EOG Takes Licking, Keeps on Ticking
Last week EOG Resources (NYSE: EOG) released its earnings for the fourth quarter and all of 2015. I consider EOG one of the best-managed of the shale oil companies, and believe its results can provide important insights into the health of the entire industry.
You may recall that in December in Ready, Set, Noncash Charge, I addressed the issue of the EOG’s $6.3 billion third-quarter impairment, which was the reason the company posted a quarterly net loss despite positive free cash flow (FCF). Fourth-quarter results included a much smaller impairment, but FCF slipped back into negative territory.
Of course the results, as well as the previously reported impairment, are a direct result of much lower oil prices. EOG’s average realized price for oil fell from $92.58/bbl in 2014 to $47.53 in 2015.
For Q4 2015 EOG reported a net loss of $284.3 million. This compares with net income of $444.6 million in the fourth quarter of 2014. EOG reported a net loss of $4.5 billion for fiscal 2015 compared with net income of $2.9 billion in 2014.
In response to these lower prices, EOG reduced capital expenditures by 56% in Q4 compared with the prior-year period. Lease and well expenses decreased 30% and transportation costs fell 8% year-over-year. General and administrative expenses were down 17%.
In contrast to the 30%-plus annual growth rates posted by the company over the prior five years, EOG’s crude oil and condensate production declined slightly in 2015. Of more significance for the future, and as I warned about last year, EOG had to write off some of its reserves as a result of lower prices.
EOG closed the year with total proved reserves of 2.1 billion barrels of oil equivalent (BOE), down 15% from 2014. Downward revisions due to lower prices reduced net proved reserves by 574 million BOE (although there were also some additions due to acquisitions and/or new discoveries.)
The impact of the reserves write-downs, combined with the lower energy prices, had a dramatic impact on EOG’s estimated future cash flows. At year-end 2014 EOG’s Standardized Measure (SM) — which is the present value of the estimated future cash flows from proved oil, natural gas liquids (NGLs) and natural gas reserves, net of development costs, income taxes and exploration costs, discounted at 10% annually — stood at $27.9 billion. The year-end 2015 SM was calculated at only $9.6 billion — a decline of 66%. At the same time, EOG’s share price only declined by 25% in 2015, which may indicate that EOG has become relatively overvalued at current oil prices.
EOG’s 2016 plan calls for capital expenditures in the range of $2.4 to $2.6 billion, which would represent a decline of 45-50% year-over-year. EOG expects to complete approximately 270 net wells in 2016, compared with 470 net wells in 2015. Its crude oil production is expected to decline by 5%.
EOG is probably the most efficiently-run shale oil company, but even it can’t escape the wrath of $30/bbl oil. The good news is that it still has a strong balance sheet, with a net debt-to-total capitalization ratio of 31%. Expect the balance sheet to weaken this year, but keep in mind that EOG is in far better shape than most of its shale oil competitors. The company will survive until oil prices recover, and that will be the cure to its current ills.
ETP Comes In From Cold
Energy Transfer Partners (NYSE: ETP) reported weak fourth-quarter results last week, because how could it not? Adjustable segment EBITDA was down 11% year-over-year, primarily because of a cyclical windfall in fuel retailing a year ago, but also because the midstream margin got squeezed by the 13-year-low in the price of natural gas liquids.
The distribution coverage ratio of 1.07 for the quarter and 0.99 for the year was boosted by one-time tax benefits. Adjusting for these but also for unusually high maintenance capital spending, distributable cash flow would have covered just 90% of the quarterly distribution, management acknowledged.
The unit price slid 9% on the news, though that came in the wake of a 56% rally in the two weeks following the Feb. 8 low. Since that comedown, units have marked time at a discount of roughly 15-20% year-to-date.
The annualized yield is near 15% on a distribution management hopes not to cut unless there is no other way to preserve the partnership’s imperiled investment-grade credit rating.
The good news is that ETP will only be an opportunistic at-the-market equity seller, its 2016 capital spending needs largely pre-funded from prior borrowing and asset sales.
Cash flow is likely to stay on the skimpy side until the middle of next year, at which point the CEO expects to be “cooking with grease” following the completion of pending growth projects.
On the positive side of the ledger, ETP continues to benefit from its rising NGL fractionation and transport volumes and from the related growth at Sunoco Logistics (NYSE: SXL), an affiliated MLP in which ETP retains a 27.5% equity stake.
Furthermore, while slumping NGL prices hit fourth-quarter margins, volumes have held up and have been on the rise early in 2016, management noted.
But perhaps the best reason to allocate new capital to ETP is that the sheer panic that has gripped the MLP sector for months appears to have run its course. ETP sponsor Energy Transfer Equity (NYSE: ETE) is up 7% since the eve of the fourth-quarter report despite the weak numbers and the continuing lack of clarity about its commitment to the merger with Williams on current terms.
Growth pick ETE remains the #3 Best Buy below $15. We’re upgrading Conservative pick ETP to a Buy below $35.
— Igor Greenwald