Home > Stock Analysis

EOG Resources Reports A Solid Quarter

Posted: Nov 05, 2008 14:22 PM by Eric Fox

Tickers in this Article: VSE, CHK, APC, EOG

EOG Resources (NYSE:EOG) reported a great third quarter and has an excellent balance sheet, although its large-headline net income number was artificially boosted by a mark-to-market gain on a derivative contract.

Get Free Stock Analysis By Email

Hedges R Us
The Houston-based oil and gas exploration company reported net income of $1.55 billion, or $6.20 per share, in Q3. This included a $1.38 billion ($889.2 million after tax, or $3.55 per share) mark-to-market gain related to financial commodity contracts. Excluding the hedging gains, the company earned $588.3 million, or $2.34 per diluted share. (You can get a crash course in how commodity derivatives work in Futures Fundamentals.)

The hedging gain was previously disclosed in an October 17 SEC filing. EOG had several different types of hedges in place during the quarter, the goal of which was "enhancing the certainty of future revenues". The company hedged both natural gas and oil. During Q2, the hedging activity hurt EOG as it took an after-tax $542.4 million ($2.16 per share) mark-to-market loss on hedging contracts. (Learn the basics of how investors and companies cover their bets at Hedging In Layman's Terms.)

Production growth was strong, and EOG reiterated its production growth target of 15% for 2008. During the quarter, the company grew production from 161.9 Bcfe (billions of cubic feet equivalent) to 189.1 Bcfe, a gain of 16.8% year over year. This production growth was stronger than at competitor Anadarko Petroleum (NYSE:APC), which reported 8% growth year over year.

Solid Financials
EOG also has a strong balance sheet. The company ended the quarter with $886 million in cash and a net debt to total capitalization ratio of 10%. This financial strength was one of the reasons the company did not have to cut back on capital expenditures during the quarter due to plunging prices for oil and gas. Competitor Chesapeake Energy (NYSE:CHK) scaled back its drilling program substantially in early October.

EOG did state that it might cut back drilling in 2009 if natural gas prices dip further, which would affect its production targets in the coming year.

Winter Weather A Determining Price Factor
"We believe that cold winter weather - or lack of it - will be the determining factor of North American natural gas prices in 2009," said Mark Papa, chairman and CEO. "If Henry Hub prices average above $8 (per million BTU), we will target 14 percent total company production growth. However, if prices average $7, we expect to reduce our North American natural gas drilling activity and achieve an overall 10 percent production increase."

Other companies have also stumbled using derivatives. Ethanol maker VeraSun Energy (NYSE:VSE) filed for bankruptcy last week after it was forced to buy corn at above-market prices due to hedges it entered into.

Bottom Line
Although EOG's huge net income number was due to a mark-to-market gain on derivatives, the company reported a great quarter and is in a strong financial position to face any downturn in the energy sector.

Sharpen your own energy forecasting skills at Become An Oil And Gas Futures Detective.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS