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EOG Resources Q2 2010 Earnings Call Transcript

EOG Resources Q2 2010 Earnings Call Transcript

EOG Resources (EOG)

Q2 2010 Earnings Call

August 06, 2010 9:00 am ET


Mark Papa - Chairman of the Board and Chief Executive Officer

Loren Leiker - Senior Executive Vice President of Exploration

Gary Thomas - Senior Executive Vice President of Operations

Timothy Driggers - Chief Financial Officer, Principal Accounting Officer and Vice President

Robert Garrison - Executive Vice President of San Antonio and General manager of San Antonio


Brian Singer - Goldman Sachs Group Inc.

Biju Perincheril - Jefferies & Company, Inc.

David Heikkinen - Tudor, Pickering & Co. Securities, Inc.

Joseph Allman - JP Morgan Chase & Co

Leo Mariani - RBC Capital Markets Corporation

Scott Wilmoth - Simmons

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Irene Haas - Canaccord Genuity

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Good day, everyone, and welcome to the EOG Resources Second Quarter 2010 Earnings Results Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer of EOG Resources, Mr. Mark Papa. Please go ahead.

Mark Papa

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing second quarter 2010 earnings and operational results.

This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and EOG's SEC filings, and we incorporate those by reference for this call.

This conference call contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at

Effective January 1, 2010, the SEC now permits oil and gas companies, in their filings with the SEC, to disclose not only proved reserves, but also probable as well as possible reserves. Some of the reserve disclosures on this conference call and webcast, including those for the South Texas Eagle Ford, Barnett Shale and New Mexico Leonard plays may include potential reserves or estimated reserves not necessarily calculated in accordance with or contemplated by the SEC’s latest reserve reporting guidelines. We incorporate, by reference, the cautionary note to U.S. investors that appears at the bottom of our press release and Investor Relations page in our website.

With me this morning are Loren Leiker, Senior EVP, Exploration; Gary Thomas, Senior EVP, Operations; Tim Driggers, Vice President and CFO; and Maire Baldwin, Vice President of Investor Relations.

An updated IR presentation was posted to our website last night, and we included third quarter and updated full year 2010 guidance in yesterday's press release. We're still on track to deliver 13% total company organic production growth this year.

Our shift to a higher liquid ratio is proceeding as planned, and as with the first quarter in EOG's history where liquid revenues exceeded gas revenues. As we reported in our April analyst conference, production will increase every quarter this year, giving us strong momentum going into 2011.

I'll now review our second quarter net income and discretionary cash flow, and then I'll provide operational highlights and discuss our capital structure. Tim Driggers will provide some financial details, and I'll close with comments regarding our macro hydrocarbon view in concluding remarks.

As outlined in our press release, for the second quarter, EOG reported net income of $59.9 million or $0.24 per share. For investors who follow the practice of industry analysts who focus on non-GAAP net income to eliminate mark-to-market impacts and certain onetime adjustments as outlined in the press release, EOG's second quarter adjusted net income was $44.9 million or $0.18 per share. For investors who follow the practice of industry analysts who focus on non-GAAP discretionary cash flow, EOG's DCF for the second quarter was $656.2 million.

I'll now address operational results, and we have plenty of good news to report. Perhaps the two biggest new items were our New Mexico Leonard Shale horizontal oil discovery and the results from some of the best wells ever completed in the Haynesville Shale.

In Southeastern New Mexico, we've been working over a year on our Red Hills area, Leonard Shale play, and our first horizontal well now has a 300-day production history. I'll note that the Leonard may also be called the Upper Bone Spring or Avalon Shale, as there are some industry variance in terminology.

We now feel we have reserve potential of 65 million barrels of oil equivalent net after royalty reserves on 31,000 of the 120,000 net acres we have in the play, which completed seven horizontal and four vertical wells, and we believe typical for well reserves for horizontal wells or about 400,000 barrels of oil equivalent net after royalty for $6.5 million well costs, which yields a 40% direct after-tax reinvestment rate of return using NYMEX future prices.

Typical wells are at Lomas Rojas 26 #1H and #2H, which tested at 710 barrels of oil per day with 1.7 million cubic feet of rich natural gas, and 800 barrels of oil per day with 1.5 million cubic feet of rich natural gas, respectively. We have 100% working interest in these wells.

We're currently testing other portions of our 120,000 acres and we'll have results before year end. I'll note that the production stream from this accumulation is analogous to our Barnett Combo play, since 1/3 of the production is crude oil, 1/3 is NGLs and 1/3 is residue gas. This play is just starting up. It will be late 2011 before we see a substantial production contribution from this asset.

Moving to the Haynesville. During our April analyst conference, we advised that we delineated a new core area in Nacogdoches and San Augustine Counties in East Texas. Our most recent well results certainly confirm this. Our Murray #1H well have reached 25 million cubic feet a day of natural gas for the first 30 days, and the Crane #26-1H well average 27 million cubic feet a day for the same period. We have 96% working interest in those wells.

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