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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-9743
EOG RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0684736
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
333 Clay Street, Suite 4200, Houston, Texas 77002-7361
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 713-651-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of April 22, 2004.
Title of each class Number of shares
Common Stock, $.01 par value 116,562,439
EOG RESOURCES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
March 31, 2004 and 2003 3
Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 6. Exhibits and Current Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EOG RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
2004 2003
Net Operating Revenues
Natural Gas $417,389 $434,091
Crude Oil, Condensate and Natural Gas Liquids 90,458 75,508
Losses on Mark-to-Market Commodity Derivative
Contracts (44,455) (45,221)
Other, Net 928 291
Total 464,320 464,669
Operating Expenses
Lease and Well 64,417 48,339
Exploration Costs 25,996 17,458
Dry Hole Costs 10,027 6,620
Impairments 17,648 11,956
Depreciation, Depletion and Amortization 113,797 103,553
General and Administrative 24,915 20,421
Taxes Other Than Income 36,084 30,193
Total 292,884 238,540
Operating Income 171,436 226,129
Other Income (Expense), Net (2,729) 152
Income Before Interest Expense and Income Taxes 168,707 226,281
Interest Expense, Net 16,683 15,318
Income Before Income Taxes 152,024 210,963
Income Tax Provision 51,171 74,407
Net Income Before Cumulative Effect of
Change in Accounting Principle 100,853 136,556
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax - (7,131)
Net Income 100,853 129,425
Preferred Stock Dividends 2,758 2,758
Net Income Available to Common $ 98,095 $126,667
Net Income Per Share Available to Common
Basic
Net Income Available to Common Before Cumulative
Effect of Change in Accounting Principle $ 0.85 $ 1.17
Cumulative Effect of Change in Accounting Principle,
Net of Income Tax - (0.06)
Net Income Per Share Available to Common $ 0.85 $ 1.11
Diluted
Net Income Available to Common Before Cumulative
Effect of Change in Accounting Principle $ 0.83 $ 1.15
Cumulative Effect of Change in Accounting Principle,
Net of Income Tax - (0.06)
Net Income Per Share Available to Common $ 0.83 $ 1.09
Average Number of Common Shares
Basic 115,645 114,441
Diluted 117,621 116,224
The accompanying notes are an integral part of these consolidated
financial statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
EOG RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
2004 2003
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 95,717 $ 4,443
Accounts Receivable, Net 303,566 295,118
Inventories 23,758 21,922
Deferred Income Taxes 46,515 31,548
Other 34,288 42,983
Total 503,844 396,014
Oil And Gas Properties (Successful Efforts Method) 8,384,989 8,189,062
Less: Accumulated Depreciation, Depletion and
Amortization (4,048,682) (3,940,145)
Net Oil and Gas Properties 4,336,307 4,248,917
Other Assets 114,902 104,084
Total Assets $ 4,955,053 $ 4,749,015
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 296,457 $ 282,379
Accrued Taxes Payable 51,305 33,276
Dividends Payable 7,377 6,175
Liabilities from Price Risk Management Activities 80,196 37,779
Deferred Income Taxes 14,274 73,611
Other 43,415 43,299
Total 493,024 476,519
Long-Term Debt 1,085,822 1,108,872
Other Liabilities 180,729 171,115
Deferred Income Taxes 879,921 769,128
Shareholders' Equity
Preferred Stock, $.01 Par, 10,000,000 Shares Authorized:
Series B, 100,000 Shares Issued, Cumulative,
$100,000,000 Liquidation Preference 98,648 98,589
Series D, 500 Shares Issued, Cumulative,
$50,000,000 Liquidation Preference 49,872 49,827
Common Stock, $.01 Par, 320,000,000 Shares Authorized
and 124,730,000 Shares Issued 201,247 201,247
Additional Paid in Capital 8,180 1,625
Unearned Compensation (29,411) (23,473)
Accumulated Other Comprehensive Income 61,761 73,934
Retained Earnings 2,212,300 2,121,214
Common Stock Held in Treasury, 8,452,475 shares at
March 31, 2004 and 8,819,600 shares at December 31, 2003 (287,040) (299,582)
Total Shareholders' Equity 2,315,557 2,223,381
Total Liabilities and Shareholders' Equity $ 4,955,053 $ 4,749,015
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
EOG RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
Cash Flows From Operating Activities
Reconciliation of Net Income to Net Operating
Cash Inflows:
Net Income $ 100,853 $ 129,425
Items Not Requiring Cash
Depreciation, Depletion and Amortization 113,797 103,553
Impairments 17,648 11,956
Deferred Income Taxes 32,016 50,441
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax - 7,131
Other, Net 7,432 2,611
Exploration Costs 25,996 17,458
Dry Hole Costs 10,027 6,620
Mark-to-Market Commodity Derivative Contracts
Total Losses 44,455 45,221
Realized Losses (2,342) (27,929)
Tax Benefits from Stock Options Exercised 2,419 2,959
Other, Net (825) 69
Changes in Components of Working Capital and
Other Liabilities
Accounts Receivable (8,404) (111,034)
Inventories (1,836) 646
Accounts Payable 14,382 20,670
Accrued Taxes Payable 23,946 23,872
Other Liabilities 4,603 (1,532)
Other, Net 2,815 (698)
Changes in Components of Working Capital Associated
with Investing and Financing Activities 10,306 8,832
Net Operating Cash Inflows 397,288 290,271
Investing Cash Flows
Additions to Oil and Gas Properties (230,516) (140,213)
Exploration Costs (25,996) (17,458)
Dry Hole Costs (10,027) (6,620)
Proceeds from Sales of Assets 5,954 7,320
Changes in Components of Working Capital Associated
with Investing Activities (11,892) (8,860)
Other, Net (11,032) (5,479)
Net Investing Cash Outflows (283,509) (171,310)
Financing Cash Flows
Long-Term Debt Repayments (23,050) (100,924)
Dividends Paid (8,461) (7,241)
Treasury Stock Purchased - (21,295)
Proceeds from Stock Options Exercised 8,775 7,456
Other, Net 231 28
Net Financing Cash Outflows (22,505) (121,976)
Increase (Decrease) in Cash and Cash Equivalents 91,274 (3,015)
Cash and Cash Equivalents at Beginning of Period 4,443 9,848
Cash and Cash Equivalents at End of Period $ 95,717 $ 6,833
The accompanying notes are an integral part of these consolidated
financial statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
EOG RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of EOG Resources, Inc.
and subsidiaries (EOG) included herein have been prepared by
management without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Accordingly, they
reflect all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the
financial results for the interim periods. Certain information
and notes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant
to such rules and regulations. However, management believes that
the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements should
be read in conjunction with the consolidated financial statements
and the notes thereto included in EOG's Annual Report on Form 10-K
for the year ended December 31, 2003 (EOG's 2003 Annual
Report).
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior period
financial statements to conform with the current presentation.
As more fully discussed in Note 12 to the consolidated
financial statements included in EOG's 2003 Annual Report, EOG
engages in price risk management activities from time to time.
These activities are intended to manage EOG's exposure to
fluctuations in commodity prices for natural gas and crude
oil. EOG utilizes commodity derivative financial instruments,
primarily price swaps and collars, as the means to manage this
price risk. In addition to these financial transactions, EOG
is a party to various physical commodity contracts for the
sale of hydrocarbons that cover varying periods of time and
have varying pricing provisions. The financial impact of
these various physical commodity contracts is included in
revenues at the time of settlement, which in turn affects
average realized hydrocarbon prices. During the first quarter
of 2004 and 2003, EOG elected not to designate any of its
commodity derivative financial contracts as accounting hedges,
and accordingly, accounted for these commodity derivative
financial contracts using the mark-to-market accounting
method.
EOG is exposed to foreign currency exchange rate risk inherent
in its operations in foreign countries, including Canada,
Trinidad and the United Kingdom. From time to time, EOG
engages in exchange rate risk management activities to manage
its exposure to exchange rates. Effective March 9, 2004, EOG
entered into a cross currency swap transaction with multiple
banks to eliminate any exchange rate impacts that may result
from the notes offered by one of the Canadian subsidiaries on
the same date (see Note 8). EOG accounts for the cross
currency swap transaction using the hedge accounting method,
pursuant to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133 - "Accounting for
Derivative Instruments and Hedging Activities," as amended by
SFAS Nos. 137, 138 and 149. Under those provisions, during
the first quarter of 2004, EOG recorded the change in the fair
value of the swap of $3.6 million in Other Liabilities in the
Liabilities section of the Consolidated Balance Sheets. The
cross currency swap results in no net impact to the Consolidated
Statements of Income or to the Accumulated Other Comprehensive
Income in the Shareholders' Equity section of the Consolidated
Balance Sheets.
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations" effective for fiscal years beginning after June
15, 2002. SFAS No. 143 essentially requires entities to
record the fair value of a liability for legal obligations
associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. EOG adopted the
statement on January 1, 2003. The impact of adopting the
statement resulted in an after-tax charge of $7.1 million,
which was reported in the first quarter of 2003 as cumulative
effect of change in accounting principle.
In December 2002, the FASB issued SFAS No. 148 - "Accounting
for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123." This statement provides
alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based
employee compensation, along with the requirement of
disclosure in both annual and interim financial statements
about the method used and effect on reported results (see Note
7). On March 31, 2004, the FASB issued a proposed statement
to amend SFAS No. 123 to require all companies to expense the
value of employee stock options. This proposed statement sets
a comment deadline of June 30, 2004 and would be effective
prospectively beginning first quarter of 2005 for EOG. EOG is
currently evaluating the effect of the proposed statement on
its financial statements and continues to monitor further
developments relating to the proposed statement.
During the third quarter of 2003, the SEC made comments to
other registrants that oil and gas mineral rights acquired
should be classified as an intangible asset pursuant to SFAS
No. 141 - "Business Combinations," and SFAS No. 142 -
"Goodwill and Other Intangible Assets." However, the SEC is
not currently requiring all oil and gas producing companies to
apply this classification or the disclosure requirements of
intangible assets. Currently, EOG classifies the cost of oil
and gas mineral rights as oil and gas properties and believes
that this is consistent with oil and gas accounting and
industry practice. The FASB has been asked to address this
issue. If the FASB determines that the reclassification is
required, EOG would reclassify these costs from oil and gas
properties to intangible assets on the balance sheet. There
would be no effect on the statement of income or cash flows.
In March 2004, the FASB reached a consensus that for the
mining industry all mineral rights are tangible assets and
that SFAS Nos. 141 and 142 should be amended accordingly. EOG
will continue to monitor the developments in this area until
the final decision by the FASB emerges.
In January 2004, the FASB released its FASB Staff Position No.
106-1 - "Accounting and Disclosure Requirements related to the
Medicare Prescription Drug, Improvement and Modernization Act
of 2003" (FSP 106-1), which allows a company to make a one-
time election to defer accounting for the effects of the
Medicare Prescription Drug Improvement Act of 2003 (Act). On
March 12, 2004, the FASB proposed FSP 106-b, which bears the
same title as and would supersede FSP 106-1, to provide
guidance on accounting for the effects of the Act for
employers that sponsor postretirement health care plans that
provide prescription drug benefits. While EOG is aware of the
Act, any measures of the net periodic benefit cost in Footnote
7 do not reflect any amount associated with the Medicare
subsidy because EOG is unable to conclude whether the benefits
provided by the plan are actuarially equivalent to Medicare
Part D under the Act. EOG has not decided whether it will
elect to defer accounting for the effects of the Act and is
currently evaluating the effect of the proposed statement on
its financial statements and continues to monitor further
developments relating to the proposed statement.
2. The following table sets forth the computation of net income
per share available to common for the three-month periods
ended March 31 (in thousands, except per share amounts):
Three Months Ended
March 31,
2004 2003
Numerator for Basic and Diluted Earnings
Per Share -
Net Income Available To Common $ 98,095 $126,667
Denominator for Basic Earnings Per Share -
Weighted Average Shares 115,645 114,441
Potential Dilutive Common Shares -
Stock Options 1,596 1,541
Restricted Stock and Units 380 242
Denominator for Diluted Earnings Per Share -
Adjusted Weighted Average Shares 117,621 116,224
Net Income Per Share Available to Common
Basic $ 0.85 $ 1.11
Diluted $ 0.83 $ 1.09
3. The following table presents the components of EOG's comprehensive
income for the three-month periods ended March 31 (in thousands):
Three Months Ended
March 31,
2004 2003
Comprehensive Income
Net Income $100,853 $129,425
Other Comprehensive Income
Foreign Currency Translation Adjustment (12,173) 39,256
Total $ 88,680 $168,681
4. Selected financial information about operating segments is
reported below for the three-month periods ended March 31 (in
thousands):
Three Months Ended
March 31,
2004 2003
Net Operating Revenues
United States $334,767 $358,514
Canada 100,802 80,691
Trinidad 28,750 25,464
Other 1 -
Total $464,320 $464,669
Operating Income (Loss)
United States $101,004 $162,122
Canada 54,249 51,391
Trinidad 19,877 16,971
United Kingdom (3,695) (4,580)
Other 1 225
Total 171,436 226,129
Reconciling Items
Other Income (Expense), Net (2,729) 152
Interest Expense, Net 16,683 15,318
Income Before Income Taxes $152,024 $210,963
5. EOG and numerous other companies in the natural gas industry
are named as defendants in various lawsuits alleging violations
of the Civil False Claims Act. These lawsuits have been
consolidated for pre-trial proceedings in the United States
District Court for the District of Wyoming. The plaintiffs
contend that defendants have underpaid royalties on natural gas
and natural gas liquids produced on federal and Indian lands
through the use of below-market prices, improper deductions,
improper measurement techniques and transactions with affiliated
companies. Plaintiffs allege that the royalties paid by
defendants were lower than the royalties required to be paid
under federal regulations and that the forms filed by defendants
with the Minerals Management Service reporting these royalty
payments were false, thereby violating the Civil False Claims
Act. The United States has intervened in certain of the cases as
to some of the defendants, but has not intervened as to EOG. The
plaintiffs in one of the two lawsuits in which EOG has been
involved dismissed EOG from that case without prejudice. Based
on EOG's present understanding of the remaining case in which it
is a defendant, EOG believes that it has substantial defenses to
the plaintiff's claims and intends to vigorously assert these
defenses. However, if EOG is found to have violated the Civil
False Claims Act, EOG could be subject to a variety of sanctions,
including treble damages and substantial monetary fines.
EOG has been named as a potentially responsible party in
certain Comprehensive Environmental Response Compensation and
Liability Act proceedings. However, management does not
believe that any potential assessments resulting from such
proceedings will individually, or in the aggregate, have a
materially adverse effect on the financial condition or
results of operations of EOG.
There are various other suits and claims against EOG that have
arisen in the ordinary course of business. However, management
does not believe these suits and claims will individually, or
in the aggregate, have a material adverse effect on the
financial condition or results of operations of EOG.
6. The following table presents the reconciliation of the
beginning and ending aggregate carrying amount of short-term
and long-term legal obligations associated with the retirement
of oil and gas properties pursuant to SFAS No. 143 for the
three-month period ended March 31, 2004 (in thousands):
Asset Retirement Obligations
Short-Term Long-Term Total
Balance at December 31, 2003 $ 5,320 $109,116 $114,436
Liabilities Incurred 321 2,073 2,394
Liabilities Settled (97) (28) (125)
Accretion 36 1,331 1,367
Reclassification 2,073 (2,073) -
Foreign Currency Translation (3) (212) (215)
Balance at March 31, 2004 $ 7,650 $110,207 $117,857
7. EOG has various stock plans (Plans) under which employees and
non-employee members of the Board of Directors of EOG and its
subsidiaries have been or may be granted certain equity
compensation.
Stock Options. EOG has in place compensatory stock option
plans whereby participants have been or may be granted rights
to purchase shares of common stock of EOG at a price not less
than the market price of the stock at the date of grant.
Employee Stock Purchase Plan. EOG has in place an employee
stock purchase plan, pursuant to Section 423 of the Internal
Revenue Code of 1986, as amended, whereby participants are
granted rights to purchase shares of common stock of EOG at a
price that is 15% less than the market price of the stock on
either the first day or the last day of a six-month offering
period, whichever is less.
Pro Forma Information. EOG's pro forma net income available
to common and net income per share available to common for the
three-month periods ended March 31, 2004 and 2003, had
compensation costs of stock options and the employee stock
purchase plan been recorded using the fair value method in
accordance with SFAS No. 123 - "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 - "Accounting for
Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123," are presented below
pursuant to the disclosure requirement of SFAS No. 148 (in
millions, except per share amounts):
Three Months Ended
March 31,
2004 2003
Net Income Available to Common - As Reported $ 98.1 $126.7
Deduct: Total Stock-Based Employee Compensation
Expense, Net of Income Tax (2.5) (3.3)
Net Income Available to Common - Pro Forma $ 95.6 $123.4
Net Income per Share Available to Common
Basic - As Reported $ 0.85 $ 1.11
Basic - Pro Forma $ 0.83 $ 1.08
Diluted - As Reported $ 0.83 $ 1.09
Diluted - Pro Forma $ 0.81 $ 1.06
The effects of applying SFAS No. 123, as amended, in this pro
forma disclosure should not be interpreted as being indicative
of future effects. SFAS No. 123 does not apply to awards
prior to 1995 and the extent and timing of additional future
awards cannot be predicted.
Restricted Stock and Units. Under the Plans, employees may be
granted restricted stock and/or units without cost to them.
Related compensation expense for the three-month periods ended
March 31, 2004 and 2003 was $2.0 million and $1.3 million,
respectively.
Pension Plans. EOG has a non-contributory defined
contribution pension plan and a matched defined contribution
savings plan in place for most of its employees in the United
States. EOG's contributions to these plans are based on
various percentages of compensation, and in some instances,
are based upon the amount of the employees' contributions to
the plan. For the three-month periods ended March 31, 2004
and 2003, the contributions to these plans amounted to
approximately $3.0 million and $1.9 million, respectively.
In addition, EOG's Canadian subsidiary maintains a non-
contributory defined contribution pension plan and a matched
savings plan and EOG's Trinidadian subsidiary maintains a
contributory defined benefit pension plan and a matched
savings plan. These plans are available to most employees of
the Canadian and Trinidadian subsidiaries, and contributions
related to these plans were $205,000 and $136,000 for the
three-month periods ended March 31, 2004 and 2003,
respectively.
Postretirement Plan. During 2000, EOG adopted postretirement
medical and dental benefits for eligible employees and their
eligible dependents. Benefits are provided under the
provisions of a contributory defined dollar benefit plan. EOG
accrues these postretirement benefit costs over the service
lives of the employees expected to be eligible to receive such
benefits.
The following table summarizes EOG's postretirement benefit
expense for the three-month periods ended March 31 (in
thousands):
Three Months Ended
March 31,
2004 2003
Service Cost $ 70 $ 44
Interest Cost 50 32
Expected Return on Plan Assets - -
Amortization of Prior Service Cost 33 19
Amortization of Net Actuarial (Gain) Loss - -
Net Periodic Benefit Cost $ 153 $ 95
EOG previously disclosed in its financial statements for the
year ended December 31, 2003, that it expected to contribute
$57,000 to its postretirement plan in 2004. As of March 31,
2004, $14,000 of contributions have been made. EOG presently
anticipates contributing an additional $43,000 to fund its
postretirement plan in 2004 for a total of $57,000.
8. On March 9, 2004, EOG Resources Canada Inc., a wholly owned
subsidiary of EOG, issued notes with a total principal amount
of US$150 million, an annual interest rate of 4.75% and a
maturity date of March 15, 2014, under Rule 144A of the
Securities Act of 1933, as amended. The notes are guaranteed
by EOG. In conjunction with the offering, EOG entered into a
cross currency swap transaction with multiple banks for the
equivalent amount of the notes, which has in effect converted
this indebtedness into CAD$201.3 million with a 5.275%
interest rate.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOG RESOURCES, INC.
Overview
EOG Resources, Inc. (EOG) is one of the largest independent
(non-integrated) oil and gas companies in the United States and
has substantial proved reserves in the U.S., Canada, offshore
Trinidad and, to a lesser extent, the United Kingdom North Sea.
EOG operates under a business strategy that focuses predominantly
on three factors: achieving a strong reinvestment rate of return
on its capital program, drilling internally generated prospects
in order to find and develop low cost reserves, and maintaining a
strong balance sheet, with a below industry average debt-to-total
capitalization ratio.
Operations
United States and Canada. EOG's effort to identify plays with
larger reserve potential has proven a successful supplement to
its base development and exploitation program in the United
States and Canada. EOG plans to continue to drill smaller wells
in large acreage plays, which, in the aggregate, will contribute
substantially to EOG's crude oil and natural gas production. EOG
has several larger potential plays under way in Wyoming, Utah and
Texas, including the Barnett Shale, where EOG has recently
completed several successful wells. EOG continues to acquire
acreage in the Barnett Shale play.
International. In Trinidad, EOG drilled two development
wells at its Parula Discovery. Production from these wells will
be among the sources to supply existing gas contracts, as well as
feeding the new ammonia and methanol plants that are scheduled to
commence operations in mid-2004 and 2005, respectively.
Although EOG continues to focus on United States and Canadian
natural gas, EOG sees an increasing linkage between United States
and Canadian natural gas demand and Trinidadian natural gas
supply. For example, liquefied natural gas (LNG) imports from
existing and planned facilities in Trinidad are serious
contenders to meet increasing United States demand. In addition,
ammonia, methanol and chemical production has been relocating
from the United States and Canada to Trinidad, driven by
attractive natural gas feedstock prices in the island nation.
EOG anticipates that its existing position with the supply
contracts to the two ammonia plants and the new methanol plant
will continue to give its portfolio an even broader exposure to
United States and Canadian natural gas fundamentals.
In EOG's new venue in the Southern Gas Basin of the United
Kingdom North Sea, EOG is on track to commence production of
approximately 40 MMcfd, net, from its two gas discoveries by the
end of 2004. These wells were farm-in opportunities from major
oil companies. EOG is reviewing additional farm-in opportunities
in this area and expects to participate in several exploration
wells in 2004. EOG is also setting up the necessary structures
to begin operatorship in the United Kingdom later in 2004.
Capital Structure
As noted, one of management's key strategies is to keep a
strong balance sheet with a consistently below industry average
debt-to-total capitalization ratio. During the first quarter
2004, EOG reduced debt by $23 million and increased its cash
position by $91 million. At March 31, 2004, its debt-to-total
capitalization ratio was 31.9%, down from 33.3% at December 31,
2003. On March 9, 2004, EOG Resources Canada Inc., a wholly-
owned subsidiary of EOG, issued notes with a total principal
amount of US$150 million. The proceeds from these notes, along
with the excess cash provided from operating activities, allowed
EOG to fund its entire first quarter 2004 capital program of $267
million and pay down $98 million on outstanding commercial paper
borrowings and $75 million on a senior unsecured term loan
facility. As management currently assesses price forecast and
demand trends for 2004, EOG continues to believe that operations
and capital expenditure activity can be funded by cash generated
from operations.
For 2004, EOG's estimated capital expenditure budget remains
approximately $1.1 billion, excluding acquisitions. EOG plans to
spend about 5% of this estimated capital expenditure budget to
drill new, internally generated, bigger target ideas. United
States and Canadian natural gas continues to be a key component
of this effort. When it fits EOG's strategy, EOG will make
acquisitions that bolster existing drilling programs or offer EOG
incremental exploration and/or production opportunities.
Management continues to believe that EOG has one of the strongest
prospect inventories in EOG's history.
Results of Operations
The following review of operations for the three-month periods
ended March 31, 2004 and 2003 should be read in conjunction with
the consolidated financial statements of EOG and notes thereto.
Net Operating Revenues
During the first quarter of 2004, net operating revenues of
$464 million and total wellhead revenues of $507 million were
essentially flat as compared to those in the same period of 2003.
Wellhead volume and price statistics for the three-month periods
ended March 31 were as follows:
Three Months Ended
March 31,
2004 2003
Natural Gas Volumes (MMcf per day)(1)
United States 618 642
Canada 203 158
United States and Canada 821 800
Trinidad 154 154
Total 975 954
Average Natural Gas Prices ($/Mcf)(2)
United States $5.40 $5.92
Canada 4.98 5.18
United States and Canada Composite 5.30 5.77
Trinidad 1.49 1.32
Composite 4.70 5.05
Crude Oil and Condensate Volumes (MBbl per day)(1)
United States 20.0 18.4
Canada 2.6 2.1
United States and Canada 22.6 20.5
Trinidad 2.6 2.3
Total 25.2 22.8
Average Crude Oil and Condensate Prices ($/Bbl)(2)
United States $34.76 $32.96
Canada 31.72 31.78
United States and Canada Composite 34.41 32.84
Trinidad 32.91 33.27
Composite 34.25 32.89
Natural Gas Liquids Volumes (MBbl per day)(1)
United States 4.8 3.1
Canada 0.6 0.7
Total 5.4 3.8
Average Natural Gas Liquids Prices ($/Bbl)(2)
United States $24.71 $23.24
Canada 20.14 22.09
Composite 24.21 23.04
Natural Gas Equivalent Volumes (MMcfe per day)(3)
United States 767 771
Canada 222 174
United States and Canada 989 945
Trinidad 169 169
Total 1,158 1,114
Total Bcfe(3) Deliveries 105.4 100.3
(1) Million cubic feet per day or thousand barrels per day, as
applicable.
(2) Dollars per thousand cubic feet or per barrel, as applicable.
(3) Million cubic feet equivalent per day or billion cubic feet
equivalent, as applicable.
Wellhead natural gas revenues for the first quarter of 2004
decreased $17 million, or 4%, due to the decrease in the
composite average wellhead natural gas price ($31 million),
partially offset by the increase in natural gas deliveries ($14
million). The composite average wellhead price for natural gas
decreased 7% to $4.70 per Mcf for the first quarter of 2004 from
$5.05 per Mcf for the same period of 2003.
Natural gas deliveries increased to 975 MMcf per day for the
first quarter of 2004 from 954 MMcf per day for the comparable
period in 2003, primarily due to a 29% increase in Canada to 203
MMcf per day in 2004. The increase in Canada was attributable to
drilling activities (41 MMcf per day) and the property
acquisitions in the fourth quarter of 2003 (32 MMcf per day),
partially offset by natural decline.
Wellhead crude oil and condensate revenues increased $11
million, or 16%, due to increases in both the wellhead crude oil
and condensate deliveries ($8 million) and the composite average
wellhead crude oil and condensate price ($3 million). The
composite average wellhead crude oil and condensate price for
first quarter of 2004 was $34.25 per barrel compared to $32.89
per barrel for the same period of 2003.
Wellhead crude oil and condensate deliveries increased 11% to
25.2 MBbl per day for the first quarter of 2004. The increase was
primarily due to the increases in the United States resulting
from the production from new wells (1.6 MBbl per day) and in
Canada resulting from property acquisitions in the fourth quarter
of 2003 (0.5 MBbl per day).
Natural gas liquids revenues were $4 million higher than a year
ago primarily due to increases in deliveries ($3 million) and the
composite average price ($1 million).
During the first quarter of 2004, EOG recognized a loss on mark-
to-market commodity derivative contracts of $44 million compared
to a loss of $45 million for the same period in 2003. During the
first quarter of 2004, net cash outflows related to settled
natural gas financial collar contracts and settled natural gas
and crude oil financial price swap contracts were $2 million
compared to net cash outflows of $28 million for the comparable
period in 2003.
Operating and Other Expenses
For the first quarter of 2004, operating expenses of $293
million were $54 million higher than the $239 million incurred in
the first three months of 2003. The following table presents the
costs per Mcfe for the three-month periods ended March 31:
Three Months Ended
March 31,
2004 2003
Lease and Well $0.61 $0.48
DD&A 1.08 1.03
G&A 0.24 0.21
Taxes Other than Income 0.34 0.30
Interest Expense, Net 0.16 0.15
Total Per-Unit Costs(1) $2.43 $2.17
(1) Total per-unit costs do not include exploration costs, dry
hole costs and impairments.
The higher per-unit costs of lease and well, depreciation,
depletion and amortization (DD&A), general and administrative
(G&A), taxes other than income and net interest expense for the
three-month period ended March 31, 2004 compared to the same
period in 2003 were due primarily to the reasons set forth below.
Lease and well expenses of $64 million were $16 million higher
than the prior year period due primarily to a general increase in
service costs related to operating activities in the United
States ($5 million) and Canada ($1 million), the increased
production in Canada as discussed above ($4 million), a general
increase in transportation related costs in the United States ($4
million) and changes in the Canadian exchange rate ($2 million).
DD&A expenses of $114 million increased $10 million from the
prior year period due primarily to increased Canadian production
as discussed above ($4 million), changes in the Canadian exchange
rate ($3 million) and increased Canadian DD&A rates from
acquiring and developing reserves ($2 million).
G&A expenses of $25 million were $5 million higher than the
comparable prior year period due primarily to expanded operations
($4 million).
Taxes other than income of $36 million were $6 million higher
than the prior year period primarily due to the results of a
production tax audit lawsuit in the first quarter of 2004 ($5
million). Excluding the impact of the lawsuit, the per unit
taxes other than income cost would have been $0.04 per Mcfe
lower, or $0.30 per Mcfe, for the first quarter of 2004.
Net interest expense of $17 million increased approximately $1
million compared to the first quarter of 2003 primarily due to an
interest charge related to the results of a production tax audit
lawsuit in the first quarter of 2004 ($2 million), which is
partially offset by slightly lower average debt balance ($1
million). Excluding the impact of the lawsuit, the per unit net
interest expense would have been $0.02 per Mcfe lower, or $0.14
per Mcfe, for the first quarter of 2004.
Exploration costs of $26 million were $9 million higher than a
year ago due primarily to increased geological and geoscience
expenditures in the United States ($8 million) and Canada ($1
million).
Impairments increased $6 million to $18 million compared to the
comparable prior year period due to higher amortization of
unproved leases in the United States ($3 million) and impairments
to the carrying value of certain long-lived assets as a result of
downward revisions in the future cash flow analysis for certain
properties in the United States ($3 million). Total impairments
under Statement of Financial Accounting Standards No. 144 -
"Accounting for the Impairment or Disposal of Long-Lived Assets"
for the first quarter of 2004 and 2003 were $3 million and less
than $1 million, respectively.
Net other expense was $3 million for the first quarter of 2004
compared to net other income of less than $1 million for the
first quarter of 2003. The increased expense was primarily due
to foreign currency transaction losses ($6 million) as a result
of applying the changes in the Canadian exchange rate to certain
intercompany short-term loans that eliminate in consolidation,
partially offset by equity income ($2 million).
The income tax provision decreased $23 million to $51 million
compared to the first quarter of 2003, primarily resulting from
lower income before income taxes for federal ($21 million) and
state ($1 million) and decreases in other adjustments ($2
million), partially offset by higher effective foreign income tax
rates ($1 million). As a result of the above changes, the net
effective tax rate for the first quarter of 2004 of 34% decreased
from 35% for the same period of 2003.
Capital Resources and Liquidity
Cash Flow
The primary sources of cash for EOG during the three months
ended March 31, 2004 included funds generated from operations,
proceeds from sales of partial interests in certain equity
investments, proceeds from new borrowings and proceeds from stock
options exercised. Primary cash outflows included funds used in
operations, exploration and development expenditures, repayment
of debt and payment of dividends to shareholders.
Net operating cash inflows of $397 million for the first three
months of 2004 increased approximately $107 million as compared
to the same period in 2003 primarily reflecting a decreased need
for working capital to be invested in accounts receivable ($103
million).
Net investing cash outflows of approximately $284 million for
the first three months of 2004 increased by $112 million as
compared to the same period in 2003 due primarily to increased
exploration and development expenditures ($102 million) and
unfavorable changes in working capital related to investing
activities ($3 million). Changes in Components of Working
Capital Associated with Investing Activities included changes in
accounts payable associated with the accrual of exploration and
development expenditures and changes in inventories which
represent materials and equipment used in drilling and related
activities.
Cash used by financing activities was $23 million for the first
three months of 2004 versus cash used of $122 million for the
same period in 2003. Financing activities for 2004 included the
net repayment of long-term debt ($23 million) consisting of
repayments of the outstanding balances of commercial paper
borrowings ($98 million) and a senior unsecured term loan
facility ($75 million), offset partially by the issuance of the
notes discussed below ($150 million). Other financing activities
included proceeds from the exercise of employee stock options ($9
million) and payments of cash dividends ($8 million).
On March 9, 2004, EOG Resources Canada Inc., a wholly owned
subsidiary of EOG, issued notes with a total principal amount of
US$150 million, an annual interest rate of 4.75% and a maturity
date of March 15, 2014, under Rule 144A of the Securities Act of
1933, as amended. The notes are guaranteed by EOG. In
conjunction with the offering, EOG entered into a cross currency
swap transaction for the equivalent amount of the notes, which
has in effect converted this indebtedness into CAD$201.3 million
with a 5.275% interest rate.
Based upon existing economic and market conditions, management
believes net operating cash flow and available financing
alternatives will be sufficient to fund net investing and other
cash requirements of EOG for the foreseeable future.
Total Exploration and Development Expenditures
The table below presents total exploration and development
expenditures for the three-month periods ended March 31 (in
millions):
Three Months Ended
March 31,
2004 2003
United States $192 $130
Canada 49 24
United States and Canada 241 154
Trinidad 17 1
United Kingdom 9 9
Exploration and Development Expenditures 267 164
Asset Retirement Costs 2 1
Total Exploration and Development Expenditures $269 $165
Total exploration and development expenditures of $269 million
for the first three months of 2004 were $104 million higher than
the comparable prior year period due primarily to increased
exploratory and development activities in the United States,
Canada and Trinidad. Included in the 2004 exploration and
development expenditures are $186 million in development, $78
million for exploration, $2 million in capitalized interest and
$1 million in property acquisitions.
The level of exploration and development expenditures will vary
in future periods depending on energy market conditions and other
related economic factors. EOG has significant flexibility with
respect to financing alternatives and the ability to adjust its
exploration and development expenditure budget as circumstances
warrant. There are no material continuing commitments associated
with expenditure plans.
Commodity Derivative Transactions
As more fully discussed in Note 12 to the consolidated
financial statements included in EOG's 2003 Annual Report, EOG
engages in price risk management activities from time to time.
These activities are intended to manage EOG's exposure to
fluctuations in commodity prices for natural gas and crude oil.
EOG utilizes commodity derivative financial instruments,
primarily price swaps and collars, as the means to manage this
price risk. In addition to these financial transactions, EOG is
a party to various physical commodity contracts for the sale of
hydrocarbons that cover varying periods of time and have varying
pricing provisions. The financial impact of these various
physical commodity contracts is included in revenues at the time
of settlement, which in turn affects average realized hydrocarbon
prices. During the first three months of 2004 and 2003, EOG
elected not to designate any of its commodity derivative
financial contracts as accounting hedges, and accordingly,
accounted for these commodity derivative financial contracts
using the mark-to-market accounting method.
Presented below is a summary of EOG's remaining 2004 natural
gas financial collar contracts and natural gas and crude oil
financial price swap contracts at March 31, 2004 with prices
expressed in dollars per million British thermal units ($/MMBtu)
and in dollars per barrel ($/Bbl), as applicable, and notional
volumes in million British thermal units per day (MMBtud) and in
barrels per day (Bbld), as applicable. EOG has not entered into
any additional natural gas financial collar contracts or natural
gas or crude oil financial price swap contracts since EOG filed
its Current Report on Form 8-K on April 30, 2004. The total fair
value of the natural gas financial collar contracts and natural
gas and crude oil financial price swap contracts at March 31,
2004 was a negative $80 million.
Natural Gas Financial Collar Contracts Financial Price Swap Contracts
Floor Price Ceiling Price Natural Gas Crude Oil
Weighted Weighted
Floor Weighted Ceiling Weighted Average Average
Volume Range Average Range Average Volume Price Volume Price
Month (MMBtud) ($/MMBtu) ($/MMBtu) ($/MMBtu) ($/MMBtu) (MMBtud) ($/MMBtu) (Bbld) ($/Bbl)
Apr 375,000 4.47 - 4.71 4.59 4.93 - 5.30 5.13 30,000 4.89 4,000 29.08
May 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.80 4,000 28.66
Jun 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.80 4,000 28.27
Jul 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.80 3,000 27.91
Aug 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.80 2,000 28.11
Sep 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.78 - -
Oct 375,000 4.47 - 4.75 4.58 4.93 - 5.19 5.09 30,000 4.80 - -
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements other than statements of historical facts,
including, among others, statements regarding EOG's future
financial position, business strategy, budgets, reserve
information, projected levels of production, projected costs and
plans and objectives of management for future operations, are
forward-looking statements. EOG typically uses words such as
"expect," "anticipate," "estimate," "strategy," "intend," "plan,"
"target" and "believe" or the negative of those terms or other
variations of them or by comparable terminology to identify its
forward-looking statements. In particular, statements, express
or implied, concerning future operating results, the ability to
replace or increase reserves or to increase production, or the
ability to generate income or cash flows are forward-looking
statements. Forward-looking statements are not guarantees of
performance. Although EOG believes its expectations reflected in
forward-looking statements are based on reasonable assumptions,
no assurance can be given that these expectations will be
achieved. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-
looking statements include, among others: the timing and extent
of changes in commodity prices for crude oil, natural gas and
related products, foreign currency exchange rates and interest
rates; the timing and impact of liquefied natural gas imports and
changes in demand or prices for ammonia or methanol; the extent
and effect of any hedging activities engaged in by EOG; the
extent of EOG's success in discovering, developing, marketing and
producing reserves and in acquiring oil and gas properties; the
accuracy of reserve estimates, which by their nature involve the
exercise of professional judgment and may therefore be imprecise;
the extent to which EOG can replicate on its other Barnett Shale
acreage the results of its most recent Barnett Shale wells;
political developments around the world; acts of war and
terrorism and responses to these acts; and financial market
conditions. In light of these risks, uncertainties and
assumptions, the events anticipated by EOG's forward-looking
statements might not occur. EOG undertakes no obligations to
update or revise its forward-looking statements, whether as a
result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION - (Concluded)
ITEM 4. CONTROLS AND PROCEDURES
EOG RESOURCES, INC.
EOG's management, with the participation of EOG's principal
executive officer and principal financial officer, evaluated the
effectiveness of EOG's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (Exchange Act)) as of
the end of the quarter ended March 31, 2004. Based on this
evaluation, the principal executive officer and principal
financial officer have concluded that EOG's disclosure controls
and procedures were effective as of the end of the quarter ended
March 31, 2004 to ensure that information that is required to be
disclosed by EOG in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
There were no changes in EOG's internal control over financial
reporting that occurred during the quarter ended March 31, 2004
that have materially affected, or are reasonably likely to
materially affect, EOG's internal control over financial
reporting.
PART II. OTHER INFORMATION
EOG RESOURCES, INC.
ITEM 1. Legal Proceedings
See Part 1, Item 1, Note 5 to Consolidated Financial
Statements, which is incorporated herein by reference.
ITEM 6. Exhibits and Current Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - Section 302 Certification of Periodic
Report of Chief Executive Officer.
Exhibit 31.2 - Section 302 Certification of Periodic
Report of Principal Financial Officer.
Exhibit 32.1 - Section 906 Certification of Periodic
Report of Chief Executive Officer.
Exhibit 32.2 - Section 906 Certification of Periodic
Report of Principal Financial Officer.
(b) Current Reports on Form 8-K
During the quarter ended March 31, 2004, EOG filed or
furnished the following Current Reports on Form 8-K:
- On January 9, 2004 to report anticipated 2003 year-end debt
balance, report anticipated financial results of the price risk
management activities for the fourth quarter of 2003 and provide
updated information on natural gas financial collar contracts and
natural gas and crude oil financial price swap contracts for the
full year 2004 in Item 9 - Regulation FD Disclosure.
- On February 4, 2004 to furnish the press release issued on
February 4, 2004 for the fourth quarter and full year 2003
financial and operational results in Item 7 - Financial
Statements and Exhibits and Item 12 - Results of Operations and
Financial Condition.
- On February 4, 2004 to provide estimates for the first
quarter and full year 2004 and updated information of the full
year 2004 natural gas financial collar contracts and natural gas
and crude oil financial price swap contracts in Item 9 -
Regulation FD Disclosure.
- On February 24, 2004 to present management's discussion and
analysis of financial condition and results of operations for
2003, financial statements for 2003 and related exhibits in Item
7 - Financial Statements and Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EOG RESOURCES, INC.
(Registrant)
Date: May 3, 2004 By: /s/ TIMOTHY K. DRIGGERS
Timothy K. Driggers
Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
*31.1 -- Section 302 Certification of Periodic Report of Chief
Executive Officer
*31.2 -- Section 302 Certification of Periodic Report of
Principal Financial Officer
*32.1 -- Section 906 Certification of Periodic Report of Chief
Executive Officer
*32.2 -- Section 906 Certification of Periodic Report of
Principal Financial Officer
*Exhibits filed herewith