EOG's Missed Estimates: What Are Marketing Costs?

As noted earlier, EOG missed analysts' estimates for the 1Q 2010.

EOG's Form 10-Q is posted and superficial reading raises one question. First, I will provide the data, and you can see where I'm going for yourself:

Form 10-Q, Part I. Financial Information, page 3 of 38.
Item 1. Financial Statements: Consolidated Statements of Income

Operating Revenues
2009, 1Q, operating revenues: $1.158 billion
2010, 1Q, operating revenues: $1.371 billion

Operating Expenses
2009, 1Q, operating expenses: $0.877 billion
2010, 1Q, operating expenses: $1.151 billion

Net Income
2009, 1Q, operating  income: $0.159 billion
2010, 1Q, operating income:  $0.118 billion

All pretty straightforward so far, eh?

Now, let's go back to look at "operating expenses."
One line item jumps out at me.
2009, 1Q, marketing costs: $0.032 billion
2010, 1Q, marketing costs: $0.169 billion (5-fold increase)
Difference between 2009 (1Q) and 2010 (1Q) marketing costs: $0.137 billion.
Add the difference ($0.137 billion) to 2010 (1Q) operating income and one gets $0.306 billiion. (In fact, the increase in marketing costs represents about one-half of the operating income).

Average number of shares outstanding (rounded):
2009, 1Q: 250,000
2010, 1Q: 250,000

As reported:
2009, 1Q: $0.159 billion/250,000 = 64 cents/share
2010, 1Q: $0.118 billion/250,000 = 47 cents/share

If one adds the difference in the "marketing cost increase" ($0.137 billion) to income, one gets: $0.255 billion.

Now, income per share would have been:  $0.255 billion/250,000 = $1.02/share (without that huge marketing expense).

The $1.02 share is more than double the reported income/share reported by EOG for 2010, 1Q.

So, the question is:

What is included in "marketing costs" that decreased income/share by more than half? What else is included in marketing costs?

All I have is the Form 10-Q, and I read through it very quickly, so I may have missed it, but I couldn't find anything about "marketing costs" in the narrative. In addition, although I didn't read the entire earnings conference call, I don't recall the company highlighting any explanation for "marketing costs."

Some might argue that with increasing production, marketing costs would increase, but I would ask, "why?" And if so, does a five-fold increase make sense?

Revenue did increase significantly from 2009 to 2010 from gathering, processing and marketing (from $0.037 billion to $0.172 billion) and it takes money to make money, but without further information, I still have no idea why the huge increase in marketing costs this past quarter.

One last thing: actually there is one other item that jumps out at me. This one is on the revenue side. In 2009, 1Q, EOG reported a staggering $0.351 billion in "gains on mark-to-market commodity derivative contracts" compared to a paltry $7.8 million for the same item in 2010.  Had their been no difference the comparison of income/share between 2009 and 2010 would have been even more noticeable -- but the other way. Take out the $0.351 billion in 2009, 1Q,  and income per share in 2009, 1Q, would have been: it looks like EOG would have reported a loss in 2009, 1Q.

A loss in 2009, 1Q? Take out the "derivative contracts" ($1.158 billion - $0.351 billion) and one gets $0.807 billion. Expenses that quarter were $0.877, and thus a loss for the bottom line.

To be continued and refined. This is a first draft. My opinions only. Take them for what they are worth.

COMMENT

It doens't bother me that marketing costs increased. What bothers me is that a) the company does not discuss this in the narrative in the 10-Q but, again, I may have missed it. I looked at it very quickly.  And b) why do analysts who call in for the conference call not ask these same questions, including a little bit more on mark-to-market commodity derivatives?

And last year, 2009, EOG would have reported a loss in the first quarter had they not had that huge "mark-to-market commodities derivative" gain. Were we still in a volatile period with depressed oil prices  then? Most likely.

Yesterday the P/E for EOG was about 50. The P/E for Newfield was about 19.