EOG Resources Q3 2010 Earnings Call Transcript

EOG Resources (EOG)

Q3 2010 Earnings Call

November 03, 2010 9:00 am ET

Executives

Mark Papa - Chairman of the Board and Chief Executive Officer

Loren Leiker - Senior Executive Vice President of Exploration

Timothy Driggers - Chief Financial Officer and Vice President

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

Analysts

Brian Singer - Goldman Sachs Group Inc.

Biju Perincheril - Jefferies & Company, Inc.

Brian Lively - Tudor, Pickering & Co. Securities, Inc.

David Tameron - Wells Fargo Securities, LLC

Scott Wilmoth - Simmons & Company International

Leo Mariani - RBC Capital Markets Corporation

Joseph Allman - JP Morgan Chase & Co

Presentation

Operator

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» EOG Resources Q2 2010 Earnings Call Transcript
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Good day, ladies and gentlemen, and welcome to today's EOG Resources 2010 Third Quarter Earnings Call. And at this time, I would like to introduce Mr. Mark Papa. Please go ahead, sir.

Mark Papa

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing the third quarter of 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 www.eogresources.com.

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 reserves 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 Combo 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 of 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 Investor Relations presentation was posted to our website last night. We included 2010 and revised preliminary volume estimates for 2011 and 2012.

We've reduced our full year 2010 growth guidance from 13% to 9%. About 70% of this reduction relates to North American natural gas volumes, where we're now projecting minus 2% growth versus the previous estimate of plus 2%. Obviously, in this price environment, we're not incented to grow gas volumes. Our conversion from a natural gas to an oil company is still on track. And we expect total crude, condensate and natural gas liquids to comprise approximately 67% of our 2011 North American revenues.

However, because of lower cash flows from weak gas prices, higher frac costs, delays in frac equipment availability and the pattern drilling used to maximize resource plays, we've also reduced our 2011 and 2012 liquids growth targets to better reflect real-world conditions. Even with these reductions, we expect to grow crude and condensate 36%, 53% and 30% in 2010, '11 and '12. We've also made progress regarding asset sales, and I'll report on that later in the call.

I'll now review our third quarter net income and discretionary cash flows. Then I'll provide some 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 third quarter, EOG reported a net loss of $70.9 million or $0.28 per share. For investors who follow the practice of industry analysts who focus on non-GAAP net income to eliminate mark-to-market impacts of certain onetime adjustments as outlined in the press release, EOG's third quarter adjusted net income was $46.6 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 third quarter was $755.4 million.

I'll now address operational results, and I'll start with the South Texas Eagle Ford. The bottom line here is that our confidence in individual well results and the total 900 million barrels of oil equivalent net after royalty reserve estimate, have increased since our April analyst conference. Because this is such a huge net oil accumulation, and I believe investors have undervalued this asset, I'm going to take several minutes and provide an update based on our results from the last six months. Our press release provided details on a number of good wells, most of which have only commenced sales in the last month.

Here's what we know right now about our asset after drilling 77 wells, 59 of which are either producing or shedding for off-site fracs or waiting on fracs.

First, the Eagle Ford formation is not a typical shale. But instead, it's a borderline conventional carbonate reservoir. Pressure and flow data from our wells indicate we're seeing a lot of matrix flow, i.e., a significant amount of flow from the rock fabric itself, which is a good sign.

Second, the Eagle Ford is a predictable play. We've not drilled a large enough population of wells and we're getting very repeatable results across a 120-mile extent of acreage block.

Third, we've had a 100% well success rate within the acreage and the horizons we originally defined to contain our estimated 0.9 billion barrels. For a startup play, this is outstanding.

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