Here’s Why EOG Resources Will Continue To Outperform Its Peers In 2018 And Beyond
EOG Resources (NYSE:EOG), the US-based independent oil and gas producer, is one of the few companies that have remained resilient through the commodity slump over the last few years. The company’s stock has grown over 25% in the last one year as the company continues to focus on delivering value rather than achieving growth at the expense of its shareholders. This philosophy, coupled with the company’s focus on premium drilling, has not only allowed it to bring down its break-even price but also maintain its industry-leading returns even in a low price environment. Thus, we expect EOG Resources to continue to be an industry leader and deliver solid returns to its shareholders over the long term, irrespective of the uncertainty in the commodity markets. Below, we highlight some of the key factors that will drive the company’s value in the coming years.
We currently have a price estimate of $120 per share for EOG Resources, which is higher than its market price. View our interactive dashboard – EOG Resources’ Price Estimate – and modify the key drivers to visualize the impact on its valuation.
Focus On Premium Drilling Locations To Boost Top-Line
In the wake of the depressed commodity prices, EOG Resources has shifted its complete focus to drilling and exploring only premium drilling locations over the last couple of years. These premium locations produce twice as much gross oil as the non-premium locations, and have a payback period of less than a year. Given the superior quality of reserves and use of longer laterals and advanced technologies, these locations yield a direct after-tax rate of return (ATROR) of more than 100%, at $60 per barrel of oil and $3 per Mcf of gas.
At the end of the June quarter of 2018, EOG had premium resource potential of 9.2 billion barrels of oil equivalent (boe), significantly higher than 6 billion boe in the last year. Also, the company has roughly 9,500 net undrilled premium locations that translate into a drilling inventory of over 13 years, higher than an inventory of 10 years last year. With this steep growth in the resource estimate, the company expects to grow its oil output by 15%-25% between the 2016-2020 time-frame, assuming that the crude oil prices become sticky in the range of $50-$60 per barrel. For 2018, the company expects to grow its oil output by 17%-19% on a year-on-year basis, at $50 per barrel oil, by completing 700 net wells and deploying 40 rigs on an average during the year.
We believe that a strong inventory of premium drilling locations will enable EOG to deliver on its production targets for the year and continue to generate higher returns for its shareholders in the coming quarters.
Cost Reduction Measures To Result In Better Performance
Backed by the company’s relentless efforts to reduce its completed well costs, EOG has witnessed a rise in its profitability over the last few quarters. To put things in perspective, EOG has managed to bring down its cash operating costs per unit from $12.86 per boe in 2014 to $9.91 per boe in 2017. The company plans to reduce it further to $9.29 per boe in 2018. This will be driven by the reduction in completed well costs in its key basins. In the Eagle Ford basin, the oil and gas producer has witnessed significant cost efficiencies and aims to reduce its well costs from $5.7 million in 2015, to $4.3 million in 2018. Further, in the Wolfcamp Oil basin, the company expects its 2018 completed well costs to be around $7.4 million, significantly lower than $9.8 million in 2015.
The low finding and development (F&D) costs of the premium drilling locations, coupled with the use of longer laterals and advanced technologies, will enable the company to bring down its operating costs significantly in its key plays, which will result in a notable jump in its bottom-line in the near term.
Higher Shareholder Value Through Lower Debt & Higher Dividend
EOG is among the few oil and gas majors, who have continued to pay dividends to its shareholders, despite the slump in the commodity markets. With its consistent efforts over the years, EOG has managed to bring down its break-even oil price to around $30 per barrel in its key basins. A low break-even price, coupled with a strong inventory of premium drilling locations, has enabled the company to deliver higher returns than most of its peers.
With the improving commodity prices, EOG expects to generate free cash flows of over $1.5 billion, at $60 per barrel oil, in 2018 and beyond. Also, the company has decided to share its growth with its shareholders by increasing its dividend by 31% in 2018, as opposed to its historical growth rate of 19%. Lastly, the company aims to reduce its long term debt by $3 billion, a reduction of almost 50% from its current level of $6.4 billion, in the next four year. Given the company’s focus on high-return premium locations, along with a strong execution ability, we expect the company to meet its targets on or ahead of schedule and continue to outperform its rivals in the coming year, too.
Do not agree with our forecast? Create your own price forecast for EOG Resources by changing the base inputs (blue dots) on our interactive dashboard.
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
Like our charts? Explore example interactive dashboards and create your own.