Hit By The Oil Price War And The COVID-19 Outbreak, Is There An Upside In Sight For EOG’s Stock?

EOG Resources (NYSE: EOG) stock dropped from $55 on March 6 to $37 on March 9 as Saudi Arabia increased oil production despite the ongoing demand slump in the wake of the COVID-19 outbreak – sending benchmark oil prices down by 25% from $45 to $34 per barrel. Though the stock observed a slight uptick in recent weeks to close at $40 on March 24, it has recorded a cumulative decline of 28% since March 6 (before Saudi Arabia’s announcement to increase production). The timing of EOG Resources’ post-coronavirus recovery is mainly dependent on the dialogue between Russia and Saudi Arabia curb surplus oil production.

Growing coronavirus cases in China was the tipping point for oil price declines

• Benchmark crude oil prices started trending downwards in January as various cities in the Hubei province of China (with Wuhan as epicenter) was placed under quarantine.
• By early March, Brent crude had declined by 25% from $66 to $50 per barrel as the number of coronavirus cases started emerging in South Korea, Germany, and Italy.
• Oil prices took another hit on March 9, declining by 25% to $34 per barrel, as Saudi Arabia increased production in response to Russia’s refusal to curb production and initiated the oil price war of 2020.
• With oil prices down by around 60% since early January, EOG Resources stock has dropped by 50% since then due to strong dependence on crude oil. (Crude Oil sales contribute nearly 85% of the company’s top line)

The coronavirus outbreak next hit the stock markets in February after the WHO’s global health emergency

• Due to the growing number of coronavirus cases outside of China, the WHO declared a global health emergency on January 31.
• EOG stock has declined by 45% to $40 on March 24 since the WHO declared a health emergency on January 31 (while the S&P 500 fell by just 30%).
• Drawing lessons from the 2008 financial crisis, we see EOG stock declined from levels of around $67 in May 2008 (the pre-crisis peak) to $23 in March 2009 (as the markets bottomed out) – implying EOG stock lost as much as 62% from its approximate pre-crisis peak.
• This marked a higher drop than the broader S&P, which fell by as much as 51%.
• We compare the performance of EOG Resources vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did EOG Resources Stock Fare During Coronavirus Crisis Compared to S&P?
• EOG recovered strongly post the 2008 crisis, to levels of about $45 in early 2010, rising by 96% between March 2009 and January 2010, primarily due to a 50% jump in crude oil prices from around $60/barrel in March 2009 to $90/barrel in January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Dialogue Between Russia and Saudi Arabia Key Factor For EOG’s Recovery

• While the Saudi-led price war likely to weigh on all U.S. oil producers in the near term, historical trends indicate that there is a strong potential for EOG stock to bounce back from its March 24th price of $40 to a level above $70 (which is still well below the pre-coronavirus crisis peak of $88) in the long run. This 80% return and its timing would majorly depend on the dialogue between Russia and Saudi Arabia. Moreover, the broader containment of the coronavirus spread would increase demand for oil, and the U.S. might intervene to stabilize oil markets. (Note: the U.S. is the largest consumer and producer of oil)
• Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyses expected recovery time-frames and possible spread.
• Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture, and our complete set of coronavirus impact and timing analyses is available here.

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