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Why EOG Expects a Strong Start to 2016

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EOG’s 3Q15 revenues

EOG Resources (EOG) released its fiscal 3Q15 financial results on November 5. We will discuss its latest quarterly results in this series. First up is a snapshot of EOG’s 3Q15 revenues and earnings. The company recorded $2.2 billion in net operating revenues in 3Q15, down ~58% from $5.1 billion recorded in 3Q14. EOG’s revenues for the latest quarter fell due to lower crude oil, natural gas, and natural gas liquids (or NGLs) production and lower price realizations.

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EOG Resources’ 3Q15 earnings

EOG Resources recorded $4.1 billion in net loss in 3Q15 versus a $1.1 billion net income in 3Q14. Net income margin slumped to a negative 187% in 3Q15 from a positive ~22% a year earlier. Net income margin is net income attributable to EOG shareholders divided by total revenues for the quarter. Continue reading to find out why the company’s net income crashed in 3Q15.

EOG’s impairment charge and derivatives gains

In 3Q15, EOG Resources recorded a $6.3 billion pre-tax net loss related to impairment charges. The company wrote down its legacy-proved oil and gas properties and related assets. The crude oil price slump, which started in June last year, triggered the impairment charges. In addition, EOG recorded $29 million in gains on mark-to-market commodity derivative contracts in 3Q15. In comparison, such gains amounted to $469 million in the corresponding quarter last year. In Market Realist’s previous series on EOG Resources, we discussed why investors could expect lower net earnings in 3Q15. Read Will EOG Resources’ Expected 3Q15 Earnings Crash? to know more.

Management’s outlook

EOG Resources expects to see improved performance in 2016. It also expects to complete many drilled but uncompleted wells (or DUC) in 2016. Billy Helms, EOG’s executive vice president, commented in the 3Q15 conference call, “EOG is uniquely positioned for strong performance next year. We’ll enter 2016 with a large high quality inventory of drilled but uncompleted wells and we’ve few capital commitments, therefore we have flexibility with respect to our CapEx program. The highest return use of our capital next year will be to complete many of our DUCs in the first half of the year. This will allow us to have a strong start to 2016.”

Pioneer Natural Resources (PXD), EOG Resources’ upstream peer, recorded a 4% decline in 3Q15 adjusted revenues over 3Q14. PXD’s market capitalization currently stands at ~$21 billion, much lower than EOG’s $47 billion market capitalization. EOG Resources makes up 0.3% of the SPDR S&P 500 ETF (SPY).

Next, we will discuss EOG’s earnings versus Wall Street’s estimates.

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