Hi B, As much as I like EOG, this can be a "confronting" number....

Hi B,

As much as I like EOG, this can be a "confronting" number. Taken from EOG's most recent 10K (AR) and so reflects 2015, the Reserves (i.e. PDP/PDNP/PUD) as at Dec 31, 2015. We know by now hopefully how the SEC PV10 standardized model for calculating the present value of the cash flows from producing those Reserves (and remember it does not include G&A or interest costs)

2015 in $'000s
Future cash inflows : $68,720,648
Future production costs $32,060,855)
Future development costs $15,785,811)
Future income taxes $4,616,201)
Future net cash flows :$16,257,781
Discount to PV 10% AR $6,636,385)
Standard SEC PV10 :$9,621,396

So far so good (albeit they did they a $6.6B impairment charge in 2015), but the SEC calculation uses ~$50 oil as the avg.

EOG states very publicly they make money at $30 oil. Well they do and they don't and as I say you have to dig deeper into numbers. Cash margin wise not a problem. Even on a Net Income basis (where you have to deduct the DD&A expense) they can squeak it out. Their new wells are highly capital efficient and deliver great returns.

But if you calculate the PV of those future cash flow on a $35 BO basis (so 30% less than the $50 used) and leave everything else the same you basically get $0. And when you take off G&A costs they become negative ... as in cannot repay their debts.

If we say we are in business to make money (and we need money to make money so we sell equity and take on debt) then measuring its future cash flows, and applying of an discount rate to those future cash flows to account for time value to bring it back to a PV, subtract out any debt and deduct corp G&A will leave you with what the business created for the equity investors.

In a $35 Bbl world that is less than $0 ... even for IMO the best pure play shale company. Fundamentals apply equally to EOG as they do to any other e.g. SSN.

I don't believe we will have $35 Bbl oil for a prolonged period going forward. Shale and access to cheap capital brought the price down. Cutting off access to cheap capital will "choke back" shale development and raise oil prices.

Not hard to say EOG will remain in business. What is hard to figure out is whether EOG's share price is good value?

GFTA.