Natural Gas Prices Holding This Player Back

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

EOG Resources (NYSE: EOG) has just announced its results for the fourth quarter and full year 2012 as well as an update on its operations. The four quarterly results announcements give us the only opportunities to examine a company in the context of its most recent numbers.  It also provides an opportunity to evaluate the company's liquids production growth as well as its impressive collection of drilling opportunities. In this article, I will examine the company as an investment opportunity using the latest numbers and assess the impact of the U.S. natural gas market on the company.

Financials

EOG has reported net income of $570.3 million, or an EPS of $2.11 per share for the full year 2012 compared to $1.09 billion, or an EPS of $4.10 per share, for the previous full year. EOG reported a net loss of $505.0 million, or $1.88 per share for the fourth quarter in comparison to net income of $120.7 million, or $0.45 per share for the same quarter of the preceding year. Adjusted non-GAAP net income for 2012 was $1.53 billion or an EPS $5.67 per share compared to $1.01 billion or $3.79 per share for 2011.

Adjusted non-GAAP net income for the fourth quarter was $437 million, or an EPS of $1.61 per share compared to $309million, or $1.15 per share for the fourth quarter of 2011.The results for the fourth quarter  include $849.4 million, net of tax ($3.13 per share) in impairment charges to Canadian natural gas assets, net losses on asset dispositions of $35.6 million, net of tax ($0.13 per share) and a  non-cash net gain of $66.4 million ($42.5 million after tax, or $0.16 per share) on financial commodity derivative contracts marked to market. As a result of EOG's higher revenue and production weighting to crude oil, adjusted non-GAAP net income per share grew by 50%, adjusted EBITDAX rose 26% and discretionary cash flow grew by 26% in comparison to the previous year.

Crude oil and condensate production in the United States increased by 46% for the full year compared to 2011. Total United States liquids production for 2012 increased by 42% year on year.  For the company as a whole, crude oil and condensate production grew by 39% and total liquids production by 37% for the full year compared to the previous year. Mark G. Papa, EOG's Chairman and Chief Executive Officer, said, "We accomplished all of EOG's 2012 goals. We generated high margin organic crude oil production growth and delivered excellent year-over-year increases in EOG's financial metrics. We maintained our net-debt-to-total cap ratio below 30 percent and recorded strong crude oil reserve replacement rates at attractive finding costs, In addition, we added the Delaware Basin Wolfcamp, a promising new liquids resource play to our portfolio and significantly increased the potential recoverable reserves of our largest and highest rate of return asset, the South Texas Eagle Ford."

Total capital expenditure for the year was approximately $7.5 billion while cash realizations from asset sales were approximately $1.3 billion. As at December 31, 2012, total debt outstanding was $6.3 billion making for a debt-to-total capitalization ratio of 32%. Taking into account cash on the balance sheet of $876 million at the end of the fourth quarter, Net debt was $5,436 million after taking into account cash and cash equivalents of $876 million making for a net debt-to-total capitalization ratio of 29%.

I would regard the financial performance for the fourth quarter as satisfactory because the negative effects of the depressed natural gas market in the United States have been offset by the increased focus on crude oil and liquid production.

Operating highlights

The company said that its outstanding performance in crude oil production in 2012 was substantially driven by drilling and completion activity in the Eagle Ford where305 net wells were drilled and completed with an average of 23 drilling rigs. In the North Dakota Bakken/Three Forks, positive results from downspaced drilling tests as well as important modifications to techniques of drilling and completion techniques, further helped crude oil production growth.

Breakthroughs in geologic modeling in the Leonard/Wolfcamp horizontal shale plays in southeastern New Mexico and West Texas also contributed. The company made progress in increasing the amount of crude oil recoverable from both its Eagle Ford and Bakken resources.  In the Eagle Ford, it increased the estimated recoverable potential reserves by 38% from 1.6 billion barrels of oil equivalent (BnBoe) to 2.2 BnBoe. At the levels of present operations, the company has a 12-year drilling inventory in the Eagle Ford.

EOG’s peers

CNOOC (NYSE: CEO) is the biggest offshore oil and gas explorer and producer in China and has almost exclusive rights to all Chinese offshore oil and gas reserves. It also has stakes in natural gas and liquefied natural gas onshore operations in China.  It is acquiring Canadian oil and gas exploration and production company Nexen, Inc. which has assets in conventional oil, oil sands, and unconventional gas and the deal is awaiting approval from the US government. CNOOC's dividend yield at around 2.5% is well below the industry average of around 5.6%, but a low forward P/E of under nine times combined with a growth forecast of over 42% makes it a potentially attractive growth stock.

Surgutneftgas (SGTZY) is a Russian oil and gas exploration company and also produces petrochemicals while being involved in gas processing and power generation.  It has a low trailing P/E at under 5 and a forward P/E of 8.0.  It is currently trading below its book value in spite of attractive operating margins and return on equity.  This stock looks interesting but you should be aware that there is not much research material available on the company because it is covered by a single Wall St analyst. 

Anadarko Petroleum (NYSE: APC) has quality assets in the Gulf of Mexico as well as the Rocky Mountains and the Appalachian basin. However, it is the international portfolio that should excite investors. Three major natural gas fields off the coast of Mozambique could make the country one of the largest producers of liquefied natural gas in the world in addition to Qatar and Australia. The company is also rumored to be an acquisition candidate and Macquarie has opined that Anadarko's large potential reserves could command a buyout offer of $102 per share at a minimum which represents a considerable premium over the current stock price.

Conclusion

EOG’s liquids rich production growth as well as its large inventory of drilling opportunities has to be balanced against the fact that its production and reserves base are still weighted in favor of gas. Unless the outlook for natural gas prices in the United States improves significantly, the stock is likely to perform only in line with the market as a whole. I rate the stock as a "Hold."


jordobivona has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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