EOG Resources Inc (EOG), a leading independent oil and gas exploration and production (E&P) company, was formed in 1985. It currently operates in the US, Canada, the Republic of Trinidad and Tobago, the UK, China, and Argentina, and is the largest oil producer in the Eagle Ford Formation in the US.
The Delaware-based company finished 2013 with total estimated net proven reserves of 2,119 million barrels of oil equivalent (MMBOE). It reported revenues of $14.57 billion for the year, having grown 23.4% year-over-year (YoY) on the back of increased crude oil production, higher NGL (natural gas liquid) deliveries and an increase in natural gas prices. The company’s total production was 510,100 barrels of oil equivalent per day (BOE/d) – 9.4% higher YoY.
The company divides its operations in four segments. The Crude Oil and Condensate segment is involved in exploration and development of crude oil and condensate reserves around the world. During FY13, the average production of crude oil and condensate was 220,400 barrels per day (bpd), an increase of 39.6% YoY. The company finished FY13 with crude oil and condensate reserves of 901 million barrels (MMbbl). The segment contributed 57.6% of the company’s revenues for the year.
EOG’s Gathering, Processing and Marketing segment is involved in natural gas, oil and NGL marketing services. It attempts to enhance the value of natural gas and oil that is to be sold to various intermediaries and in various end markets. The segment contributed 25.3% of total revenues in FY13.
The company’s Natural Gas segment is involved in the production of natural gas in the US and from reserves across the world. During FY13, average natural gas production stood at 224,500 BOE/d – a decline of 11.1% YoY. The company ended FY13 with net proven natural gas reserves of 841 million MMBOE. The segment contributed 11.7% of the company’s total revenues in FY13.
The NGL segment is the smallest operating segment of the business. Its average production increased by 16.6% YoY in FY13 to 65,200 bpd. At the end of FY13, proven NGL reserves stood at 377 MMbbl, and the segment contributed 5.4% of total revenues for the year.
In the past one year, EOG stock has risen nearly 51.3%, outperforming both the Oil and Gas Exploration and Production Industry ETF (XOP) and the S&P 500 ETF (SPY) over that period. The two exchange-traded funds (ETFs) have risen only 22.4% and 13.1% respectively over the past twelve months. Despite its strong performance over the past year, however, EOG is still trading at a very attractive valuation.
Over the last twelve months (LTM), EOG Resources has also outperformed peer E&P company Chesapeake Energy (CHK), another key beneficiary of the shale boom in the Eagle Ford play. Chesapeake’s stock price has increased by 37.9% during the same period, compared to EOG’s 51.3% gain.
According to estimates provided by the Energy Information Agency (EIA), the research wing of the US Department of Energy, crude oil production will increase 13.6% YoY to 8.46 MMbpd by the end of this year and is expected to surpass an all-time high of 9.6 MMbpd by 2016. However, increased supply will exert downward pressure on prices, and the average WTI price is expected to decline 1.2% YoY to $99.22 by the end of this year, which may negatively impact the prices realized by various E&P companies. The increased production of crude oil will reduce the import of crude oil by 9.2% this year, and by a further 11.4% in 2015, making the country more ‘energy independent’.
On the other hand, natural gas production is expected to remain constant in the US at nearly 71 billion cubic feet per day (bcf/d), but average natural gas prices are expected to rise 27% YoY. The country will become a net exporter of natural gas by the end of this decade, and various companies have invested a combined $120 billion to establish the infrastructure for liquefied natural gas (LNG).
The company’s revenues have increased at a compound annual growth rate (CAGR) of 56.4% over the past three years. Going forward, the company expects revenues to increase 16% year-over-year (YoY) during FY14 (fiscal year 2014; ends December 31, 2014) to $16.93 billion, and then by 6% during FY15 to $17.94 billion, according to sell side expectations.
The company has also been able to translate the healthy growth in its topline to stronger bottomline results: its adjusted earnings per share (EPS) have grown by an average 39.9% each year in the last three years. Analysts also estimate that the company will sustain earnings growth going forward: according to the consensus projection, EOG’s earnings will grow 28% YoY this year, and by another 11% in FY15.
EOG Resources is currently trading at a one-year forward price-to-earnings (P/E) multiple of 18.5x, which is a discount of 6.3% to its three-year average forward P/E of 19.8x.
The stock is trading at a premium of 21.6% to the S&P 500’s forward P/E of 15.2x. In the past three years, however, the stock has traded at an average premium of 51.8% to the broader market, and therefore seems attractive compared to its historical premium to the broader market.
EOG Resources is also trading at a discount of 9.2% to the Oil and Gas Exploration and Production ETF’s forward multiple of 20.4x. In the past three years, the company traded at a much higher premium of 28.9% to the ETF’s P/E valuation.
These factors signal that this is a very good entry point for investors looking to go long on EOG Resources.
EOG Resources can also be compared to Chesapeake Energy and Apache Corporation (APA) for a relative performance analysis. We have considered Apache because the company’s production portfolio is skewed towards oil exploration, while Chesapeake Energy has significant exposure to the Eagle Ford shale play, where EOG Resources is the biggest producer of oil. As can be seen EOG Resources has been the fastest growing company of the three, and is also projected to grow at a faster rate than the other two going forward.
Currently, 40 analysts provide coverage on EOG Resources, and the stock has received no Sell rating yet from any of them. Among those analysts, 31 have given the stock a Buy rating, while nine recommend investors to Hold. The 12-month price target provided by these analysts is $112.7, which translates into 10.2% upside from Monday’s (May 19) closing price of $102.30. The spread between the stock price and its 12-month average price target is currently at its highest point since the first week of February.
Among notable financial institutions, analysts at Barclays Plc (ADR) (BCS) have given EOG Resources an Overweight rating and a price target of $129. Goldman Sachs Group Inc (GS) analysts have given the stock a Buy rating with a target price of $124. JPMorgan Chase & Co. (JPM) has also given the stock an Overweight rating, but at a lower price target of $106. Citigroup Inc (C) has also given the stock a Buy rating with a price target of $115.
At the end of FY13, the company had guided total production growth of 11.5% from the 2013 level (510,100 BOE/d) driven by 27% growth in crude oil production. After recording higher-than-expected production in the US during the first quarter of the ongoing year, EOG Resources has since raised its full-year guidance for crude oil production growth to 29%, which will impact total production by 12%, against the initial estimate of 11.5%.
The company recently made a two-for-one stock split at the end of March, which has given its stock more liquidity and resulted in higher trading volumes. Since the split, EOG’s stock price is up 4.3%. Within that period, strong earnings results for 1QFY14 were also announced, which saw EOG’s stock price rise 2.50% in the three days following the announcement.
In 1QFY14, the company maintained its trend of beating revenue estimates for the 15th consecutive quarter, reporting revenues of $4.2 billion (31.6% YoY growth) compared to the consensus estimate of $3.94 billion. The company posted net income of $660.9 million for the quarter (33.6% growth YoY), which translates into adjusted EPS of $1.40. The reported EPS topped the consensus estimate by a hefty 17.6%.
All these positives aside, it should be kept in mind that EOG Resources is also exposed to certain risks associated with the E&P business. Firstly, disappointing drilling results, especially in key operating areas like the Eagle Ford Formation, Barnett, Permian and Bakken plays, could significantly impact its stock price performance. Volatility in crude oil, natural gas and NGL prices can impact its cash flows as well as earnings, and consequently impact its stock price significantly.
But for now, it seems that EOG Resources’ management is on track to delivering long-term growth using a strategy based on using a strong asset base in strategic shale plays to take full advantage of the shale boom. The company has significant resources and a deep inventory, and can easily use them to drive crude oil and natural gas production growth in the long term.
EOG Resources pays a small dividend, as is evident from its forward annual dividend yield of only 0.49%. The company has also repurchased stock worth only $66.85 million, which constitutes only 0.1% of its current market capitalization, in the last twelve months. The only way it can return value to investors is via capital gains, and given its current valuations, seems very able to do so. With the multiple reasons we have discussed in this report in mind, we rate the stock a Buy.
What did you think about our analysis of EOG Resources? Did we miss something out? Leave a comment for Micheal Kaufmann in the comments section below.
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