Key Metric To Watch For EOG Resources’ Stock Recovery

Along with the second quarter earnings, EOG Resources (NYSE: EOG) raised its full-year production guidance by 3.5% despite the second wave of coronavirus pandemic prompting governments to again shut down some local economies. The company also trimmed the yearly capital expenditure budget and lowered the unit operating cost guidance to account for the negative impact of weak benchmark prices. While EOG Resources’ stock has lost nearly half of its value since January, Trefis believes that key factors such as its premium well operating strategy and declining unit production costs are likely to support a quick recovery as demand rebounds. Our interactive dashboard What Factors Drove -58% Change in EOG Resources’ Stock between 2017 and now? provides the numbers impacting the stock price change over the last three years.

What is EOG’s Premium Drilling Strategy?

In 2016, EOG Resources launched its premium drilling strategy to focus on high return wells. The company extracts oil from wells that prove a minimum 30% return on investment, which is an internally calculated metric based on potential future cash flow from a well and required investment. Currently, the company recognizes 4,500+ wells with a high rate of return. As a result, the total cost per barrel of oil equivalent was reduced from $31.24 in 2017 to $27.51 in 2019. Interestingly, the drilling and completion costs at Eagle Ford and Delaware Basin locations have also observed a yearly reduction of 7% and 14%, respectively.

Lower unit operating costs to support earnings

Due to a steep decline in benchmark crude oil prices, the company reported 623 MBD of production volume, a 23% (y-o-y) decline, during the second quarter. Lease & well costs, transportation, depreciation, G&A, and direct taxes account for 88% of the total operating costs. The company has further lowered the full-year unit operating cost target by 4% due to improving efficiency. Excluding the impact of depreciation and exploration charges, the total cash operating cost per barrel was $12.79 for the first six months, nearly a dollar lower than 2019. Moreover, lower transportation and administrative overheads are likely to be key drivers of margin expansion in 2020.

What if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

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