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 June 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 (I.R.S. jurisdiction Employer of incorporation or Identification No.) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of July 19, 2001. Title of each class Number of shares ------------------- ---------------- Common Stock, $.01 par value 116,141,271
2 EOG RESOURCES, INC. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION No. ---- ITEM 1. Financial Statements Consolidated Statements of Income - Three Months Ended June 30, 2001 and 2000 and Six Months Ended June 30, 2001 and 2000................ 3 Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..... 4 Consolidated Statements of Cash Flows - Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders............ 15 ITEM 5. Other Information.............................................. 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) <TABLE> Three Months Ended Six Months Ended June 30, June 30, - ----------------------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> NET OPERATING REVENUES Natural Gas $357,536 $244,403 $ 879,013 $430,603 Crude Oil, Condensate and Natural Gas Liquids 73,143 77,340 148,337 150,407 Mark-to-market Gains on Commodity Contracts 36,849 - 36,283 - Gains (Losses) on Sales of Reserves and Related Assets and Other, Net (1,480) 984 (332) 1,613 ------- ------- --------- ------- TOTAL 466,048 322,727 1,063,301 582,623 OPERATING EXPENSES Lease and Well 43,248 32,223 85,822 65,962 Exploration Costs 17,746 13,204 38,011 26,149 Dry Hole Costs 12,971 3,290 28,655 9,051 Impairments 16,267 10,123 32,031 18,525 Depreciation, Depletion and Amortization 97,470 87,951 191,431 172,088 General and Administrative 18,735 16,027 36,684 32,314 Taxes Other Than Income 25,372 20,674 62,404 39,089 ------- ------- --------- ------- TOTAL 231,809 183,492 475,038 363,178 ------- ------- --------- ------- OPERATING INCOME 234,239 139,235 588,263 219,445 OTHER INCOME, NET 1,250 763 611 780 ------- ------- --------- ------- INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES 235,489 139,998 588,874 220,225 INTEREST EXPENSE, NET 10,624 15,581 23,913 30,149 ------- ------- --------- ------- INCOME BEFORE INCOME TAXES 224,865 124,417 564,961 190,076 INCOME TAX PROVISION 88,662 46,900 213,511 71,069 ------- ------- --------- ------- NET INCOME 136,203 77,517 351,450 119,007 PREFERRED STOCK DIVIDENDS (2,757) (2,860) (5,478) (5,514) ------- ------- --------- ------- NET INCOME AVAILABLE TO COMMON $133,446 $ 74,657 $ 345,972 $113,493 ======= ======= ========= ======= NET INCOME PER SHARE OF COMMON STOCK Basic $ 1.15 $ 0.64 $ 2.98 $ 0.97 ======= ======= ========= ======= Diluted $ 1.13 $ 0.63 $ 2.92 $ 0.96 ======= ======= ========= ======= AVERAGE NUMBER OF COMMON SHARES Basic 115,870 116,666 116,127 117,247 ======= ======= ========= ======= Diluted 118,047 119,177 118,551 118,757 ======= ======= ========= ======= The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
4 PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) EOG RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> June 30, December 31, 2001 2000 - --------------------------------------------------------------------------------------------- (Unaudited) ASSETS <s> <c> <c> CURRENT ASSETS Cash and Cash Equivalents $ 68,294 $ 20,152 Accounts Receivable 244,202 342,579 Inventories 20,424 16,623 Assets from Price Risk Management Activities 38,036 438 Other 13,621 15,073 ---------- ---------- TOTAL 384,577 394,865 OIL AND GAS PROPERTIES (SUCCESSFUL EFFORTS METHOD) 5,529,871 5,122,728 Less: Accumulated Depreciation, Depletion and Amortization (2,785,341) (2,597,721) ---------- ---------- Net Oil and Gas Properties 2,744,530 2,525,007 OTHER ASSETS 81,614 81,381 ---------- ---------- TOTAL ASSETS $ 3,210,721 $ 3,001,253 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $ 227,040 $ 246,468 Accrued Taxes Payable 134,124 78,838 Dividends Payable 5,069 4,525 Other 29,685 40,285 ---------- ---------- TOTAL 395,918 370,116 LONG-TERM DEBT 640,822 859,000 OTHER LIABILITIES 59,956 51,133 DEFERRED INCOME TAXES 455,439 340,079 SHAREHOLDERS' EQUITY Preferred Stock, $.01 Par, 10,000,000 Shares Authorized: Series B, 100,000 Shares Issued, Cumulative, $100,000,000 Liquidation Preference 97,998 97,879 Series D, 500 Shares Issued, Cumulative, $50,000,000 Liquidation Preference 49,375 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 10,563 4,221 Unearned Compensation (15,078) (3,756) Accumulated Other Comprehensive Income (37,159) (31,756) Retained Earnings 1,637,758 1,301,067 Common Stock Held in Treasury, 8,663,165 shares at June 30, 2001 and 7,825,708 shares at December 31, 2000 (286,118) (237,262) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 1,658,586 1,380,925 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,210,721 $ 3,001,253 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
5 PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) EOG RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> Six Months Ended June 30, - ------------------------------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------------------------------ <s> <c> <c> CASH FLOWS FROM OPERATING ACTIVITIES Reconciliation of Net Income to Net Operating Cash Inflows: Net Income $ 351,450 $ 119,007 Items Not Requiring Cash Depreciation, Depletion and Amortization 191,431 172,088 Impairments 32,031 18,525 Deferred Income Taxes 87,807 40,714 Other, Net 7,128 2,459 Exploration Costs 38,011 26,149 Dry Hole Costs 28,655 9,051 Net Assets from Price Risk Management Activities (35,805) - Losses on Sales of Reserves and Related Assets 1,128 1,650 Tax Benefits from Stock Options Exercised 8,039 11,593 Other, Net (1,232) (5,336) Changes in Components of Working Capital and Other Liabilities Accounts Receivable 100,205 (77,406) Inventories (3,801) 1,452 Accounts Payable (24,530) 5,624 Accrued Taxes Payable 55,579 (2,901) Other Liabilities 4,144 5,570 Other, Net (10,651) (6,279) Changes in Components of Working Capital Associated with Investing and Financing Activities (8,797) 5,633 -------- -------- NET OPERATING CASH INFLOWS 820,792 327,593 INVESTING CASH FLOWS Additions to Oil and Gas Properties (419,926) (175,416) Exploration Costs (38,011) (26,149) Dry Hole Costs (28,655) (9,051) Proceeds from Sales of Reserves and Related Assets 5,317 21,961 Changes in Components of Working Capital Associated with Investing Activities 6,860 (6,180) Other, Net (4,912) (15,866) -------- -------- NET INVESTING CASH OUTFLOWS (479,327) (210,701) FINANCING CASH FLOWS Long-Term Debt (218,178) (40,756) Dividends Paid (14,006) (12,517) Treasury Stock Purchased (80,125) (134,348) Proceeds from Sales of Treasury Stock 16,055 56,801 Other, Net 2,931 807 -------- -------- NET FINANCING CASH OUTFLOWS (293,323) (130,013) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 48,142 (13,121) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,152 24,836 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,294 $ 11,715 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
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 $2.2 million and $2.6 million for the three-month and six-month periods ended June 30, 2000, respectively. 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 six 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 six-month periods ended June 30, 2001, mark- to-market gains on commodity contracts were respectively $36.8 million and $36.3 million, of which $0.8 million and $0.5 million were realized gains for the respective periods. Following is a summary of EOG's derivative activities: - At June 30, 2001, EOG had outstanding swap contracts covering notional volumes of approximately 1.6 million barrels of crude oil and condensate for the period July 2001 to May 2002 at an average price of $27.36 per barrel. EOG elected not to designate these crude oil swap contracts as an accounting hedge of its crude oil production, and accordingly, is accounting for these swap contracts under mark-to-market accounting. At June 30, 2001, the fair value of these oil price swap contracts was $2.1 million. - During the period of April 30, 2001 to May 2, 2001, EOG entered into 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 the period July 2001 to November 2001 at an average premium of $0.15 per MMBtu. EOG accounts for these collars under mark-to-market accounting. At June 30, 2001, the fair value of these price collars was $35.8 million.
7 PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Continued) EOG RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - On June 29, 2001, EOG entered into price swap contracts covering notional volumes of 115,000 MMBtu/d for the period August 2001 to December 2001 at an average price of $3.38 per MMBtu and 50,000 MMBtu/d for the period January 2002 to December 2002 at an average price of $3.56 per MMBtu. EOG accounts for these swap contracts under mark-to- market accounting. At June 30, 2001, the fair value of these price swap contracts was negative $0.1 million. 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): <TABLE> Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Numerator for basic and diluted earnings per share - Net income available to common $133,446 $ 74,657 $345,972 $113,493 ======= ======= ======= ======= Denominator for basic earnings per share - Weighted average shares 115,870 116,666 116,127 117,247 Potential dilutive common shares - Stock options 1,996 2,397 2,175 1,413 Restricted stock and units 181 114 249 97 ------- ------- ------- ------- Denominator for diluted earnings per share - Adjusted weighted average shares 118,047 119,177 118,551 118,757 ======= ======= ======= ======= Net income per share of common stock Basic $ 1.15 $ 0.64 $ 2.98 $ 0.97 ======= ======= ======= ======= Diluted $ 1.13 $ 0.63 $ 2.92 $ 0.96 ======= ======= ======= ======= ------------------------------------------------------------------------------------------------------- </TABLE> 4. The following table presents the components of EOG's comprehensive income for the three-month and six-month periods ended June 30, 2001 and 2000 (in thousands): <TABLE> Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Net Income $136,203 $ 77,517 $351,450 $119,007 Other Comprehensive Income Unrealized Loss on Available-for-sale Security, net of tax (879) - (545) - Foreign Currency Translation Adjustments 12,097 (5,432) (4,858) (7,531) ------- ------- ------- ------- Comprehensive Income $147,421 $ 72,085 $346,047 $111,476 ======= ======= ======= ======= ------------------------------------------------------------------------------------------------------- </TABLE>
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 six-month periods ended June 30, 2001 and 2000 (in thousands): <TABLE> Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------------------------------------- 2001 2000 2001 2000 ------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> NET OPERATING REVENUES United States $ 398,211 $ 262,991 $ 902,200 $ 469,240 Canada 51,179 40,851 125,709 73,606 Trinidad 16,634 18,875 35,342 39,758 Other 24 10 50 19 --------- --------- --------- --------- TOTAL $ 466,048 $ 322,727 $1,063,301 $ 582,623 ========= ========= ========= ========= OPERATING INCOME (LOSS) United States $ 190,817 $ 110,878 $ 491,664 $ 170,671 Canada 33,217 19,315 86,122 33,441 Trinidad 10,504 10,401 16,489 17,432 Other (299) (1,359) (6,012) (2,099) --------- --------- --------- --------- TOTAL 234,239 139,235 588,263 219,445 --------- --------- --------- --------- RECONCILING ITEMS Other Income, Net 1,250 763 611 780 Interest Expense, Net 10,624 15,581 23,913 30,149 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES $ 224,865 $ 124,417 $ 564,961 $ 190,076 ========= ========= ========= ========= </TABLE> 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 materially adverse effect on the financial condition or results of operations of EOG. 7. During the first half of 2001, EOG repurchased 1.8 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 June 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 June 30, 2001 vs. Three Months Ended June 30, 2000 EOG generated second quarter net income available to common of $133 million compared to $75 million for the second quarter of 2000. Net operating revenues were $466 million compared to $323 million for the second quarter of 2000. Following is an explanation of the variances causing this increase. Wellhead volume and price statistics are summarized below: - ----------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------- Natural Gas Volumes (MMcf per day)(1) United States 703 633 Canada 123 131 ----- ----- North America 826 764 Trinidad 105 116 ----- ----- TOTAL 931 880 ===== ===== Average Natural Gas Prices ($/Mcf)(2) United States $ 4.61 $ 3.44 Canada 4.14 2.89 North America Composite 4.54 3.35 Trinidad 1.22 1.17 COMPOSITE 4.16 3.06 Crude Oil/Condensate Volumes (MBbl per day)(1) United States 23.5 22.8 Canada 1.7 2.3 ----- ----- North America 25.2 25.1 Trinidad 1.9 2.5 ----- ----- TOTAL 27.1 27.6 ===== ===== Average Crude Oil/Condensate Prices ($/Bbl)(2) United States $26.82 $28.37 Canada 24.99 25.66 North America Composite 26.69 28.12 Trinidad 28.73 28.54 COMPOSITE 26.84 28.16 Natural Gas Liquids Volumes (MBbl per day)(1) United States 3.8 4.3 Canada 0.5 0.8 ----- ----- TOTAL 4.3 5.1 Average Natural Gas Liquids Prices ($/Bbl) (2) United States $17.60 $18.64 Canada 17.71 15.24 COMPOSITE 17.61 18.13 Natural Gas Equivalent Volumes (MMcfe per day)(3) United States 867 795 Canada 136 150 ----- ----- North America 1,003 945 Trinidad 117 131 ----- ----- TOTAL 1,120 1,076 ===== ===== Total Bcfe(3) Deliveries 102 98 - ----------------------------------------------------------------------- (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 increased 31% to $426 million in the second quarter of 2001 compared to $324 million in the second quarter of 2000, primarily due to higher average wellhead natural gas prices worldwide and higher U.S. wellhead natural gas deliveries. Average wellhead natural gas prices were up by 36%, increasing net operating revenues by $93 million. Average wellhead crude oil and condensate prices were 5% lower than the comparable period in 2000, decreasing net operating revenues by $3 million. Second quarter 2001 U.S. wellhead natural gas deliveries were approximately 11% higher than the comparable period in 2000. The increase in volumes was primarily due to increased production in the Midland, Offshore and Tyler divisions and higher than normal prior period adjustments. Combined with reduced production in Trinidad, due to takes above the take or pay contracted volume by the Trinidadian government in the second quarter of 2000, and decreased production in the Canada division, the overall natural gas production was 6% higher than the comparable period in 2000, increasing net operating revenues by $14 million. Wellhead crude oil and condensate deliveries were 2% lower than the prior year period, decreasing net operating revenues by $1 million. The decrease was primarily due to decreased crude oil production in the Canada and International divisions. Natural gas liquids decreased net operating revenues by $2 million primarily due to a decrease in prices of 3% and a decrease in deliveries of 16%. During the second quarter, EOG recognized mark-to-market gains on commodity contracts of $36.8 million. Operating expenses of $232 million for the second quarter of 2001 were approximately $48 million higher than the second quarter of 2000. Taxes other than income were $5 million higher due to increased wellhead revenues in the U.S. Depreciation, depletion and amortization ("DD&A") increased $10 million primarily due to increased production volumes and increased per unit DD&A rates in certain North America locations. Lease and well expenses were $11 million higher than the comparable period in 2000 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 of $18 million and dry hole expenses of $13 million increased $5 million and $10 million, respectively, primarily due to increased North America exploratory drilling activities. Impairments increased $6 million to $16 million in the second quarter of 2001 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, general and administrative ("G&A") expenses, interest expense, and taxes other than income averaged $1.92 per Mcfe during the second quarter of 2001 compared to $1.76 per Mcfe during the second quarter of 2000. The increase was primarily due to a higher per unit rate of DD&A, lease and well, G&A expense and taxes other than income partially offset by a lower per unit rate of interest expense. Income tax provision for the second quarter of 2001 was $89 million (effective tax rate of 39.4%) compared to $47 million (effective tax rate of 37.8%) for the comparable period of 2000, primarily due to higher 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 - --------------------- Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000 In the first half of 2001, EOG generated net income available to common of $346 million compared to $113 million for the first half of 2000. Net operating revenues for the first half of 2001 were $1,063 million as compared to $583 million for the first half of 2000. Wellhead volume and price statistics are summarized below: - ----------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------- Natural Gas Volumes (MMcf per day) United States 704 644 Canada 120 132 ----- ----- North America 824 776 Trinidad 112 122 ----- ----- TOTAL 936 898 ===== ===== Average Natural Gas Prices ($/Mcf) United States $ 5.78 $ 2.98 Canada 5.33 2.53 North America Composite 5.72 2.90 Trinidad 1.22 1.17 COMPOSITE 5.18 2.67 Crude Oil/Condensate Volumes (MBbl per day) United States 23.2 21.7 Canada 1.8 2.3 ----- ----- North America 25.0 24.0 Trinidad 2.0 2.8 ----- ----- TOTAL 27.0 26.8 ===== ===== Average Crude Oil/Condensate Prices ($/Bbl) United States $27.44 $28.26 Canada 25.12 26.24 North America Composite 27.28 28.07 Trinidad 28.79 28.17 COMPOSITE 27.40 28.08 Natural Gas Liquids Volumes (MBbl per day) United States 3.4 4.3 Canada 0.5 0.8 ----- ----- TOTAL 3.9 5.1 Average Natural Gas Liquids Prices ($/Bbl) United States $20.41 $19.64 Canada 20.39 14.44 COMPOSITE 20.41 18.85 Natural Gas Equivalent Volumes (MMcfe per day) United States 864 801 Canada 133 150 ----- ----- North America 997 951 Trinidad 124 138 ----- ----- TOTAL 1,121 1,089 ===== ===== Total Bcfe Deliveries 203 198
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 74% to $1,025 million in the first half of 2001 compared to $590 million in the first half of 2000. Average wellhead natural gas prices for the first half of 2001 were approximately 94% higher than the comparable period of 2000 increasing net operating revenues by approximately $425 million. Average wellhead crude oil and condensate prices were down by 2%, decreasing net operating revenues by $3 million. First half 2001 wellhead natural gas deliveries were 4% higher than the comparable period in 2000, increasing net operating revenues by $16 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 1% higher than the prior year period, increasing net operating revenues by $1 million. The increase was primarily due to increased crude oil and condensate production in the U.S., partially offset by decreased crude oil production from the Canada and International divisions. Natural gas liquids decreased net operating revenues by $3 million primarily due to a decrease in deliveries of 24%, partially offset by an increase in prices of 8%. Other marketing activities associated with sales and purchases of natural gas, and closed natural gas and crude oil price hedging and trading transactions increased net operating revenues by $2 million compared to a decrease of $9 million in the first half of 2000. This increase in 2001 was primarily due to a revenue increase from natural gas marketing activities. The $9 million revenue decrease in 2000 primarily related to natural gas marketing activities and hedging contracts closed in prior periods. During the first six months of 2001, EOG recognized mark-to-market gains on commodity contracts of $36.3 million. Operating expenses of $475 million for the first half of 2001 were approximately $112 million higher than the comparable period in 2000. Taxes other than income were $23 million higher primarily due to increased wellhead revenues in the U.S. Lease and well expenses were $20 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 $12 million and $20 million higher than the comparable period a year ago due primarily to increased North America and International exploratory activities. DD&A increased $19 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 $14 million to $32 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 $1.97 per Mcfe during the first half of 2001 compared to $1.71 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 six months ended June 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 $821 million for the first six months of 2001 increased approximately $493 million as compared to the first six months of 2000 primarily reflecting higher operating revenues, partially offset by higher cash operating expenses. Net investing cash outflows of approximately $479 million for the first six months of 2001 increased by $269 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 six months of 2001 and 2000 are as follows (in millions): <TABLE> 2001 2000 ------------------------------ ------------------------------ Drilling Acquisition Total Drilling Acquisition Total -------- ----------- ----- -------- ----------- ----- <s> <c> <c> <c> <c> <c> <c> United States $ 356 $ 3 $ 359 $ 175 $ 2 $ 177 Canada 28 71 99 21 - 21 ------ ------ ---- ------ ----- ---- North America 384 74 458 196 2 198 Trinidad 21 - 21 10 - 10 Other 8 - 8 3 - 3 ------ ------ ---- ------ ----- ---- TOTAL $ 413 $ 74 $ 487 $ 209 $ 2 $ 211 ====== ====== ==== ====== ===== ==== </TABLE> Exploration and development expenditures of $487 million for the first six months of 2001 were $276 million higher than the prior year period due primarily to increased 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 $293 million for the first six months of 2001 versus $130 million for the comparable prior year period. Financing activities for 2001 included repayment of debt of $218 million, repurchases of EOG's common stock of $80 million, proceeds from sales of treasury stock of $16 million and cash dividend payments of $14 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 half of 2001, EOG repurchased 1.8 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 the Company 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. At June 30, 2001, EOG had outstanding swap contracts covering notional volumes of approximately 1.6 million barrels of crude oil and condensate for the period July 2001 to May 2002 at an average price of $27.36 per barrel. EOG elected not to designate these crude oil swap contracts as an accounting hedge of its crude oil production, and accordingly, is accounting for these swap contracts under mark-to-market accounting. At June 30, 2001, the fair value of these oil price swap contracts was $2.1 million. During the period of April 30, 2001 to May 2, 2001, EOG entered into 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 the period July 2001 to November 2001 at an average premium of $0.15 per MMBtu. EOG accounts for these collars under mark-to-market accounting. At June 30, 2001, the fair value of these price collars was $31.2 million. On June 29, 2001, EOG entered into price swap contracts covering notional volumes of 115,000 MMBtu/d for the period August 2001 to December 2001 at an average price of $3.38 per MMBtu and 50,000 MMBtu/d for the period January 2002 to December 2002 at an average price of $3.56 per MMBtu. EOG accounts for these swap contracts under mark-to-market accounting. At June 30, 2001, the fair value of these price swap contracts was negative $0.1 million. 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 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; 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 5 to Consolidated Financial Statements, which is incorporated herein by reference. ITEM 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of EOG Resources, Inc. was held on May 8, 2001, in Houston, Texas, for the purpose of electing a board of directors, ratifying the appointment of auditors, approving an employee stock purchase plan and approving an executive officer annual bonus plan. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's solicitations. (a) Each of the directors nominated by the Board and listed in the proxy statement was elected with votes as follows: Shares Shares Nominee For Withheld ------------------- ---------- --------- Fred C. Ackman 97,424,456 704,163 George A. Alcorn 97,436,997 691,622 Mark G. Papa 95,319,451 2,809,168 Edward Randall, III 97,414,660 713,959 Edmund P. Segner, III 95,336,518 2,792,101 Donald F. Textor 97,442,531 686,088 Frank G. Wisner 97,415,363 713,256 (b) The appointment of Arthur Andersen LLP, independent public accountants, as auditors for the year ending December 31, 2001 was approved by the following vote: 97,505,818 shares for; 290,379 shares against; and 332,422 shares abstaining. (c) EOG's Employee Stock Purchase Plan was approved by the following vote: 97,117,244 shares for; 598,136 shares against; and 413,239 shares abstaining. (d) EOG's Executive Officer Annual Bonus Plan was approved by the following vote: 90,707,503 shares for; 6,928,976 shares against; and 492,140 shares abstaining. ITEM 5. Other Information Fred C. Ackman, a director since 1989, when EOG first went public, passed away on July 8, 2001. He was an active member of each of the working Board Committees and was Chairman of the Audit Committee for many years. In addition, Mr. Ackman served as Chairman of the Independent Committee that was formed to evaluate and recommend to the Board of Directors the Share Exchange Agreement between EOG and Enron Corp. in 1999. 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 April 20, 2001, to provide estimate for the second quarter and full year 2001 in Item 9 - Regulation FD Disclosure. Current Report on Form 8-K filed on May 5, 2001, to report certain natural gas price swap and collar contracts in Item 5 - Other Events. Current Report on Form 8-K filed on June 29, 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: July 31, 2001 By /S/ T. K. DRIGGERS --------------------------- T. K. Driggers Vice President, Accounting and Land Administration (Principal Accounting Officer)
17 <TABLE> 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 Six Months Ended ------------------------------------------------- June 30, 2001 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> <c> <c> EARNINGS AVAILABLE FOR FIXED CHARGES: Net Income $351,450 $396,931 $569,094 $ 56,171 $121,970 $140,008 Less: Capitalized Interest Expense (4,187) (6,708) (10,594) (12,711) (13,706) (9,136) Add: Fixed Charges 31,544 72,833 77,837 66,982 47,108 27,114 Income Tax Provision (Benefit) 213,511 236,626 (1,382) 4,111 41,500 50,954 ------- ------- ------- ------- ------- ------- EARNINGS AVAILABLE $592,318 $699,682 $634,955 $114,553 $196,872 $208,940 ======= ======= ======= ======= ======= ======= FIXED CHARGES: Interest Expense $ 23,913 $ 61,006 $ 61,819 $ 48,463 $ 27,369 $ 12,370 Capitalized Interest 4,187 6,708 10,594 12,711 13,706 9,136 Rental Expense Representative of Interest Factor 3,444 5,119 5,424 5,808 6,033 5,608 ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES 31,544 72,833 77,837 66,982 47,108 27,114 Preferred Dividends on a Pre-tax Basis 8,806 17,602 660 - - - ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES AND PREFERRED DIVIDENDS $ 40,350 $ 90,435 $ 78,497 $ 66,982 $ 47,108 $ 27,114 ======= ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 18.78 9.61 8.16 1.71 4.18 7.71 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 14.68 7.74 8.09 1.71 4.18 7.71 </TABLE>