Here’s Why EOG Resources Is Better Positioned To Weather The Commodity Downturn Than Its Peers
EOG Resources (NYSE:EOG), the US-based oil and gas producer, has been a safe bet for investors this year despite the persistent weakness in commodity prices. The independent exploration and production (E&P) company’s stock has gone up by almost 18% since the beginning of 2016, while most of its competitors have be struggling to remain afloat in the ongoing oil slump. The primary reasons behind this resilience have been the company’s high quality assets, and its ability to improve its capital productivity, while controlling its operating costs. In addition, the company has a strong balance sheet with an investment grade rating that has enabled it to deliver consistent returns to its shareholders, despite the volatility in the commodity markets. In this article, we discuss why EOG Resources has been able to cope with the current down cycle and is likely to outperform its peers even at low commodity prices.
We currently have a $87 per share price estimate for EOG Resources, which is roughly 5% higher than its current market price.
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Source: Google Finance
Growing Drilling Inventory
As of 31st December 2015, EOG Resources had total net proved reserves of approximately 2.1 billion barrels of oil equivalent (BOE). Of these, almost 97% are located in the US, with a large presence in Eagle Ford, Bakken, and Delaware Basin. These regions are considered to be some of the most lucrative oil and gas plays in the US, primarily because of their rich oil and gas reserves and high economic value. Hence, the company has continued to grow its reserves and drilling inventory in these regions over the years. In total, the company has acreage of approximately 1.3 million with close to 12,500 remaining drilling locations, translating into a drilling inventory for more than 20 years. Further, the company has also been focused at building its premium drilling locations which can enable it to make large capital efficiency gains and deliver a faster production growth in a strong price environment. Since, most of these drilling locations have not commenced production yet, EOG has a huge potential to ramp up its production once the commodity markets rebound.
EOG’s Drilling Inventory of Crude Oil Assets
Source: EOG Resources 1Q’16 Presentation
The company’s exposure to such high quality assets has allowed it to maintain its production and deliver a high rate of return, despite the decline in its capital spending over the last few quarters. Based on the current market conditions, EOG expects 60% of its assets to yield an after-tax rate of return (ATROR) of 30%, even if the crude oil prices are at $40 per barrel. Further, if the oil prices reach $50 per barrel, the company anticipates these fields to generate on ATROR of close to 60%.
Source: EOG Resources 1Q’16 Presentation
Reducing Operating Costs
Apart from leveraging the high quality assets, EOG Resources has been proactively reducing its operating costs to sustain its operating profits in the current downturn. The company has maintained its lease and operating expenses (LOE) at around $6 per BOE over the last five years despite the rising liquids production, while its competitors have LOE in the range of $8 to $10 per BOE. By creating a dent in its LOE, the Houston-based company has managed to bring down its cash operating costs by over 30% over the last five quarters.
EOG’s Cash Operating Cost Reduction ($ per BOE)
Source: EOG Resources 1Q’16 Presentation
Further, the oil and gas producer has been consistently reducing its completed well costs in its key basins. For example, the company targets to reduce the completed well cost of its Bakken assets from $8.8 million in 2014 to $6.2 million in 2016. Similarly, it plans to cut the completed well costs for the Delaware Basin Wolfcamp Oil Play from $11.5 million in 2014 to $6.7 million by the end of this year. Although some of these costs could increase once the oil prices recover, a few of these costs are permanent in nature, and will allow EOG to maintain its industry leading margins even in a strong oil price environment.
Strong Balance Sheet
Due to the deteriorating commodity prices, the cash flows of most of the E&P companies have been declining. As a result, several have been forced to file for bankruptcy over the last few quarters. However, EOG Resources has a strong balance sheet with an investment grade credit rating, unlike most of its counterparts, who have highly levered books. At the end of 2015, the company had long term debt of $6.6 billion, which is significantly lower than its competitors, such as Anadarko Petroleum and ConocoPhillips. In fact, the company anticipates its net debt to EBITDAX ratio (earnings before interest, taxes, depreciation, depletion, amortization (DD&A), and exploration expenses) for 2016 to be less than 3, much below the industry average of 4.
EOG Has A Low Net Debt To EBITDAX Ratio Compared To The Industry
Source: EOG Resources 1Q’16 Presentation
In addition to this, the company has continued to return value to its shareholders in the form of dividends, despite its diminishing cash flows. The company has grown its dividends at a compounded annual growth rate of 21% over the last 16 years, from $0.03 per share in 1999 to $0.67 per share in 2015. Despite the uncertain outlook of commodity markets, the company expects to pay a dividend of $0.67 per share in 2016, even when most of its peers have suspended dividends to preserve their cash flows.
Thus, we conclude that with an increasing drilling inventory of high quality assets, lower operating costs, and a strong balance sheet, EOG Resources is well positioned to weather the commodity down cycle and grow at a fast pace when the commodity markets rebound.
Have more questions about EOG Resources (NYSE:EOG)? See the links below:
- How Will EOG Resources’ Production Trend Over The Next Few Years?
- Why Are EOG Resources’ Crude Oil Operations More Important Than Its Natural Gas Operations?
- How Will EOG Resources’ Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- How Will EOG Resources’ Revenue Move If Crude Oil Prices Average At $50 Per Barrel Till 2018?
- How Will EOG Resources’ Revenue And EBITDA Grow Over The Next Five Years?
- How Has EOG Resources’ Revenue And EBITDA Changed Over The Last Five Years?
- What Will Be EOG Resources’ Revenue And EBITDA Composition In 2016?
- What Is EOG Resources’ Fundamental Value Based On 2016 Estimated Numbers?
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- EOG Resources Posted Weak 1Q’16 Results Driven By Ongoing Commodity Downturn
- Expect Another Weak Quarter From EOG Resources On The Back Of Depressed Commodity Prices
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- How Are Natural Gas Prices And Global Gas Rig Count Correlated?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for EOG Resources
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