0000821189-01-500030.txt : 20011031 0000821189-01-500030.hdr.sgml : 20011031 ACCESSION NUMBER: 0000821189-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EOG RESOURCES INC CENTRAL INDEX KEY: 0000821189 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 470684736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09743 FILM NUMBER: 1768764 BUSINESS ADDRESS: STREET 1: 333 CLAY SUITE 4200 CITY: HOUSTON STATE: TX ZIP: 77002-7361 BUSINESS PHONE: 7136517000 MAIL ADDRESS: STREET 1: 1200 SMITH STREET CITY: HOUSTON STATE: TX ZIP: 77002-7361 FORMER COMPANY: FORMER CONFORMED NAME: ENRON OIL & GAS CO DATE OF NAME CHANGE: 19920703 10-Q 1 eog3q10q.txt EOG 3RD QUARTER FORM 10-Q 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 September 30, 2001 [ ] 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 jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of October 22, 2001. Title of each class Number of shares ------------------- ---------------- Common Stock, $.01 par value 115,483,474 2 EOG RESOURCES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page No. -------- ITEM 1. Financial Statements Consolidated Statements of Income - Three Months Ended September 30, 2001 and 2000 And Nine Months Ended September 30, 2001 and 2000 ................................. 3 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 ........................................... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 ................................. 5 Notes to Consolidated Financial Statements .................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 9 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ..................................... 15 ITEM 6. Exhibits and Reports on Form 8-K ...................... 15 3 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 Nine Months Ended September 30, September 30, -------------------- --------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- NET OPERATING REVENUES Natural Gas $ 229,653 $ 309,668 $1,108,667 $ 740,271 Crude Oil, Condensate and Natural Gas Liquids 65,324 88,434 213,661 238,841 Mark-to-market Gains (Losses) on Commodity Contracts 58,750 (3,623) 95,033 (3,623) Gains on Sales of Reserves and Related Assets and Other, Net 445 7,672 112 9,285 -------- -------- --------- -------- TOTAL 354,172 402,151 1,417,473 984,774 OPERATING EXPENSES Lease and Well 43,640 35,304 129,462 101,266 Exploration Costs 12,408 14,898 50,419 41,047 Dry Hole Costs 10,617 5,627 39,272 14,678 Impairments 20,597 9,786 52,628 28,311 Depreciation, Depletion and Amortization 103,351 91,577 294,782 263,665 General and Administrative 20,925 17,053 57,609 49,367 Taxes Other Than Income 18,687 24,248 81,091 63,337 -------- -------- --------- -------- TOTAL 230,225 198,493 705,263 561,671 -------- -------- --------- -------- OPERATING INCOME 123,947 203,658 712,210 423,103 OTHER INCOME, NET 1,272 35 1,883 815 -------- -------- --------- -------- INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES 125,219 203,693 714,093 423,918 INTEREST EXPENSE, NET 10,242 14,750 34,155 44,899 -------- -------- --------- -------- INCOME BEFORE INCOME TAXES 114,977 188,943 679,938 379,019 INCOME TAX PROVISION 43,014 72,466 256,525 143,535 -------- -------- --------- -------- NET INCOME 71,963 116,477 423,413 235,484 PREFERRED STOCK DIVIDENDS 2,759 2,755 8,237 8,269 -------- -------- --------- -------- NET INCOME AVAILABLE TO COMMON $ 69,204 $ 113,722 $ 415,176 $ 227,215 ======== ======== ========= ======== NET INCOME PER SHARE AVAILABLE TO COMMON Basic $ 0.60 $ 0.98 $ 3.58 $ 1.94 ======== ======== ========= ======== Diluted $ 0.59 $ 0.95 $ 3.51 $ 1.91 ======== ======== ========= ======== AVERAGE NUMBER OF COMMON SHARES Basic 115,692 116,559 115,982 117,018 ======== ======== ========= ======== Diluted 117,141 119,262 118,159 118,932 ======== ======== ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
4 PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) EOG RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 11,344 $ 20,152 Accounts Receivable 206,270 342,579 Inventories 21,576 16,623 Assets from Price Risk Management Activities 63,229 438 Other 33,773 15,073 ---------- ---------- TOTAL 336,192 394,865 OIL AND GAS PROPERTIES (SUCCESSFUL EFFORTS METHOD) 5,851,142 5,122,728 Less: Accumulated Depreciation, Depletion and Amortization (2,889,907) (2,597,721) ---------- ---------- Net Oil and Gas Properties 2,961,235 2,525,007 OTHER ASSETS 88,935 81,381 ---------- ---------- TOTAL ASSETS $ 3,386,362 $ 3,001,253 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $ 257,681 $ 246,468 Accrued Taxes Payable 75,928 78,838 Dividends Payable 5,047 4,525 Other 43,842 40,285 ---------- ---------- TOTAL 382,498 370,116 LONG-TERM DEBT 701,022 859,000 OTHER LIABILITIES 56,167 51,133 DEFERRED INCOME TAXES 557,185 340,079 SHAREHOLDERS' EQUITY Preferred Stock, $.01 Par, 10,000,000 Shares Authorized: Series B, 100,000 Shares Issued, Cumulative, $100,000,000 Liquidation Preference 98,056 97,879 Series D, 500 Shares Issued, Cumulative, $50,000,000 Liquidation Preference 49,421 49,285 Common Stock, $.01 Par, 320,000,000 Shares Authorized and 124,730,000 Shares Issued 201,247 201,247 Additional Paid in Capital 4,603 4,221 Unearned Compensation (15,985) (3,756) Accumulated Other Comprehensive Income (51,619) (31,756) Retained Earnings 1,702,339 1,301,067 Common Stock Held in Treasury, 9,132,405 shares at September 30, 2001 and 7,825,708 shares at December 31, 2000 (298,572) (237,262) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 1,689,490 1,380,925 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,386,362 $ 3,001,253 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
5 PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) EOG RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended September 30, ----------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Reconciliation of Net Income to Net Operating Cash Inflows: Net Income $ 423,413 $ 235,484 Items Not Requiring Cash Depreciation, Depletion and Amortization 294,782 263,665 Impairments 52,628 28,311 Deferred Income Taxes 170,315 81,603 Other, Net 9,483 3,587 Exploration Costs 50,419 41,047 Dry Hole Costs 39,272 14,678 Mark-to-market Commodity Contracts Total (Gains) Losses (95,033) 3,623 Realized Gains (Losses) 27,798 (430) (Gains) Losses on Sales of Reserves and Related Assets 1,028 (5,137) Tax Benefits from Stock Options Exercised 6,133 23,400 Other, Net (2,748) (8,706) Changes in Components of Working Capital and Other Liabilities Accounts Receivable 138,819 (115,659) Inventories (4,953) 2,356 Accounts Payable 4,026 56,682 Accrued Taxes Payable (17,300) 10,280 Other Liabilities (1,067) 5,274 Other, Net (46) (5,975) Changes in Components of Working Capital Associated with Investing and Financing Activities (43,527) (21,780) --------- --------- NET OPERATING CASH INFLOWS 1,053,442 612,303 INVESTING CASH FLOWS Additions to Oil and Gas Properties (754,035) (414,866) Exploration Costs (50,419) (41,047) Dry Hole Costs (39,272) (14,678) Proceeds from Sales of Reserves and Related Assets 7,380 25,588 Changes in Components of Working Capital Associated with Investing Activities 41,218 20,517 Other, Net (8,642) (24,026) --------- --------- NET INVESTING CASH OUTFLOWS (803,770) (448,512) FINANCING CASH FLOWS Long-Term Debt (157,978) (45,139) Dividends Paid (21,306) (19,263) Treasury Stock Purchased (103,008) (196,867) Proceeds from Sales of Treasury Stock 20,631 91,783 Other, Net 3,181 (2,434) --------- --------- NET FINANCING CASH OUTFLOWS (258,480) (171,920) --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (8,808) (8,129) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,152 24,836 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,344 $ 16,707 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
6 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. Accordingly, they reflect all 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 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 2000 Annual Report to Shareholders. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Beginning first quarter of 2001, the "Impairment of Unproved Oil and Gas Properties" caption on the Consolidated Statements of Income was renamed "Impairments" to include the impairment loss of long-lived assets as described in Statement of Financial Accounting Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed of" ("SFAS 121 Impairments"). As a result, EOG reclassified all prior periods to reflect such SFAS 121 Impairments in Impairments, instead of Depreciation, Depletion and Amortization ("DD&A") as previously reported. SFAS 121 Impairments reclassified from DD&A to Impairments were $0.5 million and $3.1 million for the three-month and nine-month periods ended September 30, 2000. 2. As more fully discussed in Notes 1 and 12 to the consolidated financial statements included in EOG's 2000 Annual Report to Shareholders, EOG engages in price risk management activities from time to time. Derivative financial instruments (primarily price swaps and costless collars) are utilized selectively to hedge the impact of market fluctuations on natural gas and crude oil market prices. EOG adopted on January 1, 2001 Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and 138 ("SFAS 133"). SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings using the mark-to-market accounting method unless specific hedge accounting criteria are met. The adoption of SFAS 133 did not have a material impact on EOG's financial statements. During the first nine months of 2001, EOG elected not to designate any of its price risk management activities as accounting hedges under SFAS 133, and accordingly, accounted for them using the mark-to-market accounting method. Under this accounting method, the changes in the market value of outstanding financial instruments are recognized as gains or losses in the period of change. The gains or losses are recorded in Mark-to- market Gains (Losses) on Commodity Contracts in the Net Operating Revenues section of the Consolidated Statements of Income. The related cash flow impact is reflected as cash flows from operating activities in the Consolidated Statements of Cash Flows. For the three-month and nine-month periods ended September 30, 2001, mark-to-market gains on commodity contracts were respectively $58.8 million and $95.0 million, of which $27.3 million and $27.8 million were realized gains for the respective periods. Following is a summary of EOG's open futures positions at September 30, 2001: o Crude Oil and Condensate Price Swaps - EOG had outstanding price swaps covering notional volumes of approximately 0.9 million barrels of crude oil and condensate for the period October 2001 to May 2002 at an average price of $27.11 per barrel. At September 30, 2001, the fair value of these oil price swaps was $3.1 million. o Natural Gas Price Collars - EOG had outstanding price collars that set a floor price of $4.40 per MMBtu and ceiling prices that average $6.15 per MMBtu covering notional volumes of 200,000 million British thermal units of natural gas per day ("MMBtu/d") for October 2001 and November 2001 at an average premium of $0.15 per MMBtu. At September 30, 2001, the fair value of these natural gas price collars was $28.5 million. 7 PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Continued) EOG RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS o Natural Gas Price Swaps - EOG had outstanding price swaps covering notional volumes of 115,000 MMBtu/d for October 2001 and November 2001 at an average price of $3.40 per MMBtu, notional volumes of 200,000 MMBtu/d for December 2001 at an average price of $3.62 per MMBtu, and notional volumes of 100,000 MMBtu/d for the period January 2002 to December 2002 at an average price of $3.46 per MMBtu. At September 30, 2001, the fair value of these natural gas price swaps was $36.0 million. As of September 30, 2001, $63.2 million of the derivatives has been recorded on the balance sheet in Current Assets - Assets from Price Risk Management Activities. The remaining $4.4 million has been recorded as a long-term asset on the balance sheet in Other Assets. 3. The following table sets forth the computation of basic and diluted earnings from net income available to common (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 2001 2000 2001 2000 -------- --------- --------- ---------- Numerator for basic and diluted earnings per share - Net income available to common $ 69,204 $ 113,722 $ 415,176 $ 227,215 ======= ======== ======== ======== Denominator for basic earnings per share - Weighted average shares 115,692 116,559 115,982 117,018 Potential dilutive common shares - Stock options 1,385 2,570 1,911 1,797 Restricted stock and units 64 133 266 117 ------- ------- ------- -------- Denominator for diluted earnings per share - Adjusted weighted average shares 117,141 119,262 118,159 118,932 ======= ======== ======== ======== Net income per share of common stock Basic $ 0.60 $ 0.98 $ 3.58 $ 1.94 ======= ======== ======== ======== Diluted $ 0.59 $ 0.95 $ 3.51 $ 1.91 ======= ======== ======== ======== --------------------------------------------------------------------------------------------------------
4. The following table presents the components of EOG's comprehensive income for the three-month and nine-month periods ended September 30, 2001 and 2000 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net Income $ 71,963 $ 116,477 $ 423,413 $ 235,484 Other Comprehensive Income Unrealized Gain (Loss) on Available-for-sale Security, net of tax (517) 115 (1,062) 115 Foreign Currency Translation Adjustments (13,943) (5,259) (18,801) (12,790) ------- -------- -------- -------- Comprehensive Income $ 57,503 $ 111,333 $ 403,550 $ 222,809 ======= ======== ======== ======== --------------------------------------------------------------------------------------------------------
8 PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Concluded) EOG RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Selected financial information about operating segments is reported below for the three-month and nine-month periods ended September 30, 2001 and 2000 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2001 2000 2001 2000 --------- ---------- ---------- --------- NET OPERATING REVENUES United States $ 304,188 $ 334,125 $1,206,388 $ 803,365 Canada 32,897 46,443 158,606 120,049 Trinidad 17,071 21,566 52,413 61,324 Other 16 17 66 36 -------- -------- --------- -------- TOTAL $ 354,172 $ 402,151 $1,417,473 $ 984,774 ======== ======== ========= ======== OPERATING INCOME (LOSS) United States $ 101,409 $ 163,622 $ 593,073 $ 334,293 Canada 12,966 27,979 99,088 61,420 Trinidad 9,865 12,749 26,354 30,181 Other (293) (692) (6,305) (2,791) -------- -------- --------- -------- TOTAL 123,947 203,658 712,210 423,103 RECONCILING ITEMS Other Income, Net 1,272 35 1,883 815 Interest Expense, Net 10,242 14,750 34,155 44,899 -------- -------- --------- -------- INCOME BEFORE INCOME TAXES $ 114,977 $ 188,943 $ 679,938 $ 379,019 ======== ======== ========= ======== ------------------------------------------------------------------------------------
6. As reported in EOG's 2000 Annual Report to Shareholders, two stockholders of EOG filed separate lawsuits purportedly on behalf of EOG against Enron Corp. and directors of EOG, alleging that Enron Corp. and directors of EOG breached their fiduciary duties of good faith and loyalty in approving the Share Exchange described in EOG's Quarterly Report on Form 10-Q for the third quarter of 1999. The lawsuits have been consolidated and seek to temporarily and permanently enjoin the Share Exchange transaction and seek to rescind the transaction or to receive monetary damages and costs and expenses, including reasonable attorneys' and experts' fees. EOG, Enron Corp. and directors of EOG believe the lawsuits are without merit and intend to vigorously contest them. 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. 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 material adverse effect on the financial condition or results of operations of EOG. 7. During the first nine months of 2001, EOG repurchased 2.6 million shares of common stock, primarily to reduce the number of shares of stock outstanding and to limit the dilution resulting from shares issued or anticipated to be issued under EOG's employee stock plans. To supplement its share repurchase program, EOG entered into a series of equity derivative transactions in the second quarter. During the second quarter of 2001, EOG sold put options obligating EOG to purchase up to 0.6 million shares of its common stock, with such options expiring in December 2001 at an average price of $33.42. These transactions are accounted for as equity transactions with premiums received recorded to Additional Paid In Capital in the Consolidated Balance Sheets. Settlement alternatives under all circumstances are at the option of EOG and include physical share, net share and net cash settlement. EOG will assess the status of its share repurchase program at the time these options expire and will determine at that time whether to settle these options in shares or in cash. 9 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EOG RESOURCES, INC. The following review of operations for the three-month periods ended September 30, 2001 and 2000 should be read in conjunction with the consolidated financial statements of EOG Resources, Inc. and subsidiaries ("EOG") and Notes thereto. Results of Operations --------------------- Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000 EOG generated third quarter net income available to common of $69 million compared to $114 million for the third quarter of 2000. Net operating revenues were $354 million compared to $402 million for the third quarter of 2000. Following is an explanation of the variances causing this decrease. Wellhead volume and price statistics are summarized below: ---------------------------------------------------------------------- 2001 2000 ---------------------------------------------------------------------- Natural Gas Volumes (MMcf per day)(1) United States 681 652 Canada 124 125 ----- ----- North America 805 777 Trinidad 116 132 ----- ----- TOTAL 921 909 ===== ===== Average Natural Gas Prices ($/Mcf)(2) United States $ 2.91 $ 4.22 Canada 2.48 3.44 North America Composite 2.84 4.09 Trinidad 1.21 1.17 COMPOSITE 2.64 3.67 Crude Oil/Condensate Volumes (MBbl per day)(1) United States 21.9 23.8 Canada 1.8 2.1 ----- ----- North America 23.7 25.9 Trinidad 1.9 2.5 ----- ----- TOTAL 25.6 28.4 ===== ===== Average Crude Oil/Condensate Prices ($/Bbl)(2) United States $25.60 $31.48 Canada 23.97 28.83 North America Composite 25.48 31.27 Trinidad 23.12 31.87 COMPOSITE 25.30 31.32 Natural Gas Liquids Volumes (MBbl per day)(1) United States 3.6 4.2 Canada 0.6 0.7 ----- ----- TOTAL 4.2 4.9 ===== ===== Average Natural Gas Liquids Prices ($/Bbl) (2) United States $15.46 $20.12 Canada 12.10 18.16 COMPOSITE 14.99 19.84 Natural Gas Equivalent Volumes (MMcfe per day)(3) United States 834 820 Canada 138 142 ----- ----- North America 972 962 Trinidad 128 147 ----- ----- TOTAL 1,100 1,109 ===== ===== Total Bcfe(3)Deliveries 101 102 ------------------------------------------------------------------------ (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. 10 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) EOG RESOURCES, INC. Wellhead revenues decreased 27% to $289 million in the third quarter of 2001 compared to $398 million in the third quarter of 2000, primarily due to lower average North America wellhead natural gas prices and lower crude oil and condensate prices worldwide. Average wellhead natural gas prices were down by 28%, decreasing net operating revenues by $87 million. Average wellhead crude oil and condensate prices were 19% lower than the comparable period in 2000, decreasing net operating revenues by $14 million. Third quarter 2001 North America wellhead natural gas deliveries were approximately 4% higher than the comparable period in 2000. The increase in volumes was primarily due to increased production in the Midland, Offshore, Pittsburgh and Tyler divisions, partially offset by decreased production in the Corpus Christi division. Combined with reduced production in Trinidad, due to takes above the take or pay contracted volume by the Trinidadian government in the third quarter of 2000, the overall natural gas production was 1% higher than the comparable period in 2000, increasing net operating revenues by $4 million. Wellhead crude oil and condensate deliveries were 10% lower than the prior year period, decreasing net operating revenues by $8 million. The decrease was primarily due to decreased crude oil production in the Midland, Canada and International divisions. Revenues from natural gas liquids decreased by $3 million primarily due to a decrease in prices of 24% and a decrease in deliveries of 14%. During the third quarter of 2001, EOG recognized mark-to-market gains on commodity contracts of $58.8 million, of which $27.3 million were realized gains. Operating expenses of $230 million for the third quarter of 2001 were approximately $32 million higher than the third quarter of 2000. Taxes other than income were $6 million lower due to decreased wellhead revenues. Depreciation, depletion and amortization ("DD&A") increased $12 million primarily due to increased production volumes and increased per unit DD&A rates in North America. Lease and well expenses were $8 million higher than the comparable period in 2000 primarily due to an industry-wide increase in costs and increased North America production activities. Exploration expenses of $12 million decreased $2 million primarily due to decreased geological and geophysical expenses. Dry hole expenses of $11 million were $5 million higher than the comparable period in 2000. Impairments increased $11 million to $21 million in the third quarter of 2001 due primarily to increased reduction of carrying values of certain long-lived assets as a result of future cash flow analysis. The per unit operating costs of EOG for lease and well, DD&A, general and administrative ("G&A") expenses, interest expense, and taxes other than income averaged $1.95 per Mcfe during the third quarter of 2001 compared to $1.79 per Mcfe during the third quarter of 2000. The increase was primarily due to a higher per unit rate of DD&A, lease and well, and G&A expense partially offset by a lower per unit rate of taxes other than income and interest expense. Income tax provision for the third quarter of 2001 was $43 million (effective tax rate of 37%) compared to $72 million (effective tax rate of 38%) for the comparable period of 2000. The reduction was primarily due to lower pre-tax income. 11 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) EOG RESOURCES, INC. Results of Operations --------------------- Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000 In the first nine months of 2001, EOG generated net income available to common of $415 million compared to $227 million for the comparable period of 2000. Net operating revenues for the first nine months of 2001 were $1,417 million as compared to $985 million for the comparable period of 2000. Wellhead volume and price statistics are summarized below: ----------------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------------- Natural Gas Volumes (MMcf per day) United States 696 647 Canada 121 130 ----- ----- North America 817 777 Trinidad 114 124 ----- ----- TOTAL 931 901 ===== ===== Average Natural Gas Prices ($/Mcf) United States $ 4.83 $ 3.40 Canada 4.35 2.83 North America Composite 4.76 3.30 Trinidad 1.21 1.17 COMPOSITE 4.33 3.01 Crude Oil/Condensate Volumes (MBbl per day) United States 22.8 22.5 Canada 1.7 2.2 ----- ----- North America 24.5 24.7 Trinidad 2.0 2.6 ----- ----- TOTAL 26.5 27.3 ===== ===== Average Crude Oil/Condensate Prices ($/Bbl) United States $26.84 $29.41 Canada 24.73 27.07 North America Composite 26.69 29.20 Trinidad 26.94 29.36 COMPOSITE 26.71 29.21 Natural Gas Liquids Volumes (MBbl per day) United States 3.5 4.3 Canada 0.5 0.7 ----- ----- TOTAL 4.0 5.0 ===== ===== Average Natural Gas Liquids Prices ($/Bbl) United States $18.69 $19.80 Canada 17.23 15.61 COMPOSITE 18.50 19.18 Natural Gas Equivalent Volumes (MMcfe per day) United States 854 807 Canada 135 148 ----- ----- North America 989 955 Trinidad 125 140 ----- ----- TOTAL 1,114 1,095 ===== ===== Total Bcfe Deliveries 304 300 ------------------------------------------------------------------------ 12 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) EOG RESOURCES, INC. Wellhead revenues increased approximately 33% to $1,314 million in the first nine months of 2001 compared to $988 million in the first nine months of 2000. Average wellhead natural gas prices for the first nine months of 2001 were approximately 44% higher than the comparable period of 2000 increasing net operating revenues by approximately $336 million. Average wellhead crude oil and condensate prices were down by 9%, decreasing net operating revenues by $18 million. During the first nine months of 2001 wellhead natural gas deliveries were 3% higher than the comparable period in 2000, increasing net operating revenues by $22 million. The increase in volumes was primarily due to increased production in the Midland, Offshore and Tyler divisions and higher than normal prior period adjustments, partially offset by reduced production from the Canada and International divisions. Wellhead crude oil and condensate deliveries were 3% lower than the prior year period, decreasing net operating revenues by $7 million. The decrease was primarily due to decreased crude oil and condensate production in certain U.S. divisions along with the Canada and International divisions. Revenues from natural gas liquids decreased by $6 million primarily due to a decrease in deliveries of 20% and a decrease in prices of 4%. During the first nine months of 2001, EOG recognized mark-to- market gains on commodity contracts of $95.0 million, of which $27.8 million were realized gains. Operating expenses of $705 million for the first nine months of 2001 were approximately $144 million higher than the comparable period in 2000. Taxes other than income were $18 million higher primarily due to increased wellhead revenues in the U.S. Lease and well expenses were $28 million higher than the prior year period primarily due to an industry-wide increase in costs and increased North America production activities to maximize the volumes delivered at higher product prices. Exploration expenses and dry hole expenses were respectively $9 million and $25 million higher than the comparable period a year ago due primarily to increased North America and International exploratory activities. DD&A increased $31 million compared to the prior year period primarily due to increased production volumes in North America and increased per unit DD&A rates in certain North America locations. Impairments increased $24 million to $53 million due primarily to increased amortization of unproved leases and the reduction of carrying values of certain long-lived assets as a result of future cash flow analysis. The per unit operating costs of EOG for lease and well, DD&A, G&A, interest expense and taxes other than income averaged $1.96 per Mcfe during the first nine months of 2001 compared to $1.74 per Mcfe in 2000. This increase was primarily due to a higher per unit rate of DD&A, taxes other than income, lease and well, and G&A expense, partially offset by a lower per unit rate of interest expense. 13 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) EOG RESOURCES, INC. Capital Resources and Liquidity ------------------------------- EOG's primary sources of cash during the nine months ended September 30, 2001 included funds generated from operations, proceeds from sales of reserves and related assets and proceeds from sales of treasury stock. Primary cash outflows included funds used in operations, exploration and development expenditures, repayments of debt, dividends and common stock repurchases. Net operating cash flows of $1,053 million for the first nine months of 2001 increased approximately $441 million as compared to the first nine months of 2000 primarily reflecting higher operating revenues, partially offset by higher cash operating expenses. Net investing cash outflows of approximately $804 million for the first nine months of 2001 increased by $355 million versus the comparable prior year period due primarily to higher exploration and development expenditures and lower proceeds from sales of reserves and related assets. 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. Exploration and development expenditures for the first nine months of 2001 and 2000 are as follows (in millions): 2001 2000 ---------------------------- ---------------------------- Drilling Acquisition Total Drilling Acquisition Total -------- ----------- ----- -------- ----------- ----- United States $ 558 $ 96 $ 654 $ 317 $ 84 $ 401 Canada 71 72 143 44 1 45 ---- ---- ---- ---- ---- ---- North America 629 168 797 361 85 446 Trinidad 39 - 39 22 - 22 Other 8 - 8 3 - 3 ---- ---- ---- ---- ---- ---- TOTAL $ 676 $ 168 $ 844 $ 386 $ 85 $ 471 ==== ==== ==== ==== ==== ====
Exploration and development expenditures of $844 million for the first nine months of 2001 were $373 million higher than the prior year period due primarily to increased acquisition and development and exploratory activities. 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. Cash used by financing activities was $258 million for the first nine months of 2001 versus $172 million for the comparable prior year period. Financing activities for 2001 included repayment of debt of $158 million, repurchases of EOG's common stock of $103 million, proceeds from sales of treasury stock of $21 million and cash dividend payments of $21 million. On February 13, 2001, EOG announced a 14% increase in the annual dividend rate from $.14 per share to $.16 per share beginning with dividends payable after April 19, 2001. During the first nine months of 2001, EOG repurchased 2.6 million shares of common stock, primarily to reduce the number of shares of stock outstanding and to limit the dilution resulting from shares issued or anticipated to be issued under EOG's employee stock plans. To supplement its share repurchase program, EOG entered into a series of equity derivative transactions in the second quarter. During the second quarter of 2001, EOG sold put options obligating EOG to purchase up to 0.6 million shares of its common stock, with such options expiring in December 2001 at an average price of $33.42. These transactions are accounted for as equity transactions with premiums received recorded to Additional Paid In Capital in the Consolidated Balance Sheets. Settlement alternatives under all circumstances are at the option of EOG and include physical share, net share and net cash settlement. EOG will assess the status of its share repurchase program at the time these options expire and will determine at that time whether to settle these options in shares or in cash. 14 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Concluded) EOG RESOURCES, INC. 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. During the first nine months of 2001, EOG engaged in certain price risk management activities and elected not to designate any of these activities as accounting hedges under SFAS 133. Accordingly, EOG accounted for them using the mark-to-market accounting method. Following is a summary of EOG's open futures positions at September 30, 2001: o Crude Oil and Condensate Price Swaps - EOG had outstanding price swaps covering notional volumes of approximately 0.9 million barrels of crude oil and condensate for the period October 2001 to May 2002 at an average price of $27.11 per barrel. At September 30, 2001, the fair value of these oil price swaps was $3.1 million. o Natural Gas Price Collars - EOG had outstanding price collars that set a floor price of $4.40 per MMBtu and ceiling prices that average $6.15 per MMBtu covering notional volumes of 200,000 million British thermal units of natural gas per day ("MMBtu/d") for October 2001 and November 2001 at an average premium of $0.15 per MMBtu. At September 30, 2001, the fair value of these natural gas price collars was $28.5 million. o Natural Gas Price Swaps - EOG had outstanding price swaps covering notional volumes of 115,000 MMBtu/d for October 2001 and November 2001 at an average price of $3.40 per MMBtu, notional volumes of 200,000 MMBtu/d for December 2001 at an average price of $3.62 per MMBtu, and notional volumes of 100,000 MMBtu/d for the period January 2002 to December 2002 at an average price of $3.46 per MMBtu. At September 30, 2001, the fair value of these natural gas price swaps was $36.0 million. As of September 30, 2001, $63.2 million of the derivatives has been recorded on the balance sheet in Current Assets - Assets from Price Risk Management Activties. The remaining $4.4 million has been recorded as a long-term asset on the balance sheet in Other Assets. 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 increase reserves or 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 and interest rates; 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 judgement and may therefore be imprecise; political developments around the world, including terrorist activities and responses to terrorist activities 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. 15 PART II. OTHER INFORMATION EOG RESOURCES, INC. ITEM 1. Legal Proceedings See Part 1, Item 1, Note 6 to Consolidated Financial Statements, which is incorporated herein by reference. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends (b) Reports on Form 8-K Current Report on Form 8-K filed on July 31, 2001, to provide estimate for the third and fourth quarters and full year 2001 in Item 9 - Regulation FD Disclosure. Current Report on Form 8-K filed on August 27, 2001, to report certain natural gas price swap, collar, and physical contracts in Item 5 - Other Events. 16 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: October 29, 2001 By /S/ T. K. DRIGGERS ---------------------------- T. K. Driggers Vice President, Accounting and Land Administration (Principal Accounting Officer) 17 Exhibit 12 EOG RESOURCES, INC. Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends (In Thousands) (Unaudited) Year Ended December 31 Nine Months Ended ------------------------------------------------------ September 30, 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------------- EARNINGS AVAILABLE FOR FIXED CHARGES: Net Income $423,413 $396,931 $569,094 $ 56,171 $121,970 $140,008 Less: Capitalized Interest Expense (6,390) (6,708) (10,594) (12,711) (13,706) (9,136) Add: Fixed Charges 45,589 72,833 77,837 66,982 47,108 27,114 Income Tax Provision (Benefit) 256,525 236,626 (1,382) 4,111 41,500 50,954 ------- ------- ------- ------- ------- ------- EARNINGS AVAILABLE $719,137 $699,682 $634,955 $114,553 $196,872 $208,940 ======= ======= ======= ======= ======= ======= FIXED CHARGES: Interest Expense $ 34,155 $ 61,006 $ 61,819 $ 48,463 $ 27,369 $ 12,370 Capitalized Interest 6,390 6,708 10,594 12,711 13,706 9,136 Rental Expense Representative of Interest Factor 5,044 5,119 5,424 5,808 6,033 5,608 ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES 45,589 72,833 77,837 66,982 47,108 27,114 Preferred Dividends on a Pre-tax Basis 13,227 17,602 660 - - - ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES AND PREFERRED DIVIDENDS $58,816 $ 90,435 $ 78,497 $ 66,982 $ 47,108 $ 27,114 ====== ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 15.77 9.61 8.16 1.71 4.18 7.71 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 12.23 7.74 8.09 1.71 4.18 7.71