EOG Resources Set For Another Strong Quarter Backed By Premium Drilling Locations And Higher Commodity Prices
EOG Resources (NYSE:EOG), the US-based shale producer, is set to report its September quarter financial results on 1st November 2018. The market expects the company’s top-line and earnings to show significant improvement, backed by higher volumes and better price realization. Further, the company’s philosophy of delivering value rather than achieving growth, coupled with its 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 deliver solid returns to its shareholders in this quarter as well.
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.
Key Trends To Watch For In 3Q’18
- Rebound in commodity prices is expected to boost EOG’s 3Q’18 revenues. Brent crude oil price rose sharply in the third quarter and averaged at $75.07 per barrel, 44% higher compared to the same quarter of last year. Accordingly, we expect EOG to see higher price realization in the quarter, which will drive its top-line growth.
- At the end of 2Q18, 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. We expect further expansion in the company’s premium locations and resource potential during the third quarter.
- For full year 2018, the company expects to grow its oil output by 17%-19% on a year-on-year basis in 2018, 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, EOG is well-positioned to deliver on its production targets for the year.
- On the cost side, EOG plans to reduce its cash operating costs from $12.86 per boe in 2014 to $9.29 per boe in 2018. In the Eagle Ford basin, the oil and gas producer 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 quarter as well as full year.
- 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%.
- Furthermore, 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 years. 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.
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