Eog Resources Inc (EOG) SEC Quarterly Report (10-Q) for Q2 2016

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-9743

(Exact name of registrant as specified in its charter)

1111 Bagby, Sky Lobby 2, Houston, Texas 77002

(Address of principal executive offices)       (Zip Code)

713-651-7000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes  ý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ý    Accelerated filer  o    Non-accelerated filer  o   Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes  o  No  ý

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

EOG RESOURCES, INC.

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EOG RESOURCES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands, Except Per Share Data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

EOG RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

EOG RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

EOG RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

General. The consolidated financial statements of EOG Resources, Inc., together with its subsidiaries (collectively, EOG), included herein have been prepared by management without audit pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Accordingly, they reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. However, management believes that the disclosures included either on the face of the financial statements or in these notes are sufficient to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in EOG's Annual Report on Form 10-K for the year ended December 31, 2015 , filed on February 25, 2016 (EOG's 2015 Annual Report).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The operating results for the three and six months ended June 30, 2016 , are not necessarily indicative of the results to be expected for the full year.

Effective January 1, 2016, EOG adopted the provisions of Accounting Standards Update (ASU) 2015-03, "Interest - Computation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct reduction from the related debt liability rather than as an asset. In connection with the adoption of ASU 2015-03, EOG restated its December 31, 2015 Consolidated Balance Sheet to reclassify $ 4.8 million of unamortized debt issuance costs from "Other Assets" to "Long-Term Debt." Debt issuance costs related to EOG's senior unsecured credit facility remain classified as "Other Assets."

Recently Issued Accounting Standards. In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09), which amends certain aspects of accounting for share-based payment arrangements. ASU 2016-09 revises or provides alternative accounting for the tax impacts of share-based payment arrangements, forfeitures and minimum statutory tax withholdings and prescribes certain disclosures to be made in the period the new standard is adopted. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016, and early application is permitted. EOG is evaluating ASU 2016-09 in order to determine what impact the new standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" (ASU 2016-02), which significantly changes accounting for leases by requiring that lessees recognize a right-of-use asset and a related lease liability representing the obligation to make lease payments, for virtually all lease transactions. Additional disclosures about an entity's lease transactions will also be required. ASU 2016-02 defines a lease as "a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration." ASU 2016-02 is effective for interim and annual periods beginning after December 31, 2018 and early application is permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. EOG is reviewing the provisions of ASU 2016-02 to determine the impact on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" (ASU 2015-17), which simplifies the presentation of deferred taxes in a classified balance sheet by eliminating the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. Instead, ASU 2015-17 requires that all deferred tax liabilities and assets be shown as noncurrent in a classified balance sheet. ASU 2015-17 is effective for financial statements issued for interim and annual periods beginning after December 15, 2016, and early application is permitted. EOG does not intend to early-adopt ASU 2015-17 and does not expect the new standard to have a material impact on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, "Accounting for Inventory" (ASU 2015-11), which requires entities to measure most inventory at lower of cost or net realizable value. ASU 2015-11 defines net realizable value as "the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation." ASU 2015-11 is effective prospectively for interim and annual periods beginning after December 15, 2016, and early application is permitted. EOG is reviewing the requirements of the new standard and does not believe that the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, "Revenue From Contracts With Customers" (ASU 2014-09), which will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will supersede most current guidance related to revenue recognition when it becomes effective. The new standard also will require expanded disclosures regarding the nature, amount, timing and certainty of revenue and cash flows from contracts with customers. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted.  The new standard permits adoption through the use of either the full retrospective approach or a modified retrospective approach.  In May 2016, the FASB issued ASU 2016-11 which rescinds certain SEC guidance in the Accounting Standards Codification, including guidance related to the use of the "entitlements" method of revenue recognition used by EOG. EOG does not intend to early-adopt ASU 2014-09 and has not determined which transition method it will use. EOG continues to analyze ASU 2014-09, as well as subsequent guidance which amends and clarifies certain aspects of ASU 2014-09, in order to determine what impact it will have on EOG's consolidated financial statements and related disclosures.

2. Stock-Based Compensation

As more fully discussed in Note 7 to the Consolidated Financial Statements included in EOG's 2015 Annual Report, EOG maintains various stock-based compensation plans. Stock-based compensation expense is included on the Consolidated Statements of Income and Comprehensive Income based upon the job function of the employees receiving the grants as follows (in millions):

The Amended and Restated EOG Resources, Inc. 2008 Omnibus Equity Compensation Plan (2008 Plan) provides for grants of stock options, stock-settled stock appreciation rights (SARs), restricted stock and restricted stock units, performance units and performance stock and other stock-based awards. At June 30, 2016 , approximately 24.5 million common shares remained available for grant under the 2008 Plan. EOG's policy is to issue shares related to the 2008 Plan from previously authorized unissued shares or treasury shares to the extent treasury shares are available.

Stock Options and Stock-Settled Stock Appreciation Rights and Employee Stock Purchase Plan . The fair value of stock option grants and SAR grants is estimated using the Hull-White II binomial option pricing model. The fair value of Employee Stock Purchase Plan (ESPP) grants is estimated using the Black-Scholes-Merton model. Stock-based compensation expense related to stock option, SAR and ESPP grants totaled $13.0 million and $11.7 million during the three months ended June 30, 2016 and 2015 , respectively, and $26.2 million and $23.3 million during the six months ended June 30, 2016 and 2015 , respectively.

Weighted average fair values and valuation assumptions used to value stock option, SAR and ESPP grants during the six -month periods ended June 30, 2016 and 2015 are as follows:

Expected volatility is based on an equal weighting of historical volatility and implied volatility from traded options in EOG's common stock. The risk-free interest rate is based upon United States Treasury yields in effect at the time of grant. The expected life is based upon historical experience and contractual terms of stock option, SAR and ESPP grants.

The following table sets forth stock option and SAR transactions for the six -month periods ended June 30, 2016 and 2015 (stock options and SARs in thousands):

At June 30, 2016 , unrecognized compensation expense related to non-vested stock option, SAR and ESPP grants totaled $76.0 million . Such unrecognized expense will be amortized on a straight-line basis over a weighted average period of 2.3 years .

Restricted Stock and Restricted Stock Units. Employees may be granted restricted (non-vested) stock and/or restricted stock units without cost to them. Stock-based compensation expense related to restricted stock and restricted stock units totaled $13.7 million and $ 16.5 million for the three months ended June 30, 2016 and 2015 , respectively, and $32.4 million and $ 37.7 million for the six months ended June 30, 2016 and 2015, respectively.

The following table sets forth restricted stock and restricted stock unit transactions for the six -month periods ended June 30, 2016 and 2015 (shares and units in thousands):

At June 30, 2016 , unrecognized compensation expense related to restricted stock and restricted stock units totaled $137.8 million . Such unrecognized expense will be amortized on a straight-line basis over a weighted average period of 2.3 years .

Performance Units and Performance Stock. EOG grants performance units and/or performance stock (Performance Awards) to its executive officers. As more fully discussed in the grant agreements, the performance metric applicable to these performance-based grants is EOG's total shareholder return over a three -year performance period relative to the total shareholder return of a designated group of peer companies (Performance Period). Upon the application of the performance multiple at the completion of the Performance Period, a minimum of 0% and a maximum of 200% of the Performance Awards granted could be outstanding. Subject to the termination provisions set forth in the grant agreements and the applicable performance multiple, the grants of Performance Awards will "cliff" vest five years from the date of grant. The fair value of the Performance Awards is estimated using a Monte Carlo simulation.

At December 31, 2015, 405,000 Performance Awards were outstanding. Upon completion of the Performance Period for the Performance Awards granted in 2012, a performance multiple of 200% was applied to the 2012 grants resulting in an additional grant of 142,556 Performance Awards in February 2016. Performance Awards totaling 134,016 were released during the six months ended June 30, 2016 , with a total intrinsic value of $9.7 million , based upon the closing price of EOG's common stock on the release date. Upon the application of the performance multiple at the completion of the remaining Performance Periods, a minimum of 151,096 and a maximum of 675,984 Performance Awards could be outstanding. There were 413,540 Performance Awards outstanding as of June 30, 2016 .

Stock-based compensation expense related to the Performance Award grants totaled $0.4 million for both the three month periods ended June 30, 2016 and 2015 , respectively, and $0.9 million and $ 0.7 million for the six months ended June 30, 2016 and 2015 , respectively. At June 30, 2016 , unrecognized compensation expense related to Performance Awards totaled $5.1 million . Such unrecognized expense will be amortized on a straight-line basis over a weighted average period of 2.8 years .

3. Net Income (Loss) Per Share

The following table sets forth the computation of Net Income (Loss) Per Share for the three -month and six -month periods ended June 30, 2016 and 2015 (in thousands, except per share data):

The diluted earnings per share calculation excludes stock options, SARs, restricted stock and units and performance units and stock that were anti-dilutive. Shares underlying the excluded stock options and SARs totaled 10.2 million and 2.0 million shares for the three months ended June 30, 2016 and 2015 , respectively, and 10.4 million and 10.0 million shares for the six months ended June 30, 2016 and 2015 , respectively. For both the three months and six months ended June 30, 2016 , 4.6 million shares of restricted stock, restricted stock units and performance units were excluded. For the three months and six months ended June 30, 2015 , zero and 5.5 million shares, respectively, of restricted stock, restricted stock units and performance units were excluded.

4. Supplemental Cash Flow Information

Net cash paid for interest and income taxes was as follows for the six -month periods ended June 30, 2016 and 2015 (in thousands):

EOG's accrued capital expenditures at June 30, 2016 and 2015 were $371 million and $ 777 million , respectively.

5. Segment Information

Selected financial information by reportable segment is presented below for the three -month and six -month periods ended June 30, 2016 and 2015 (in thousands):

(1)    Other International primarily includes EOG's United Kingdom, China, Canada and Argentina operations.

Total assets by reportable segment are presented below at June 30, 2016 and December 31, 2015 (in thousands):

(1)    Other International primarily consists of EOG's United Kingdom, China, Canada and Argentina operations.

6. Asset Retirement Obligations

The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of short-term and long-term legal obligations associated with the retirement of property, plant and equipment for the six -month periods ended June 30, 2016 and 2015 (in thousands):

The current and noncurrent portions of EOG's asset retirement obligations are included in Current Liabilities - Other and Other Liabilities, respectively, on the Consolidated Balance Sheets.

7. Exploratory Well Costs

EOG's net changes in capitalized exploratory well costs for the six -month period ended June 30, 2016 , are presented below (in thousands):

At June 30, 2016 , all capitalized exploratory well costs had been capitalized for periods of less than one year.

8. Commitments and Contingencies

There are currently various suits and claims pending against EOG that have arisen in the ordinary course of EOG's business, including contract disputes, personal injury and property damage claims and title disputes. While the ultimate outcome and impact on EOG cannot be predicted, management believes that the resolution of these suits and claims will not, individually or in the aggregate, have a material adverse effect on EOG's consolidated financial position, results of operations or cash flow. EOG records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.

9. Pension and Postretirement Benefits

EOG has defined contribution pension plans in place for most of its employees in the United States, Trinidad and the United Kingdom, and a defined benefit pension plan covering certain of its employees in Trinidad. For the six months ended June 30, 2016 and 2015 , EOG's total costs recognized for these pension plans were $17.2 million and $18.4 million , respectively. EOG also has postretirement medical and dental plans in place for eligible employees in the United States and Trinidad, the costs of which are not material.

10. Long-Term Debt

During the six months ended June 30, 2016 , EOG utilized commercial paper borrowings bearing market interest rates, for various corporate financing purposes. At June 30, 2016 , EOG had no outstanding commercial paper borrowings or uncommitted credit facility borrowings. The average borrowings outstanding under the commercial paper program were $210 million during the six months ended June 30, 2016 . The weighted average interest rate for commercial paper borrowings during the six months ended June 30, 2016 was 0.76% . EOG had no outstanding commercial paper borrowings or uncommitted credit facility borrowings at June 30, 2015 and did not utilize any such borrowings during the six months ended June 30, 2015 .

On February 1, 2016 , EOG repaid upon maturity the $400 million aggregate principal amount of its 2.500% Senior Notes due 2016 (2016 Notes).

On January 14, 2016 , EOG closed its sale of $750 million aggregate principal amount of its 4.15% Senior Notes due 2026 and $250 million aggregate principal amount of its 5.10% Senior Notes due 2036 (collectively, the Notes). Interest on the Notes is payable semi-annually in arrears on January 15 and July 15 of each year beginning on July 15, 2016. Net proceeds from the Notes offering totaled approximately $991 million and were used to repay the 2016 Notes when they matured on February 1, 2016 , and for general corporate purposes, including repayment of outstanding commercial paper borrowings and funding of capital expenditures.

EOG currently has a $2.0 billion senior unsecured Revolving Credit Agreement (Agreement) with domestic and foreign lenders. The Agreement has a scheduled maturity date of July 21, 2020 , and includes an option for EOG to extend, on up to two occasions, the term for successive one-year periods subject to certain terms and conditions. Advances under the Agreement will accrue interest based, at EOG's option, on either the London InterBank Offered Rate plus an applicable margin (Eurodollar rate) or the base rate (as defined in the Agreement) plus an applicable margin. At June 30, 2016 , there were no borrowings or letters of credit outstanding under the Agreement. The Eurodollar rate and applicable base rate, had there been any amounts borrowed under the Agreement, would have been 1.47% and 3.50% , respectively.

11. Fair Value Measurements

As more fully discussed in Note 13 to the Consolidated Financial Statements included in EOG's 2015 Annual Report, certain of EOG's financial and nonfinancial assets and liabilities are reported at fair value on the Consolidated Balance Sheets. The following table provides fair value measurement information within the fair value hierarchy for certain of EOG's financial assets and liabilities carried at fair value on a recurring basis at June 30, 2016 . There were no such amounts outstanding at December 31, 2015. Amounts shown in millions.

The estimated fair value of commodity derivative contracts was based upon forward commodity price curves based on quoted market prices. Commodity derivative contracts were valued by utilizing an independent third-party derivative valuation provider who uses various types of valuation models, as applicable.

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. A reconciliation of EOG's asset retirement obligations is presented in Note 6.

Fair Value of Debt. At June 30, 2016 and December 31, 2015 , EOG had outstanding $6,990 million and $6,390 million , respectively, aggregate principal amount of senior notes, which had estimated fair values of approximately $7,418 million and $6,524 million , respectively. The estimated fair value of debt was based upon quoted market prices and, where such prices were not available, other observable (Level 2) inputs regarding interest rates available to EOG at the end of each respective period.

12. Risk Management Activities

Commodity Price Risk . As more fully discussed in Note 12 to the Consolidated Financial Statements included in EOG's 2015 Annual Report, EOG engages in price risk management activities from time to time. These activities are intended to manage EOG's exposure to fluctuations in commodity prices for crude oil and natural gas. EOG utilizes financial commodity derivative instruments, primarily price swap, option, swaption, collar and basis swap contracts, as a means to manage this price risk. EOG has not designated any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for financial commodity derivative contracts using the mark-to-market accounting method.

Commodity Derivative Contracts. Presented below is a comprehensive summary of EOG's natural gas derivative contracts at June 30, 2016 , with notional volumes expressed in million British thermal units (MMBtu) per day (MMBtud) and prices expressed in dollars per MMBtu ($/MMBtu).

Credit Risk. Notional contract amounts are used to express the magnitude of a financial derivative. The amounts potentially subject to credit risk, in the event of nonperformance by the counterparties, are equal to the fair value of such contracts (see Note 11). EOG evaluates its exposure to significant counterparties on an ongoing basis, including those arising from physical and financial transactions. In some instances, EOG renegotiates payment terms and/or requires collateral, parent guarantees or letters of credit to minimize credit risk.

All of EOG's derivative instruments are covered by International Swap Dealers Association Master Agreements (ISDAs) with counterparties. The ISDAs may contain provisions that require EOG, if it is the party in a net liability position, to post collateral when the amount of the net liability exceeds the threshold level specified for EOG's then-current credit ratings. In addition, the ISDAs may also provide that as a result of certain circumstances, including certain events that cause EOG's credit ratings to become materially weaker than its then-current ratings, the counterparty may require all outstanding derivatives under the ISDAs to be settled immediately. Natural gas derivative instruments with a fair value of $1.3 million were in a net liability position at June 30, 2016 . EOG had no collateral posted and held no collateral at June 30, 2016 and December 31, 2015 .

13.  Divestitures

During the first six months of 2016 , EOG received proceeds of approximately $253 million primarily from sales of producing properties and acreage in the Permian Basin and Oklahoma. Additionally, in the second quarter of 2016, EOG signed purchase and sale agreements for the sale of certain properties in the United States. At June 30, 2016 , the book value of these assets held for sale and the related liabilities were $92 million and $23 million , respectively. During the first six months of 2015 , EOG received proceeds of approximately $116 million primarily from the sales of gathering and processing assets.

PART I.  FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EOG RESOURCES, INC.

Overview

EOG Resources, Inc., together with its subsidiaries (collectively, EOG), is one of the largest independent (non-integrated) crude oil and natural gas companies in the United States with proved reserves in the United States, Trinidad, the United Kingdom and China. EOG operates under a consistent business and operational strategy that focuses predominantly on maximizing the rate of return on investment of capital by controlling operating and capital costs and maximizing reserve recoveries. This strategy is intended to enhance the generation of cash flow and earnings from each unit of production on a cost-effective basis, allowing EOG to deliver long-term production growth while maintaining a strong balance sheet. EOG implements its strategy by emphasizing the drilling of internally generated prospects in order to find and develop low-cost reserves. Maintaining the lowest possible operating cost structure that is consistent with prudent and safe operations is also an important goal in the implementation of EOG's strategy.

United States. EOG's efforts to identify plays with large reserve potential have proven to be successful. EOG continues to drill numerous wells in large acreage plays, which in the aggregate have contributed substantially to, and are expected to continue to contribute substantially to, EOG's crude oil and liquids-rich natural gas production. EOG has placed an emphasis on applying its horizontal drilling and completion expertise to unconventional crude oil and liquids-rich reservoirs.

Crude oil and natural gas prices have been volatile, and this volatility is expected to continue. As a result of the many uncertainties associated with the world political environment, worldwide supplies of, and demand for, crude oil and condensate, natural gas liquids (NGLs) and natural gas and the availability of other worldwide energy supplies, EOG is unable to predict what changes may occur in crude oil and condensate, NGL, and natural gas prices in the future. The market prices of crude oil and condensate, NGLs and natural gas in 2016 will continue to impact the amount of cash generated from operating activities, which will in turn impact EOG's financial position and results of operations. For the first half of 2016, the average U.S. New York Mercantile Exchange (NYMEX) crude oil and natural gas prices were $39.85 per barrel and $2.00 per million British thermal units (MMBtu), respectively, representing declines of 18% and 25%, respectively, from the average NYMEX prices in 2015. Based on its 2016 drilling plan, which has been influenced by the continued low commodity price environment, EOG expects 2016 crude oil and condensate and natural gas production to decline modestly as compared to 2015.

During the first half of 2016, EOG continued to focus on increasing drilling and completion efficiencies using precision lateral targeting and advanced completion methods and reducing operating and capital costs through efficiency improvements and service cost reductions. These efficiency gains along with realized lower service costs resulted in lower drilling and completion costs and decreased operating expenses during the first half of 2016. EOG continues to look for opportunities to add drilling inventory through leasehold acquisitions, farm-ins or tactical acquisitions and to evaluate certain potential crude oil and liquids-rich natural gas exploration and development prospects. On a volumetric basis, as calculated using the ratio of 1.0 barrel of crude oil and condensate or NGLs to 6.0 thousand cubic feet of natural gas, crude oil and condensate and NGL production accounted for approximately 72% of United States production during the first half of 2016 as compared to 71% for the same comparable period of 2015. During the first half of 2016, drilling and completion activities occurred primarily in the Eagle Ford play, Delaware Basin play and Rocky Mountain area. EOG's major producing areas in the United States are in New Mexico, North Dakota, Texas, Utah and Wyoming.

Trinidad. In Trinidad, EOG continues to deliver natural gas under existing supply contracts. Several fields in the South East Coast Consortium (SECC) Block, Modified U(a) Block, Block 4(a), Modified U(b) Block and the Sercan Area (formerly known as the EMZ area) have been developed and are producing natural gas, which is sold to the National Gas Company of Trinidad and Tobago Limited and its subsidiary and crude oil and condensate which is sold to the Petroleum Company of Trinidad and Tobago Limited. In 2016, EOG expects to drill and complete one net well and install infrastructure in the Sercan Area.

Other International. In the United Kingdom, EOG began production from its 100% working interest East Irish Sea Conwy crude oil project in March 2016, selling its first crude oil cargo at the end of the first quarter. Modifications to the nearby third-party-owned Douglas platform, which is used to process Conwy production, were completed in the first quarter of 2016, and acceptance and performance testing is ongoing.

In the Sichuan Basin, Sichuan Province, China, EOG is evaluating future Shaximiao development opportunities in the Chuan Zhong Block.

EOG's activity in Argentina is focused on the Vaca Muerta oil shale formation in the Neuquén Province. Management is currently evaluating options for this investment.

EOG continues to evaluate other select crude oil and natural gas opportunities outside the United States primarily by pursuing exploitation opportunities in countries where indigenous crude oil and natural gas reserves have been identified.

Capital Structure . One of management's key strategies is to maintain a strong balance sheet with a consistently below average debt-to-total capitalization ratio as compared to those in EOG's peer group. EOG's debt-to-total capitalization ratio was 37% and 34% at June 30, 2016 and December 31, 2015, respectively. As used in this calculation, total capitalization represents the sum of total current and long-term debt and total stockholders' equity.

On February 1, 2016, EOG repaid upon maturity the $400 million aggregate principal amount of its 2.500% Senior Notes due 2016 (2016 Notes).

On January 14, 2016, EOG closed its sale of $750 million aggregate principal amount of its 4.15% Senior Notes due 2026 and $250 million aggregate principal amount of its 5.10% Senior Notes due 2036 (collectively, the Notes). Interest on the Notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2016. Proceeds from the issuance of the Notes totaled approximately $991 million and were used to repay the 2016 Notes and for general corporate purposes, including repayment of outstanding commercial paper borrowings and funding of capital expenditures.

Total anticipated 2016 capital expenditures are estimated to range from approximately $2.4 billion to $2.6 billion, excluding acquisitions. The majority of 2016 expenditures will continue to be focused on United States crude oil drilling activities. EOG has significant flexibility with respect to financing alternatives, including borrowings under its commercial paper program and other uncommitted credit facilities, bank borrowings, borrowings under its $2.0 billion senior unsecured revolving credit facility and equity and debt offerings.

When it fits EOG's strategy, EOG will make acquisitions that bolster existing drilling programs or offer incremental exploration and/or production opportunities. Management continues to believe EOG has one of the strongest prospect inventories in EOG's history.

Results of Operations

The following review of operations for the three months and six months ended June 30, 2016 and 2015 should be read in conjunction with the consolidated financial statements of EOG and notes thereto included in this Quarterly Report on Form 10‑Q.

Three Months Ended June 30, 2016 vs. Three Months Ended June 30, 2015

Net Operating Revenues. During the second quarter of 2016 , net operating revenues decreased $694 million, or 28%, to $1,776 million from $2,470 million for the same period of 2015 . Total wellhead revenues, which are revenues generated from sales of EOG's production of crude oil and condensate, NGLs and natural gas, for the second quarter of 2016 decreased $504 million, or 28%, to $1,327 million from $1,831 million for the same period of 2015 . EOG recognized net losses on the mark-to-market of financial commodity derivative contracts of $44 million for the second quarter of 2016 compared to $48 million for the same period of 2015 . Gathering, processing and marketing revenues for the second quarter of 2016 decreased $193 million, or 28%, to $485 million from $678 million for the same period of 2015 .

Wellhead volume and price statistics for the three-month periods ended June 30, 2016 and 2015 were as follows:

Wellhead crude oil and condensate revenues for the second quarter of 2016 decreased $394 million, or 27%, to $1,059 million from $1,453 million for the same period of 2015 . The decline was primarily due to a lower composite wellhead crude oil and condensate price ($335 million) and a decrease of 10 MBbld, or 4%, in wellhead crude oil and condensate production ($58 million). Decreased production was primarily due to declines in the Eagle Ford, the Rocky Mountain area, and the Fort Worth Basin Barnett Shale area, partially offset by increased production in the Permian Basin. EOG's composite wellhead crude oil and condensate price for the second quarter of 2016 decreased 24% to $43.65 per barrel compared to $57.45 per barrel for the same period of 2015 .

NGL revenues for the second quarter of 2016 increased $8 million, or 7%, to $112 million from $104 million for the same period of 2015 due to an increase of 11 MBbld, or 15%, in NGL deliveries ($15 million) primarily in the Permian Basin and the Eagle Ford, partially offset by a lower composite average price ($7 million). EOG's composite NGL price for the second quarter of 2016 decreased 6% to $14.56 per barrel compared to $15.54 per barrel for the same period of 2015 .

Wellhead natural gas revenues for the second quarter of 2016 decreased $118 million, or 43%, to $156 million from $274 million for the same period of 2015 . The decrease was due to a lower composite wellhead natural gas price ($104 million) and a decrease in natural gas deliveries ($14 million). Natural gas deliveries for the second quarter of 2016 decreased 63 MMcfd, or 5%, compared to the same period of 2015 due primarily to lower production in the United States (71 MMcfd), partially offset by an increase in production in Trinidad (15 MMcfd). The decrease in the United States was due primarily to decreased production in the Fort Worth Basin Barnett Shale, Upper Gulf Coast and South Texas areas, partially offset by increased production of associated natural gas from the Permian Basin. The increase in Trinidad was primarily due to higher contractual deliveries. EOG's composite wellhead natural gas price for the second quarter of 2016 decreased 40% to $1.44 per Mcf compared to $2.40 per Mcf for the same period of 2015 .

During the second quarter of 2016 , EOG recognized net losses on the mark-to-market of financial commodity derivative contracts of $44 million compared to net losses of $48 million for the same period of 2015 . During the second quarter of 2016 , net cash paid for settlements of financial commodity derivative contracts was $15 million compared to net cash received of $193 million for the same period of 2015 .

Gathering, processing and marketing revenues are revenues generated from sales of third-party crude oil, NGLs and natural gas as well as gathering fees associated with gathering third-party natural gas and revenues from sales of EOG-owned sand. Purchases and sales of third-party crude oil and natural gas are utilized in order to balance firm transportation capacity with production in certain areas and to utilize excess capacity at EOG-owned facilities. Marketing costs represent the costs of purchasing third-party crude oil and natural gas and the associated transportation costs as well as costs associated with EOG-owned sand sold to third parties.

Gathering, processing and marketing revenues less marketing costs for the second quarter of 2016 decreased $3 million as compared to the same prior year period. The decrease primarily reflects lower margins in 2016 on natural gas marketing activities.

Operating and Other Expenses. For the second quarter of 2016 , operating expenses of $2,064 million were $366 million lower than the $2,430 million incurred during the second quarter of 2015 .  The following table presents the costs per barrel of oil equivalent (Boe) for the three-month periods ended June 30, 2016 and 2015 :

The primary factors impacting the cost components of per-unit rates of lease and well, transportation costs, DD&A, G&A and interest expense, net, for the three months ended June 30, 2016 , compared to the same period of 2015 are set forth below. See "Net Operating Revenues" above for a discussion of production volumes.

Lease and well expenses include expenses for EOG-operated properties, as well as expenses billed to EOG from other operators where EOG is not the operator of a property. Lease and well expenses can be divided into the following categories: costs to operate and maintain crude oil and natural gas wells, the cost of workovers and lease and well administrative expenses. Operating and maintenance costs include, among other things, pumping services, salt water disposal, equipment repair and maintenance, compression expense, lease upkeep and fuel and power. Workovers are operations to restore or maintain production from existing wells.

Each of these categories of costs individually fluctuates from time to time as EOG attempts to maintain and increase production while maintaining efficient, safe and environmentally responsible operations. EOG continues to increase its operating activities by drilling new wells in existing and new areas. Operating and maintenance costs within these existing and new areas, as well as the costs of services charged to EOG by vendors, fluctuate over time.

Lease and well expenses of $218 million for the second quarter of 2016 decreased $72 million from $290 million for the same prior year period primarily due to decreased operating and maintenance costs in the United States ($64 million) and lower lease and well administrative expenses in the United States ($10 million), partially offset by increased operating and maintenance costs in the United Kingdom ($2 million).

Transportation costs represent costs associated with the delivery of hydrocarbon products from the lease to a downstream point of sale. Transportation costs include transportation fees, costs associated with crude-by-rail operations, the cost of compression (the cost of compressing natural gas to meet pipeline pressure requirements), dehydration (the cost associated with removing water from natural gas to meet pipeline requirements), gathering fees and fuel costs.

Transportation costs of $179 million for the second quarter of 2016 decreased $31 million from $210 million for the same prior year period primarily due to decreased transportation costs in the Fort Worth Basin Barnett Shale area ($18 million) and Rocky Mountain area ($12 million).

DD&A of the cost of proved oil and gas properties is calculated using the unit-of-production method. EOG's DD&A rate and expense are the composite of numerous individual DD&A group calculations. There are several factors that can impact EOG's composite DD&A rate and expense, such as field production profiles, drilling or acquisition of new wells, disposition of existing wells and reserve revisions (upward or downward) primarily related to well performance, economic factors and impairments. Changes to these factors may cause EOG's composite DD&A rate and expense to fluctuate from period to period. DD&A of the cost of other property, plant and equipment is generally calculated using the straight-line depreciation method over the useful lives of the assets.

DD&A expenses for the second quarter of 2016 decreased $47 million to $862 million from $909 million for the same prior year period. DD&A expenses associated with oil and gas properties for the second quarter of 2016 were $43 million lower than the same prior year period. The decrease primarily reflects decreased rates in the United States ($21 million) and Trinidad ($5 million) and decreased production in the United States ($20 million), partially offset by increased production in Trinidad ($2 million). DD&A unit rates in the United States decreased primarily due to reserves added at lower costs as a result of efficiencies and impairments of proved oil and gas properties recorded in the third quarter of 2015 . These variances were partially offset by downward revisions of reserves at December 31, 2015 as a result of lower commodity prices.

G&A expenses of $98 million for the second quarter of 2016 increased $16 million from $82 million for the same prior year period primarily due to employee-related expenses in connection with certain voluntary retirements.

Exploration costs of $31 million for the second quarter of 2016 decreased $13 million from $44 million for the same prior year period primarily due to decreased exploration administrative expenses ($8 million) and decreased geological and geophysical costs ($7 million), partially offset by increased delay rental costs ($3 million), all in the United States.

Impairments include amortization of unproved oil and gas property costs, as well as impairments of proved oil and gas properties; other property, plant and equipment; and other assets. Unproved properties with acquisition costs that are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive is amortized over the remaining lease term. When circumstances indicate that a proved property may be impaired, EOG compares expected undiscounted future cash flows at a DD&A group level to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows are lower

than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated by using the Income Approach described in the Fair Value Measurement Topic of the Financial Accounting Standards Board's Accounting Standards Codification. In certain instances, EOG utilizes accepted bids as the basis for determining fair value.

Impairments of $73 million for the second quarter of 2016 were $4 million higher than impairments for the same prior year period primarily due to increased amortization of unproved property costs in the United States.

Interest expense, net, of $71 million for the second quarter of 2016 increased $11 million compared to the same prior year period primarily due to interest expense on the Notes issued in January 2016 ($11 million) and decreased capitalized interest ($2 million), partially offset by reduced interest expense on notes repaid during June 2015 and February 2016 ($5 million).

Gathering and processing costs represent operating and maintenance expenses and administrative expenses associated with operating EOG's gathering and processing assets.

Gathering and processing costs decreased $6 million to $29 million for the second quarter of 2016 compared to $35 million for the same prior year period. The decrease primarily reflects decreased operating expenses in the Eagle Ford ($4 million) and Fort Worth Basin Barnett Shale area ($2 million), partially offset by costs associated with increased activities in the Permian Basin ($2 million).

Taxes other than income include severance/production taxes, ad valorem/property taxes, payroll taxes, franchise taxes and other miscellaneous taxes. Severance/production taxes are generally determined based on wellhead revenues, and ad valorem/property taxes are generally determined based on the valuation of the underlying assets.

Taxes other than income for the second quarter of 2016 decreased $29 million to $93 million (7.0% of wellhead revenues) compared to $122 million (6.7% of wellhead revenues) for the same prior year period. The decrease in taxes other than income was primarily due to decreases in severance/production taxes ($23 million), primarily as a result of decreased wellhead revenues, and in ad valorem/property taxes ($8 million), both in the United States, partially offset by a decrease in credits available to EOG in the second quarter of 2016 for Texas high-cost gas severance tax rate reductions ($3 million).

Other income (expense), net for the second quarter of 2016 decreased $30 million compared to the same prior year period primarily due to an increase in foreign currency exchange losses.

EOG recognized an income tax benefit of $88 million for the second quarter of 2016 compared to an income tax benefit of $17 million in the second quarter of 2015 , primarily due to a decrease in pretax income, partially offset by an increase in taxes in Trinidad resulting from a tax settlement reached in the second quarter of 2016 ($43 million) and the absence of a tax benefit related to a 2015 statutory income tax rate reduction in Texas ($20 million). The Trinidad tax settlement also impacted the net effective tax rate for the second quarter of 2016 resulting in a 23% rate.

Six Months Ended June 30, 2016 vs. Six Months Ended June 30, 2015

Net Operating Revenues. During the first six months of 2016 , net operating revenues decreased $1,658 million, or 35%, to $3,130 million from $4,788 million for the same period of 2015 . Total wellhead revenues for the first six months of 2016 decreased $1,169 million, or 33%, to $2,322 million from $3,491 million for the same period of 2015 . During the first six months of 2016 , EOG recognized net losses on the mark-to-market of financial commodity derivative contracts of $39 million compared to net gains of $28 million for the same period of 2015 . Gathering, processing and marketing revenues for the first six months of 2016 decreased $430 million, or 34%, to $819 million from $1,249 million for the same period of 2015 .

Wellhead volume and price statistics for the six -month periods ended June 30, 2016 and 2015 were as follows: