EOG Resources To Report Strong 1Q’17 Earnings Backed By Its Premium Drilling Locations
With the surge in commodity prices over the last few months, EOG Resources (NYSE:EOG), one of the largest oil and gas producers in the US, is expected to post a remarkable improvement in its March quarter results, after the market closes on 8th May 2017((EOG Resources To Announce March Quarter 2017 Results, 4th April 2017, www.eogresources.com)). Having exceeded the consensus estimate by a huge margin in the last quarter, the market expects the company to repeat its excellent performance in this quarter, backed by its focus on premium drilling and relentless efforts to control its operating costs. While the company’s stock has suffered due to the rising US stockpile and production in the last couple of months, we believe that the company’s high quality assets and focused execution is likely to augment its future value.
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Key Trends Witnessed In 1Q’17
As the Organization of Petroleum Exporting Countries (OPEC) implemented the promised production cuts in the first quarter, crude oil prices saw a sudden rise, and averaged at around $52 per barrel during the quarter, as opposed to an average of only $33 per barrel in the same quarter of last year. Since gas prices are closely related to oil prices, the Henry Hub gas prices increased from $1.99 per MMBTU in 1Q’16 to over $3.02 per MMBTU in the latest quarter. This rebound in oil and gas prices is expected to result in a drastic jump in EOG Resources’ price realizations for the quarter.
Data Source: Google Finance; US Energy Information Administration (EIA)
Further, EOG plans to transform into a premium-only driller and expects to deliver an 18% oil production growth in 2017, at $50 per barrel oil and $3 per mcf gas. For this, the company acquired Yates Petroleum Corporation to increase its presence in the Delaware and Permian Basin. With this deal, the E&P company’s premium drilling locations, that generate 30% direct after tax rate of return (ATROR) at $40 per barrel oil, increased by 40% to 6,000 locations, With a higher focus on premium drilling sites, and consistent efforts to improve their well productivity, we expect EOG’s 1Q’17 production to witness a notable growth, which will boost its top-line for the quarter.
On the cost side, EOG has managed to significantly bring down its operating costs in order to maintain its industry leading margins. In 2016, the oil and gas producer reduced its cash operating costs to $10.55 per barrel of oil equivalent (boe), 15% lower compared to the prior year. Based on the progress of its cost cutting measures, the company expects to further reduce its cash costs in its key basins – the Bakken region, the Eagle Ford basin, and the Delaware basin.
Over the long term, EOG expects its oil production to grow at a compounded annual rate of 15%-25% over the next four years, if crude oil prices remain in the $50-$60 per barrel range. The company expects this growth to be driven by its major basins – the Eagle Ford, the Delaware Basin, the Bakken, the Powder River Basin, and the DJ Basin. In order to achieve its expansion plans, the company has budgeted $3.7-$4.1 billion for its capital spending in 2017, of which more than 80% will be directed towards exploration and development activities. Also, the oil and gas producer will continue to optimize its balance sheet by divesting its non-core and non-strategic assets, and will be dedicated towards returning value to its stakeholders in the form of dividends.
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