EOG Resources Reports Second Quarter 2012 Results, Increases 2012 Crude Oil Production Growth Target to 37 Percent

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EOG Resources, Inc. (NYSE: EOG) today reported second quarter 2012 net income of $395.8 million, or $1.47 per share. This compares to second quarter 2011 net income of $295.6 million, or $1.10 per share.

Consistent with some analysts' practice of matching realizations to settlement months and making certain other adjustments in order to exclude one time items, adjusted non GAAP net income for the second quarter 2012 was $312.4 million, or $1.16 per share. Adjusted non GAAP net income for the second quarter 2011 was $299.2 million, or $1.11 per share.

The results for the second quarter 2012 included impairments of $1.5 million, net of tax ($0.01 per share) related to certain non-core North American assets, net gains on asset dispositions of $75.1 million, net of tax ($0.28 per share) and a previously disclosed non cash net gain of $188.4 million ($120.7 million after tax, or $0.45 per share) on the mark to market of financial commodity contracts. During the quarter, the net cash inflow related to financial commodity contracts was $173.2 million ($110.9 million after tax, or $0.41 per share). (Please refer to the attached tables for the reconciliation of adjusted non-GAAP net income to GAAP net income.)

With 86 percent of North American wellhead revenues currently derived from crude oil, condensate and natural gas liquids, EOG delivered strong earnings per share growth of 64 percent for the first half of 2012 compared to the same period in 2011. Discretionary cash flow increased 29 percent and adjusted EBITDAX rose 28 percent over the first half of 2011. (Please refer to the attached tables for the reconciliation of non-GAAP discretionary cash flow to net cash provided by operating activities (GAAP) and adjusted EBITDAX (non-GAAP) to income before interest expense and income taxes (GAAP).)

"EOG's financial and operating results get better and better. We are achieving this consistent string of home runs because EOG has captured the finest inventory of onshore crude oil assets in the entire United States and has the technical acumen to maximize reserve recoveries," said Mark G. Papa, Chairman and Chief Executive Officer. "EOG is the largest crude oil producer in the South Texas Eagle Ford and North Dakota Bakken with the sweet spot positions in both plays. In addition, we are uniquely positioned to market a significant portion of this crude oil at robust Brent type pricing through our own rail offloading facility at St. James, Louisiana, and to reach the Houston Gulf Coast market via the recently completed Enterprise Eagle Ford pipeline."

Read the entire EOG earnings report

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Why Devon Is Worth $83 Per Share

From guest blogger The Global Value Investor.....

Devon (DVN) is a energy company listed in S&P 500 and engages in exploration, development and production of oil and natural gas. Competitors include Chesapeake Energy Corporation (CHK), Encana Corporation (ECA) and EOG Resources (EOG). Devon has a market capitalization of $23.5 billion and revenues of $11.8 billion.

Risks refer to a price drop in the underlying commodities, particularly gas liquids as this article suggests. Now, missing analyst estimates is always a possibility, as is the decline in price of market traded commodities. Since I am long term oriented investor, I do not assign much weight to near term price fluctuations and suggest, investors use the current weakness in Devon, and stocks in general, to their advantage and increase their equity exposure.

Why I like Devon
From a value investor perspective, the stock is trading below intrinsic value. The company is achieving an operating margin of 44% and a decent, yet not spectacular, return on equity of 10.5%.

Investors sometimes point out the debt load of Devon which seems to be quite high at $11 billion dollars. However, they neglect the around $7 billion cash position on Devon's balance sheet, bringing its net debt position down to only $3.7 billion, or only 16% of current market value of equity. Factoring the cash position, Devon is significantly less leveraged than Chesapeake for example.

In fact, Devon's cash position allows for major capital expenditures for its US and Canadian operations that are going to drive EPS going forward. Currently, analysts estimate about 9.55% earnings growth per year over a 5 year period. EPS growth is expected to increase by over 30% over next year, which makes the investment proposition even more attractive.

Analysts estimate a 2013 EPS on average of $5.53. Applying a multiple of only 15x forward earnings (which is conservative because it still discounts Devon's strong cash flow prospects from its US operations, its high level of proven reserves and strong balance sheet) would yield an intrinsic value estimate of $82.95 - representing about 43% upside potential.

Chart traders may also find this natural gas play interesting. The stock has just rebounded from its lower bound trend canal at just below $55 and regained strength after testing its support level. The stock now sits just under the upper bound of its short term trend canal that it defined in April, when the stock started sliding downwards from its 52 week high.

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Carl Icahn Bought Chesapeake Energy, Should You?

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Last week, it was announced that corporate raider Carl Icahn was up to his usual antics, acquiring a 7.6 percent activist stake in the natural gas E&P giant Chesapeake Energy Corp (NYSE: CHK). In a move that makes him the company’s third largest shareholder, Icahn bought 50 million shares of CHK worth nearly $800 million between April 19th and May 24th. Icahn has pledged to make a host of changes within Chesapeake, beginning with his appointment of four new board members. In the longer term, it is expected that he will look for CHK to shore up its troubled business model, which has led to cash flow shortages, and large declines in shareholder wealth. Over the past year, the company’s stock has lost nearly 50 percent, having recently hit a post recession low below $14 a share. The everyday investor may be wise to consider following Icahn into Chesapeake now, due to stock’s undervaluation, strong earnings growth, and future expansion potential.

One thing that sets this E&P operator, which stands for exploration and production, apart from its competitors is its dominance in the unconventional natural gas arena. In layman’s terms, unconventional natural gas is not extracted from traditional well based platforms; instead, it is gathered in a less economical manner.
 In CHK’s case, it extracts natural gas from six distinct sources.....

(1) gas below 15,000 feet underground
(2) gas trapped in sandstone or limestone
(3) shale deposits
(4) coalbed methane
(5) geopressurized gas
(6) methane hydrates.

 The latter is the newest form of natural gas in Chesapeake’s energy staple. From a macroeconomic standpoint, unconventional natural gas usage has nearly doubled in the past decade, and currently comprises 42 percent of all natural gas production in the U.S. It is estimated that this figure will reach 64 percent by 2020, driven by growth in the shale and coalbed markets.

Looking at its income statement, CHK has seen revenues remain stagnant since the recession, though the industry’s average has actually shrank during this time period, as it has yielded a 3-year average growth rate of -2.8 percent. More notably, competitors like Devon Energy (NYSE: DVN) at -6.2 percent, Anadarko Petroleum (NYSE: APC) at -2.7 percent have also experienced shrinking revenues, though EOG Resources (NYSE: EOG) and Apache Corp (NYSE: APA) have seen positive top line growth. From an earnings standpoint, CHK has been more impressive, generating a 3-year average EPS growth of 35.6 percent, higher than the industry average (-5.4%) and peers DVN, APC, and EOG.

From a valuation standpoint, CHK is undervalued, as it currently sports a P/E ratio (6.4X) below the industry average (16.3X), and it’s own 10-year historical average (13.5X). Moreover, shares of CHK have historically traded at a 20 percent discount relative to the S&P’s average over the past decade. This year, the stock is cheaper than usual, trading at a 58 percent discount. Using the industry average P/E in conjunction with a modest year-ahead EPS forecast of $1.80, we can set a target price of $29.34 by next spring.

It should also be pointed out that Chesapeake has had a host of cash flow problems, reporting negative free cash flows of at least -$3.0 billion since 2007. Interestingly, the company reported recently that it was expecting a positive FCF in 2012, due to sales of assets in its Mississippi Lime, Permian Basin, and Texas Panhandle Granite Wash regions. Icahn and other CHK shareholders are hoping that these sales can offset historic lows in natural gas prices, and it seems that the markets are responding favorably. Since company execs announced these plans on May 14th, shares of CHK have risen nearly 2 percent.

Looking to the hedge fund industry, CHK has a favorite of mega fund managers like Mason Hawkins, Curtis Macnguyen, John Rogers, and Peter Eichler over the past few years. Moreover, this month’s 13F filings show that funds like Millennium Management, Tetrem Capital Management, and Samlyn Capital increased their holdings in CHK in the first quarter of 2012. Whether its Carl Icahn’s promise to restore shareholder value back to this natural gas E&P, or the stock’s attractive valuation, investors may be wise to consider a long position in Chesapeake (CHK).

Posted courtesy of our friends at Insider Monkey.Com. If you aren't following the hedge funds you should be, and you should be doing it at Insider Monkey.Com

Here is the simple truth about trends

Could Crude Oil Prices Intensify a Pending SP 500 Sell Off?

Last week we received reports that the unemployment rate in the United States was improving markedly. In addition, sentiment numbers were released that confirmed my previous speculation that market participants were becoming more and more bullish as prices in the S&P 500 edged higher. The exact numbers that came in demonstrated that bullish sentiment had not reached current lofty levels since February 11, 2011. The table below illustrates the most recent sentiment survey:

Chart Courtesy of the American Association of Individual Investors

Clearly investors are growing considerably more bullish at the present time.  The bullishness being exhibited by market participants is rather interesting considering the notable headwinds that exist in the European sovereign debt markets, the geopolitical risk seen in light sweet crude oil futures, and the potential for a recession to play out in Europe.

To further illustrate the complacency in the S&P 500, the daily chart of the Volatility Index is shown below:

The VIX has been falling for several weeks and is on the verge of making new lows this week. If prices work down into the 16 – 18 price range a low risk entry to get long volatility may present itself. For option traders, when the VIX is at present levels or lower there are potentially significant risks associated with increases in volatility.

My expectations have not changed considerably since my article was posted last week. However, I continue to believe that the bulls will push prices higher yet in what I believe could be the mother of all bull traps. Let me explain. As shown above, we have strong bullish sentiment among market participants paired with general complacency regarding risk assets.

As I pointed out last week, my expectation if for the S&P 500 to top somewhere between 1,292 and 1,325. A lot of capital is sitting on the sidelines presently and if prices continue to work higher I suspect that a move above the 1,292 price level will trigger a lot of long entries back into stocks or other risk assets.

We could see prices extend higher while the “smart” money sells into the rally. Retail investors and traders will point to the inverse head and shoulders pattern on the daily chart of the S&P 500 and the breakout above the key 1,292 price level. The pervasive fear of missing a strong move higher will help fuel long entries from retail investors.

At the same time retail investors begin buying, a lot of committed shorts will be stopped out if prices push significantly above the 1,292 area or higher toward the more the obvious 1,300 price level. Thus, there will be few shorts to help support prices should a failed breakout transpire. A perfect storm could essentially be born from the lack of shorts to hold prices higher paired with the trapping of late coming bulls.

The daily chart of the S&P 500 Index below illustrates what I expect to take place in the next few weeks:

I want to reiterate to readers that it is not totally out of the question that the 1,292 price level could hold as resistance or that we could roll over early this coming week. Additionally a breakout over 1,330 will certainly lead to a test of the 2011 highs around the 1,370 area.

If the S&P 500 pushes above the 1,370 area we could witness a strong bull market play out. Ask yourself this question, what reasons could produce such a rally and what are the probabilities of that outcome transpiring in the next few weeks?

Obviously earnings season is going to be upon us shortly and if earnings come in below expectations a potential sell off could intensify. Furthermore, economic data in Europe continues to weaken and slower growth appears to be manifesting within the core Eurozone countries like Germany and France. If most of Europe plunges into a recession, deficits will widen beyond economic forecasts and the strain in the sovereign debt market of the Eurozone will increase dramatically.

One key element that many analysts are not even discussing is the potential for higher oil prices to present additional economic headwinds for developed western economies.

Clearly the situation in the Middle East is unstable, specifically what we are seeing taking place in the Strait of Hormuz involving Iran. If a “black swan” event occurs such as a military conflict between the United States and Iran or Israel and Iran the prices of oil will surge.

In a recent research piece put out by SocGen, nearly every scenario that is referenced involves significantly higher oil prices. According to the report, the Eurozone is considering the banning of imported Iranian oil which could cause Brent crude oil prices to surge to a range of $120 – $150 / barrel according to SocGen.

The other scenario involves the complete shut down of the Strait of Hormuz by Iran. If this shutdown were to persist for several days the expectation at SocGen for Brent crude oil prices is in the $150 – $200 / barrel price range.

Clearly if either of these two scenarios play out in real time, the impact that higher oil prices will have on European and U.S. economies could be catastrophic.

The daily chart of light sweet crude oil futures is shown below:

I want readers to note that I am not suggesting that oil prices are going to rise or fall, just outlining the report from SocGen about where they expect oil prices to go should either of the two scenarios presented above play out. If oil prices were to work to the $125 / barrel level and remain there for a period of time, I would anticipate a very sharp decline in the S&P 500.

Currently there are a lot of headwinds for bulls, some of which could persist for quite some time. I intend to remain objective and focus on collecting time premium as a primary profit engine for my Options Trading service.

Once I see a confirmed move in either direction I will get involved. For now, I intend to let others do the heavy lifting until a low risk, high probability trade setup presents itself. Risk is increasingly high.

Get these weekly reports and trade ideas free here at my Option Signals Website

JW Jones

Musings: Separating Wheat from The Chaff of Unconventionals

Increasingly, petroleum industry executives are speaking out about the significance of the unconventional hydrocarbon resources in this country, although they do not always agree about the longer term outlook for the resources. In some cases we question the extrapolations speakers are making about the importance of unconventional resources in the nation’s long range energy mix and, for that matter, the world’s mix.

Recently, several senior energy executives spoke at industry meetings about their views of these trends. One presentation that received media attention was by Mark Papa, CEO of EOG Resources, Inc. (EOG). His presentation was to a joint meeting of the Houston chapters of the IPAA and TIPRO. With respect to the success of unconventional drilling and production, Mr. Papa called it a “game changer” for the industry, something about which most industry participants would readily agree.

Horizontal drilling and hydraulic fracturing technologies have dramatically altered the near term supply picture and have forced energy prognosticators to recast their forecasting models. Most of them now are calling into question the need for the U.S. to import as many hydrocarbons as previously thought. Optimism is fine, but euphoria can be dangerous as it tends to create blind spots that become our downfall.

According to Mr. Papa, “There is clearly sufficient North American gas supply to last for a bunch of years; 50 years at least. And there is clearly no need for us to import LNG (liquefied natural gas) for multiple years to come.” At the present time, natural gas supplies are swamping the market due to the drop in demand associated with an overall decline in energy consumption due to the lasting effects of the recession and the surge in unconventional supply due to accelerated drilling dictated by the need for producers to hold leased acreage for which they have offered huge bonuses.......Read the entire article.


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