Is The Market Pricing EOG Resources Fairly?

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EOG: EOG Resources logo
EOG
EOG Resources

EOG Resources (NYSE: EOG) reported ~45% year-on-year (Y-o-Y) jump in revenue for its full-year 2017, compared to the same period the previous year. The company has largely benefited from higher crude oil and natural gas prices with the extension of oil production cuts by the Organization of Petroleum and Exporting Countries (OPEC) and non-OPEC allies. Additionally, the company’s continued focus on its premium drilling locations has helped cut costs and boosted its bottom line. We have a $126 price estimate for the company, based on our interactive valuation calculator. This price is ~20% higher than the current market price. We believe that the market is underpricing the impact of higher oil prices on the company’s performance.

Our $126 price estimate for the company is based on an estimated EBITDA of $5 billion in 2018. P/EBITDA multiple is assumed to be 14.2, close to its 2017 level. With an implied share count of 575 million, we arrive at our estimated fair price of $126 for the company.

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EOG displayed significant improvement in its EBITDA margin in 2017 backed by the company’s relentless efforts to reduce its completed well costs in its key plays such as the Eagle Ford, Delaware Basin, and Bakken. Due to this reason, we believe that the company’s EBITDA margin will remain at a higher range of ~37%, close to its 2017 figure. With an estimated net revenue of $13.8 billion and an EBITDA margin of 37%, we arrive at our estimated EBITDA value of $5 billion.

Revenue of $13.8 billion is arrived at by taking the sum of crude oil sales revenue, natural gas revenue, natural gas & liquids (NGLs) revenue, and gathering, processing, marketing and other revenue. We expect crude oil sales volume to be 145 million barrels, in line with the company’s guidance. Crude oil prices are expected to subside at $58/ barrel for the company, benefiting from the oil production cuts by the OPEC and non-OPEC allies. This suggests an annual revenue of $8.3 billion from the crude oil segment. Additionally, natural gas prices are also likely to benefit from the aforementioned output cuts, which should result in the natural gas price to subside at $2.36/ mcf. With an expected natural gas output of 446 bcf, we expect total natural gas revenue to be $1.1 billion in 2018. Total NGL and gathering, processing, marketing and other revenue are expected to be rangebound at around $903 million and $3.5 billion, which gives us our total estimated revenue of $13.8 billion.

We believe that the prevalent favorable pricing environment for crude oil and EOG’s improving cost position provides the company with a significant potential to grow in the current year. This results in our price estimate for the company to be $126, about 20% higher than the current market price. In case you have a different perspective, you can create your own scenario by changing our modifiable assumptions and arrive at your own fair price estimate for the company.

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