EOG Resources Inc. (NYSE:EOG)

The period under review demonstrates a significant evolution in financial performance, as measured by economic profit. Initially, the entity experienced substantial economic losses, which gradually diminished before stabilizing at a negative, though reduced, level. This analysis details the observed trends in net operating profit after taxes, cost of capital, invested capital, and ultimately, economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited a volatile pattern. Beginning with a considerable loss in 2015, it improved substantially, turning positive in 2017. While remaining positive through 2019, NOPAT decreased from its peak in 2018, indicating a potential slowing of operational profitability. The magnitude of the initial loss in 2015 was significantly larger than any subsequent decline from the 2018 high.

Cost of Capital

The cost of capital remained relatively stable throughout the period, fluctuating within a narrow range between 16.96% and 17.97%. A slight decrease was observed in 2019, potentially reflecting changes in market conditions or the entity’s risk profile. However, the overall consistency suggests that the fundamental cost of financing operations remained largely unchanged.

Invested Capital

Invested capital demonstrated a consistent upward trend. From 2015 to 2019, the amount of capital employed in the business increased steadily, indicating ongoing investment in operations and growth initiatives. The largest increase occurred between 2017 and 2018, coinciding with a peak in NOPAT.

Economic Profit

Economic profit, representing the difference between NOPAT and the cost of capital applied to invested capital, consistently registered as a negative value across all years examined. The magnitude of the economic loss decreased from 2015 to 2018, suggesting improving efficiency in capital allocation. However, economic profit worsened in 2019, despite positive NOPAT, likely due to the continued increase in invested capital and a slight decrease in NOPAT. The trend indicates that while operational profitability improved, the returns generated were insufficient to cover the cost of the capital employed.

In summary, the entity transitioned from substantial economic losses to reduced losses, driven by improvements in NOPAT and increasing invested capital. However, the persistent negative economic profit suggests that the entity’s investments, while generating positive operational income, are not yet yielding returns exceeding the cost of capital. The increase in economic loss in 2019 warrants further investigation to determine the underlying causes and potential corrective actions.

The financial data reveals significant fluctuations in the company's profitability and operating performance over the five-year period.

Net Income (Loss)

There is a marked improvement from a substantial loss of approximately $4.52 billion in 2015 to a more moderate loss of about $1.10 billion in 2016. This negative trend reverses in 2017 when the company reports a net income of roughly $2.58 billion. The upward trajectory continues through 2018 and 2019, with net income increasing to approximately $3.42 billion and then slightly declining to about $2.73 billion, respectively. This pattern indicates a recovery and stabilization of net profitability after the initial losses in 2015 and 2016.

Net Operating Profit After Taxes (NOPAT)

The NOPAT data exhibits a similar trend to net income, with significant losses recorded in 2015 and 2016, amounting to approximately $6.84 billion and $1.42 billion, respectively. The company moves into positive territory in 2017 with a NOPAT of about $784 million, which then substantially increases to around $4.67 billion in 2018. There is a slight decrease in NOPAT to approximately $3.77 billion in 2019. These changes suggest improvements in core operational efficiency and profitability through the period, particularly from 2017 onwards.

Overall, the data indicates a transition from heavy losses to consistent profitability, reflecting either operational improvements, favorable market conditions, or other strategic adjustments that significantly enhanced financial performance starting in 2017. Both net income and NOPAT trends are aligned, reinforcing the conclusion of a robust turnaround in the company’s financial health over the observed years.

The financial data reveals several notable trends and changes over the examined periods.

Income Tax Provision (Benefit)

This item shows significant volatility throughout the years. In 2015 and 2016, the figures reflect substantial tax benefits, with values of approximately -2.4 billion and -460.8 million respectively, indicating periods of considerable tax relief or deferred tax benefits. The benefit peaked again in 2017 at nearly -1.9 billion, before reversing sharply in 2018 and 2019 to positive figures of 822 million and 810 million respectively. This shift from benefit to provision suggests a change in taxable income or tax obligations, possibly due to improved profitability or changes in tax regulations.

Cash Operating Taxes

Cash operating taxes presented a more stable but fluctuating pattern across the years. From 2015 to 2017, this expense remained positive, ranging between approximately 157.8 thousand and 173.4 thousand, indicating ongoing tax payments related to operations. Contrastingly, 2018 and 2019 show negative values of -165.6 thousand and -15.3 thousand, respectively, which could imply tax refunds, credits, or adjustments exceeding tax payments during these periods. The sharp decline and transition from positive to negative cash operating taxes in 2018 particularly highlight a notable operational or fiscal event impacting tax cash outflows.

The financial data reveals several notable trends in the company's capital structure over the five-year period ending December 31, 2019.

Total reported debt & leases

The total reported debt and leases show a consistent decline from 7,023,659 thousand US dollars in 2015 to 5,974,808 thousand US dollars in 2019. This represents a reduction of approximately 15% over the period, indicating a strategic effort to decrease debt obligations.

Stockholders’ equity

Stockholders’ equity demonstrates a steady and significant increase each year, rising from 12,943,035 thousand US dollars in 2015 to 21,640,716 thousand US dollars by the end of 2019. This growth, approximately 67% over five years, suggests retained earnings accumulation and possible additional equity issuances, strengthening the company's financial base.

Invested capital

Invested capital shows an upward trend throughout the period, increasing from 24,433,279 thousand US dollars in 2015 to 32,663,914 thousand US dollars at the end of 2019, marking a growth of about 34%. This trend indicates ongoing investments in assets, supporting the company's expansion or operational needs.

Overall, the combination of decreasing debt levels alongside increasing equity and invested capital suggests a strengthening of the capital structure with a shift towards greater equity financing. This could enhance the company's financial stability and capacity for future investment.

The economic spread ratio demonstrates a consistent, albeit decelerating, improvement over the observed period. Initially negative, the ratio moves closer to zero, indicating a diminishing gap between returns generated and the cost of capital. While still negative across all years, the magnitude of the negative spread decreases significantly.

Economic Spread Ratio Trend

In 2015, the economic spread ratio stood at -44.97%. This represents a substantial negative spread, suggesting returns were significantly lower than the cost of invested capital. A marked improvement is then observed in 2016, with the ratio increasing to -23.10%, indicating a reduction in the negative spread. This positive trend continues through 2017 (-15.02%) and 2018 (-2.52%), demonstrating a substantial narrowing of the gap between returns and the cost of capital. The rate of improvement slows in 2019, with the ratio settling at -5.57%, still negative but the least negative value observed during the period.

The invested capital consistently increased throughout the period, from US$24,433,279 thousand in 2015 to US$32,663,914 thousand in 2019. This increase in capital employed occurred alongside the improving economic spread ratio, suggesting that while more capital was deployed, it was utilized more efficiently in generating returns relative to its cost.

Economic Profit and Invested Capital Relationship

Economic profit remained negative throughout the period, although the absolute value decreased over time. The reduction in negative economic profit, coupled with the increasing invested capital, directly contributes to the observed improvement in the economic spread ratio. The trend suggests a growing ability to generate returns, even if those returns do not yet fully cover the cost of capital.

The consistent negative economic profit indicates that the company did not generate sufficient returns to cover its cost of capital during any of the observed years. However, the improving economic spread ratio suggests a positive trajectory in terms of value creation, indicating that the company is becoming more efficient in its capital allocation and is moving closer to achieving positive economic profit.

The economic profit margin exhibited a consistent, though decelerating, improvement from 2015 to 2019. Initially deeply negative, the margin moved towards less negative values over the five-year period. This improvement coincided with fluctuations in both economic profit and operating revenues and other.

Economic Profit Margin Trend

In 2015, the economic profit margin stood at -125.45%. A substantial improvement was observed in 2016, with the margin increasing to -79.48%. This positive trend continued in 2017, reaching -35.60%. The rate of improvement slowed in 2018, with the margin reaching -4.44%, and further to -10.47% in 2019.

Relationship to Economic Profit

The economic profit itself also showed improvement over the period, moving from a loss of -10,986,598 thousand US dollars in 2015 to a loss of -1,820,159 thousand US dollars in 2019. The magnitude of the reduction in economic loss was greatest between 2015 and 2017, aligning with the most significant improvements in the economic profit margin. The smaller reduction in economic loss between 2018 and 2019 corresponds with the slower improvement in the margin during that time.

Relationship to Operating Revenues

Operating revenues and other experienced a decrease from 8,757,428 thousand US dollars in 2015 to 7,650,632 thousand US dollars in 2016. However, revenues then increased significantly, reaching 11,208,320 thousand US dollars in 2017, 17,275,399 thousand US dollars in 2018, and 17,379,973 thousand US dollars in 2019. The substantial revenue growth from 2016 onwards likely contributed to the improvements observed in the economic profit margin, although the margin’s improvement was not directly proportional to revenue increases, suggesting changes in cost structure or capital efficiency also played a role.

The economic profit margin’s movement towards zero indicates a lessening of economic loss, but remained negative throughout the analyzed period. The deceleration in margin improvement in the later years suggests potential limitations to further gains without significant changes in underlying profitability or capital allocation.