EOG Misses Market Estimates But Delivers Strong Growth; Increases Production Growth Target For 2017

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EOG: EOG Resources logo
EOG
EOG Resources

EOG Resources (NYSE:EOG), which reported its June quarter results on 1st August 2017((EOG Resources Announces June Quarter 2017 Results, 1st August 2017, www.eogresources.com)), missed the market expectations for its earnings by a fair margin. However, the company posted a remarkable improvement in its revenue on a year-on-year basis, backed by the significant growth in its production volumes and higher price realizations during the quarter. Further, the US-based company, which is known to be one of the lowest cost producers globally, continued to bring down its operating costs drastically, resulting in a solid jump in its profits compared to the same quarter of last year.

Although the market seems to be a little disappointed by the earnings miss, EOG has increased its production growth target from 5% to 7% for the full year 2017. Also, unlike its competitors, Anadarko Petroleum and ConocoPhillips, who have pulled back their capital spending budget for the year, EOG has upheld its current capital investment plan of $3.7-$4.1 billion, and aims to complete around 480 wells by the end of the current fiscal year. While some may see this as an aggressive move which could backfire, we believe that with EOG’s high-quality assets and excellent execution skills, these targets are easily achievable and are likely to enhance the company’s returns in the near term.

See Our Complete Analysis For EOG Resources Here

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Operational Highlights

  • EOG’s production volumes rose by almost 10% in the second quarter, driven by the surge in its oil production as a result of well productivity improvements realized by the company. Further, the oil and gas company’s average price realization for the quarter was notably higher compared to the same quarter of the last year. This allowed the company to report 2Q’17 revenue of $2.61 billion, nearly 50% higher than the year ago quarter.

  • Further, the company continued to use longer laterals and advanced technologies to bring down its operating costs during the quarter. EOG managed to reduce its completed well costs for the first half of 2017 by an average of 7% in its key plays such as the Eagle Ford, Delaware Basin, and Bakken. Based on the continued success of its cost reduction initiatives, the company expects to meet its cost saving targets in its three key plays by the end of the year.

  • Unlike last quarter, EOG’s premium drilling location inventory did not increase in the second quarter. However, the company continues to hold 7,200 premium drilling locations that have a 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. The E&P company will continue to actively engage in a robust exploration program to lease and test multiple new prospects and grow its premium locations in the coming quarters.

Going Forward

  • The major highlight of EOG’s 2Q’17 results was the update in its production growth target for the year. Given the strong well productivity improvements witnessed by the company, it now expects its US oil output to increase by 20% as opposed to its earlier expectation of an 18% rise. Accordingly, the company estimates its overall production to expand by 7% instead of 5% as previously anticipated. To achieve these plans, the company aims to complete roughly 480 wells by deploying an average of 26 rigs during the year.
  • In order to meet these aggressive production targets, EOG has maintained its capital investment budget at $3.7-$4.1 billion for 2017. EOG’s move is contrary to the trend witnessed in the current earnings season, where large E&P companies have pulled back their capital investment in the wake of the growing uncertainty in the commodity markets. However, in our view, given the robust inventory of premium drilling locations, lowest cost structure, and exceptional delivery skills, it should not be difficult for EOG to achieve these targets by year end. In fact, we believe that the company is well-positioned to leverage its low cost structure and will continue to generate industry leading returns even in a low price environment.

EOG’s Revised Targets For 2017

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