700 feet of stacked pay in the Austin Chalk and Eagle Ford Shale formations. The company has identified an initial 1,250 net premium drilling locations across its 163,000 net acre position in the core of the play. EOG has drilled 17 wells in the Dorado play since January 2019, including five wells targeting the Austin Chalk and 12 wells targeting the Upper and Lower Eagle Ford.

The Austin Chalk formation has an estimated net resource potential of 9.5 Tcf of natural gas. EOG has identified 530 net premium drilling locations in the Austin Chalk. The prolific Austin Chalk wells generate rates of return that are competitive with EOG's large inventory of premium oil plays. The rates of return are supported by low cash operating costs and proximity to several natural gas markets with options for LNG and pipeline export pricing. In addition, EOG plans to apply its latest water and emissions management technology to minimize the environmental footprint of its development activities.

The five initial Austin Chalk wells produced an average of 3.5 billion cubic feet (Bcf) of natural gas per well in the first year of production, with an average lateral length of 6,600 feet per well. EOG expects to complete approximately 15 wells in the Austin Chalk in 2021. A typical Austin Chalk well is expected to recover 22 Bcf of natural gas, or 18 Bcf net after royalty, from a 9,000 foot lateral at a targeted well cost of $7.0 million per well.

The company has identified additional net resource potential of 11.5 Tcf and 720 net premium drilling locations in the Lower and Upper Eagle Ford, which underlies the Austin Chalk in the same area. Wells targeting the Eagle Ford also generate strong premium rates of return, supported by low drilling costs and shared infrastructure with the Austin Chalk wells.

The first 12 wells targeting the Eagle Ford produced an average of 2.8 Bcf of natural gas per well in the first year of production, with an average lateral length of 7,700 feet per well. A typical Eagle Ford well is expected to recover 19 Bcf of natural gas, or 16 Bcf net after royalty, from a 9,000 foot lateral at a targeted well cost of $6.5 million per well.

Including the Dorado locations, EOG added 1,400 net premium drilling locations to its undrilled premium inventory in the third quarter 2020. Taking into account wells drilled over the past year and updated location counts across its portfolio, EOG's premium inventory now totals approximately 11,500 net locations.

"Our new South Texas natural gas play is the latest example of EOG's sustainable business model of organic exploration-driven resource expansion," Thomas said. "The addition of Dorado to EOG's diverse portfolio of premium plays improves the financial profile of EOG by every measure. It also allows us to diversify capital deployment throughout the organization and across our assets. We believe this prolific new discovery represents the lowest-cost natural gas play in the U.S., which will be both operationally efficient and have a small environmental footprint. With 21 Tcf of net resource potential captured by EOG in the heart of the play, it is also one of the largest. Dorado competes today with EOG's premium oil plays, and we expect it to move rapidly into the top tier of our inventory as development unfolds. This is just the latest example of how EOG continues to organically improve."

Capital Allocation Outlook

Over the next three years, EOG's goal is to continue improving reinvestment returns, lowering per-unit operating costs and generating strong free cash flow to support a growing sustainable dividend while further strengthening its balance sheet. The company anticipates the current imbalance in the global crude oil market is likely to extend into 2021, and therefore expects to maintain its crude oil production at approximately the same level as the fourth quarter 2020. Assuming a balanced crude oil market after 2021, EOG expects to reinvest 70 to 80 percent of its discretionary cash flow and generate up to 10 percent compound annual crude oil production growth in 2022 and 2023 at a $50 West Texas Intermediate crude oil price and using the company's current inventory of premium locations. At higher oil prices, EOG expects to maintain the same growth rate of up to 10 percent per year. Priorities for the allocation of additional free cash flow include sustainable dividend growth, debt reduction, the return of additional cash to shareholders and low-cost property acquisitions.

"Our new three-year outlook provides visibility into the momentum we have built the last four years since the introduction of our premium return criteria," Thomas said. "EOG's long-term strategy and capital allocation priorities remain consistent. We are focused on high-return reinvestment in our growing stable of premium plays, which continues to improve in quality and drives increasing capital efficiency. With our disciplined capital allocation, we expect free cash flow growth, which will support sustainable dividend growth and further strengthen the balance sheet. Returning additional cash to shareholders also becomes more likely as oil prices continue to recover. Altogether, this balanced strategy leverages the competitive strengths of EOG and maximizes total shareholder value."

Financial Review

At September 30, 2020, total debt outstanding was $5.7 billion for a debt-to-total capitalization ratio of 22 percent. Considering $3.1 billion of cash on the balance sheet at the end of the third quarter, EOG's net debt-to-total capitalization ratio was 12 percent. EOG's liquidity is further enhanced by $2.0 billion of availability under its senior unsecured revolving credit agreement as of September 30, 2020. For a reconciliation of non-GAAP measures to GAAP measures, please refer to the attached tables.

EOG divested its assets in the Marcellus Shale effective September 1, 2020 for proceeds of approximately $130 million. Current production from the divested assets is approximately 40 million cubic feet of natural gas per day and there were no premium locations associated with the assets.