EOG Resources To Post A Strong Jump In Its 4Q’16 Earnings Backed By The Recovery In Commodity Prices

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With a majority of the oil and gas companies posting a notable improvement in their profitability in the last quarter, the investors have now set their eyes on the financial results of EOG Resources (NYSE:EOG), one of the largest oil and gas producers in the US. This is because the company is among the few oil and gas players that have held a firm ground during the commodity downturn and has continued to deliver consistent returns to its shareholders. Thus, the exploration and production company, which is slated to discuss its December quarter and full year 2016 performance on 28th February 2017((EOG Resources To Announce Its December Quarter 2016 Results, 17th January 2017, www.eogresources.com)), is expected to report a significant jump in its top-line as well as bottom-line backed by the rebound in commodity prices in the last few months, and its cost reduction initiatives during the quarter.

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While the oil and gas producer was unable to deliver on the market expectations in the September quarter, we believe that the company will manage to meet or exceed the analyst estimate for this quarter and continue to outperform its competitors, driven by its high quality assets and excellent execution skills. In the third quarter, EOG had acquired Yates Petroleum Corporation to increase its presence in the Delaware and Permian Basin. Post the deal, the oil and gas producer upgraded its production forecast, and revised its growth guidance from a compounded annual growth rate (CAGR) of 15%-25%, higher from the previous guidance of 10%-20% CAGR. Further, the US-based company raised its production guidance for 2016 to 559 MBOED (mid-point), representing an increase of nearly 3% from its previous guidance.

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Source: Google Finance; US Energy Information Administration (EIA)

On the cost side, too, the company made changes to its operating cost targets for the year, based on the progress of its cost cutting measures. For instance, in the Bakken region, EOG has witnessed significant cost efficiencies and aims to record well costs of $4.8 million in 2016, almost 27% lower than its prior guidance of $6.1 million. Also, in the Eagle Ford basin, EOG now expects its completed well costs to be around $4.5 million, lower than its previous target of $4.8 million.

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However, the highlight of the guidance change was the upward revision in the company’s capital expenditure. Despite the uncertainty in the recovery path of the commodities markets, EOG Resources increased its capital expenditure guidance for the year from $2.5 billion to $2.7 billion. This move, though risky, could be helpful to instill investor confidence in the company and its future prospects, given its willingness to invest more, even in a low price environment. That said, it could work against the company as well, and create a burden on its cash flows, if the company is unable to execute its strategy as planned and the commodity markets continue to disappoint in the coming quarters.

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Besides this, EOG continues to return a great value to its shareholders in the form of dividends and share buybacks. The company continues to pay its quarterly dividend of $0.1675 per share, indicating that the company is willing to share its returns with its shareholders.

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