EOG Resources (EOG -0.01%) has been on a tear to start 2022. Its nearly 30% year-to-date gain stands in stark contrast to the S&P 500's 10% loss over the same period.
But no matter how hot a particular stock or sector may be, earnings results matter. If a company misses expectations, provides poor guidance, or fails to offer a compelling strategy, it can lose investors' trust, and its share price can tumble. Long-term investors need to keep tabs on how their stocks perform -- and not just in terms of the share price. Rather, they should use quarterly results to gauge a company's financial strength and the management team's credibility.
With that in mind, let's look at how EOG performed.
Beating on the top line, missing on the bottom
EOG reported adjusted earnings per share for the fourth quarter of 2021 (the period ending Dec. 31) of $3.09, which missed the consensus estimate of $3.21. Nevertheless, this figure was well above the year-earlier amount of $0.71.
Revenues of $6 billion beat the consensus estimate of $5.8 billion and shattered the year-earlier figure of $2.9 billion. Higher sale prices for oil and natural gas were the main driver of revenues -- along with increased production levels.
Total production rose 2.2% from the third quarter -- despite crude oil and natural gas liquids production holding steady quarter-over-quarter. Meanwhile, natural gas production jumped by 7.8% and drove the overall increase. All told, EOG's production growth surpassed management guidance for a more modest 1.4% rise during the quarter.
While its $3.09 earnings per share fell short of consensus estimates, it was a quarterly earnings record. As oil and gas prices have skyrocketed, so has EOG's cash flow. Fourth-quarter free cash flow surged 65% quarter-over-quarter to $2.2 billion, allowing the company to declare a special dividend of $1.00 per share payable at the end of March. What's more, cash on hand rose to $5.2 billion, bringing net debt to zero.
By nearly every measure, it was another solid quarter. However, there was what you might call a fly in the ointment: rising costs.
Image source: Getty images.
Rising costs and the impact of inflation
For any business, rising costs can eat away at earnings. And one of the biggest drivers of costs is inflation. Year-over-year measures of inflation, such as the consumer price index, have reached 40-year highs at 7.5%.
When it comes to EOG, inflation's impact is noticeable. Cash operating costs for the fourth quarter came in at $10.56 per barrel of oil equivalent (Boe for short, an industry term that provides a standardized metric for oil, natural gas, and natural gas liquids production). This outpaced management's guidance of $10.15/Boe and was up from $10.00/Boe in the third quarter.
The most significant increases came from lease and well operating expenses (LOEs for short). LOEs are the costs of keeping a well functional following the initial drilling expenditures. It includes the salaries of the operators who monitor and maintain the site. All told, EOG's lease and well operating expenses jumped to $4.09 per Boe, $0.34 above guidance, and well above the $3.48 per Boe in the third quarter. In other words, EOG's costs of keeping its oil and gas flowing have jumped 17.5% in three months.
What's more, general and administrative costs (G&A) were higher than management expected. These are administrative-employee-related costs, such as salaries, benefits, and bonuses. Fourth-quarter G&A expenses were $1.75/Boe, 12.9% above guidance of $1.55.
This all hints at the increasing pinch of inflation on EOG's bottom line. Increasing costs for labor, equipment, and transportation outran management's guidance and chipped away at earnings -- despite the rising prices for oil and natural gas.
What is the takeaway for investors?
On its most recent earnings call, management committed to keeping well operating expenses flat in 2022 through a combination of "innovation and technical advances, contracting for services, supply chain management, self-sourcing and materials." EOG plans to self-source local water and sand supplies which are both used in their operations. By using local sand and water the company hopes to offset some inflationary pressure.
Keeping year-over-year costs flat might be an ambitious goal, given current levels of inflation. But if management can deliver, it would mean significant results for EOG -- and perhaps significant returns for investors, too.
