EOG’s 2Q’17 Earnings To Be Driven By Its Premium Drilling Locations And Cost Reduction Measures
EOG Resources (NYSE:EOG), one of the largest oil and gas producers in the US, is expected to post a notable improvement in its June quarter results, after the market closes on 1st August 2017((EOG Resources To Announce June Quarter 2017 Results, 14th June 2017, www.eogresources.com)). While the E&P company’s top-line is likely to suffer sequentially due to lower price realizations during the second quarter, it is is expected to be higher compared to the same quarter of last year. Although the company’s stock has continued to suffer due to the imbalance in the commodity markets, we believe that its high quality assets and focused execution will enable the company to remain resilient through this commodity slump.
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Key Trends Witnessed In 1Q’17
The rebound in crude oil prices due to the OPEC production cuts slowed down in the June quarter as the US oil production and inventory levels rose sharply in the second quarter. Consequently, the WTI crude oil prices dropped from an average of $52 per barrel in the first quarter of 2017 to $48 per barrel in the latest quarter. Accordingly, we expect EOG’s price realization for the quarter to be lower than that of the previous quarter, impacting its June quarter revenues on a sequential basis.
Source: Google Finance; US Energy Information Administration (EIA)
EOG has consistently worked towards bringing down its cash costs over the last few quarters. The company reduced its completed well costs by 6% compared to the full year average of 2016 in the Eagle Ford, Delaware Basin, and Bakken using normalized lateral lengths. Post the cost savings realized in the first quarter, the company revised its cost targets for 2017 in its three key plays. For instance, the company had reduced the completed well cost in Delaware Basin to $7.8 million in 1Q’17, 8% lower than the average in 2016. Now, the company expects to further bring this cost down to $7.6 million by the end of 2017.
EOG Resources’ Completed Well Costs
On the operational front, EOG continued to focus on increasing its premium drilling locations in its key plays. According to EOG, a premium drilling location is one which has the potential to deliver a direct after tax rate of return of (ATROR) of more than 30% at $40 crude oil and $2.50 natural gas prices. In the previous quarter, the US-based company grew its development activity in the Delaware Basin and the Eagle Ford region and managed to expand its premium drilling locations by 20% to 7,200. We expect to see a similar rise in EOG’s premium drilling locations in the June quarter as well. A jump in the premium locations would result in higher profits and returns for the company and its shareholders.
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