EOG Resources (NYSE:EOG) will produce around 300,000 barrels of oil per day from its US operations in Q4 and is widely considered the most efficient unconventional oil producer. The company has gone to great lengths to assure that even at a $40 oil price some of its acreage produces 10% rates of return. I have always been skeptical of soft data, such as statements or company presentations. I prefer analyzing cash flows to get a clear picture of financial viability of such statements.
EOG is a stellar company, unlike all other competitors, it kept growing in a cash-flow neutral way. Its debt has remained relatively steady over the past three years, while oil production averaged 40%+ growth. Operating cash flows have been sufficient to fund said growth and to me that's the primary trait of sustainability. However, the overall paradigm has changed since Q3 of 2014. EOG has grown in an average oil price environment of $95 per barrel, can it continue its enviable streak at $60? Can it remain cash-flow neutral at $60?
EOG operates primarily in Eagle Ford and Bakken, two areas with 70-75% decline curve profiles.
Bakken decline curve
Eagle Ford decline curve
EOG 1H well decline curve
It is important to understand that in order to keep production flat the company needs to spend significant amount of capital. I have estimated that level is around 65% of current year's capex. However, there have been advancements in completion techniques and it is quite possible that drilling costs will come down circa 20%. Taking those two considerations into account I believe a company as efficient as EOG can keep production flat for the next two years with 60% of current year's capex or $5 billion.
Here's EOG's cash flow statement for 9 months of 2014:
For the first nine months EOG's operating cash flow supplanted cash used for investment purposes by around $400 million, of which approximately $300 million was used to pay out a dividend and repurchase shares.
Average realized oil price before the effect of derivatives was $100.10 per barrel.
On the cash outflow side there are five items of interest: LOE, transportation costs, production taxes, G&A, and interest expense.
There is a table in 10Q with info on most of these items. Bear in mind, that interest expense and G&A are calculated based on an average production of 275,000 barrels of oil per day.
The lone remaining item is production taxes and page 29 provides a figure of 6.1% of wellhead revenue.
Now I have enough information to forecast EOG's net cash inflows for 2015 using 300,000 barrels of daily oil production and $5 billion in capex for next year, which is around 60% of what it was for 2014. I will adjust NGL prices lower by 40% and keep natural gas production and sales unchanged. Canadian oil operations will provide less revenue in 2014 considering the recent sale, but they were insignificant to begin with.
|Oil (NYSE:BBL)||NGL||Natural gas (NYSEMKT:MCF)|
|Cash outflow||Volume BOE (annual)||Cost (per BOE)||Total|
|Net cash inflow||
Other costs include dry hole costs, exploration costs, and cash income taxes.
As the table above shows EOG remains cash-flow neutral in a prolonged $60 oil price environment and can even maintain the current level of dividends. The premise that capex gets cut by 40% will be tested when the company issues its annual outlook in several weeks.
Overleveraged and under-hedged US tight oil companies will have a difficult time surviving the current commodity price environment, but EOG is well positioned to come out a winner.
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