Here’s Why We Are Bullish On EOG Resources

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EOG Resources

EOG Resources (NYSE:EOG), the US-based oil and gas producer, has been on the rise since the beginning of the year, despite the turbulence in the commodity markets taking a severe toll on its competitors. The company’s stock price has grown close to 28% year-to-date, almost twice the recovery in the S&P 500 Index (Energy Sector) during the same period. This overly optimistic outlook by investors for the US-based oil and gas producer is not without strong grounds. The company has large proved reserves in the Eagle Ford, Bakken, and Delaware Basins, which are considered to be some of the best oil and gas plays in the US. This, along with its ability to improve its capital productivity and reducing its operating costs, has enabled the E&P company to deliver industry leading margins and shareholder returns.

Thus, we have revised our price estimate for EOG Resources to $93 per share, which is more than 3% higher than its current market price. Below, we discuss the major reasons for our bullish stance on the company.

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Source: Google Finance

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Firstly, over the last few quarters EOG Resources has been focused at improving its well productivity by increasing its exposure to premium drilling locations. A premium location, by EOG’s definition, is an area which has enough net resources to generate a direct after-tax rate of return (ATROR) of at least 30%, assuming crude oil price to be at $40 per barrel. In order to increase its premium drilling inventory, the oil and gas producer is either converting its existing locations into premium locations by using longer laterals, and innovative technology, or is increasing its exploring activities in its key basins.

As a result of this strategy, the company, in its latest quarterly earnings, highlighted that its premium reserve potential grew to 3.5 billion barrels of oil equivalent (billion boe) at the end of the second quarter, a 75% jump over the reserve potential in February. The company holds approximately 4,300 premium drilling locations, which represents a drilling inventory of over 10 years. With a strong and premium drilling inventory, we expect the company’s capital productivity to improve significantly in the coming quarters. That is to say, that EOG’s production and returns are likely to grow faster, even with fewer wells and lower capital spend.

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Further, the Houston-based company has been drilling wells with more efficient rigs, which allow for multiple operations to be conducted simultaneously, reducing both the time spent and costs incurred per well. As a result, the oil and gas major has managed to bring down its cash operating costs per unit by 15% in the first half of 2016 compared to full year 2015. Given these impressive capital efficiency gains, the company has revised its completed well cost targets for its major basins. Below, we provide a gist of EOG’s completed well cost guidance for 2016.

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Source: EOG Resources’ 2Q’16 Presentation

Due to the higher well productivity and capital efficiency gains over the last quarter, EOG Resources exceeded the high end of its second quarter oil production target. Since the company expects these improvements to flow even in the future, it has increased its oil production forecast to 270-276 thousand barrels of oil per day (Mbpd), nearly 2% higher from its previous guidance, without any significant change in its capital expenditure guidance.

Thus, we believe that with a strong execution track record, high quality assets, and a low cost structure, EOG will continue to deliver consistently high returns to its shareholders and outperform its peers in the future.

Have more questions about EOG Resources (NYSE:EOG)? See the links below:

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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