VALUATION HIGHLIGHTS

1. Crude Oil constitutes 81% of the Trefis price estimate for EOG Resources's stock.
2. Natural Gas Liquids constitute 10% of the Trefis price estimate for EOG Resources's stock.
3. Natural Gas constitute 10% of the Trefis price estimate for EOG Resources's stock.

WHAT HAS CHANGED?

Strong Fundamentals Assisting Shareholder Returns

The shares of EOG Resources have observed a 20% correction in the past month as benchmark prices dropped with the easing of production curtailments by OPEC.

The company did not slash dividends in the past year as its assets continued to generate returns despite an uncertain crude oil demand.

It has largely been due to the company’s premium drilling strategy and just $2 billion of asset impairments in 2020. The company is committed to maintaining a strong balance sheet and returning capital to shareholders in the coming years. Thus, the company remains a good pick for stable dividend returns.

The company is targeting $2.4 billion of free cash flow generation at an average WTI benchmark price of $50. After slashing the capital expenditure budget by 50% from $6.1 billion in 2019 to $3.2 billion in 2020, the company plans to maintain the lower capital spending target this year while keeping the total production volumes relatively similar to 2019 levels, supported by the premium drilling strategy.

As operational efficiency boosts cash generation, the company has announced a 10% dividend growth for 2021. Given the stability in benchmark prices due to production curtailments by OPEC+, EOG’s earnings are likely to get improve from top-line expansion and operational efficiencies.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are some key value drivers for EOG Resources that present opportunities for a significant upside or downside to the current Trefis price estimate for the company:

• Average Crude Oil Sales Price: EOG Resources' stock price is highly sensitive to crude oil prices as the company derives almost 80% of its total value, by our estimates, from the sale of crude oil. The company's average crude oil realization stood at $51 per barrel in 2017. Given the OPEC's decision to cut its oil output over the next few months, we estimate oil prices to recover gradually and average at around $63 per barrel by the end of this year. After that, the oil prices will grow gradually to $100 per barrel by 2025. However, if oil prices remain depressed for longer than what we currently expect, and increase only to around $85 per barrel by the end of our forecast period, there could be 8% downside to our current price estimate for EOG Resources.


• Average Daily Crude Oil Sales Volume: EOG Resources' average daily crude oil sales volume has grown sharply from just around 55 thousand barrels per day (MBD) in 2009 to 222 MBD in 2017, implying a CAGR of roughly 20%. Almost all of this growth in the company's crude oil sales volume has come from its operations in the Eagle Ford and Bakken shale plays in the U.S. We currently forecast EOG Resources' Average Daily Net Crude Oil Sales Volume to grow at an increasing rate to around 548 MBD by the end of our forecast period.
  However, if the company is not able to ramp up its crude oil production at the projected rate and it increases to just around 460 MBD by the end of the Trefis forecast period, there could be 14% downside to our current price estimate for EOG Resources. On the other hand, if the company can grow its average daily crude oil sales volume to 590 MBD, there could be a 6% upside to our current price estimate for EOG Resources.

For additional details, select a driver above or select a division from the interactive Trefis split for EOG Resources at the top of the page.

BUSINESS SUMMARY

EOG Resources is an independent oil and gas company that explores for, develops, produces, and markets crude oil and natural gas primarily in major producing basins in the U.S., Trinidad, Canada, and the U.K. Around 97% of the company's total net proved reserves are located in the U.S., while 3% of remaining net proved reserves are located in Trinidad. The remaining proved reserves of the company are spread across other International markets, including the U.K., Canada, Argentina, and China.

The difference between EOG Resources' reported net revenue and the figures used in our model is primarily because we use core sales revenue (which comes from the sale of hydrocarbons) figures that exclude the revenue it generates from distribution, processing, and marketing of hydrocarbon and other sources of income.

SOURCES OF VALUE

Crude Oil exploration and production is by far the most valuable division for EOG Resources for the following reasons:

Huge proven reserves

Proven reserves is an extremely critical metric for an oil and gas exploration and production company. It represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. It directly impacts the company's production growth outlook.

EOG Resources' proved hydrocarbon reserves stood at 2.7 billion barrels of oil equivalent at the end of 2018. Just to give some perspective on these numbers, EOG Resources currently holds enough reserves to produce oil and gas for the next 10.5 years at 2017 production rates.

Leading position in the Eagle Ford shale

The Eagle Ford shale formation in South Texas runs from the US-Mexico border north of Laredo in a narrow band extending northeast for several hundred miles to just north of Houston. The Eagle Ford shale is now the largest tight oil play in the U.S. by EIA estimates. It contributes about 50% to EOG Resources' total crude oil production.

EOG Resources is the leading oil producer and acreage holder in the Eagle Ford shale. The company holds 590,000 net acres in the play, a majority of which 582,000 acres fall in the crude oil window of the formation. In 2017, EOG Resources produced crude oil from the Eagle Ford shale at an average rate of 157,000 barrels per day, compared to just over 30,000 barrels per day that it produced in 2011.

KEY TRENDS

Improving volume-mix

EOG Resources' volume mix has been improving recently with the proportion of liquids (crude oil and natural gas liquids) in its total sales mix increasing. Liquids are priced higher than natural gas primarily due to higher energy density and ease of transport, among other factors. In 2017, EOG Resources sold liquids at an average price of over $55.01 per barrel, while the company realized a price of just $13.74 per BOE of natural gas on average. Therefore, despite lower finding, development, and lifting costs per BOE of natural gas, the production of liquids is still a far more lucrative source of revenue for upstream oil and gas companies in the U.S.

The proportion of liquids in EOG Resources’ total production volume-mix has improved significantly from just around 22% in 2009 to 65% in 2016. We expect the company’s sales volume-mix to improve further as it plans to increase its focus on liquids production in the coming years. The trend of increasing liquids proportion in the company's production mix is expected to continue in the long run, boosting its unit profitability.

Improving well productivity

Over the last few years, EOG Resources’ average well productivity has increased considerably on optimized spacing and efficiency improvements in fracking techniques. Higher well productivity leads to lower per-unit production costs, which results in thicker operating margins for upstream oil and gas companies. EOG Resources’ cumulative crude oil production (in the first 90 days) from a normalized 6,600-foot lateral well in the Eagle Ford play has increased from just over 30,000 barrels in 2011 to roughly 84000 in 2018.

Going forward, we expect EOG Resources' well productivity to improve further on increasing estimated ultimate recovery (EUR) per well due to technological advancements in fracking techniques.

Declining well costs

Continuous improvements in drilling efficiency are leading to lower cash costs per well for EOG Resources. The company’s average completed well cost (CWC) for a normalized 5,300-foot lateral well in the Eagle Ford shale has declined from $7.2 million in 2011 to $4.5 million in 2018.

Peak oil

It is estimated that a large part of the world's oil reserves has already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.

However, many institutions, such as the International Energy Agency (IEA), believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand for energy will be met at all times to come.