EOG Stock Has A Sizable Upside Potential
Supported by the recovery in benchmark oil prices, the shares of EOG Resources (NYSE: EOG) have rallied by 55% since November 2020. Considering the uncertainty associated with the macroeconomic rebound and oil demand, the company plans to curtail capital expenses for the next couple of quarters . However, Trefis believes that EOG Resources stock has a strong upside potential primarily due to its premium drilling objective, where the company extracts oil from wells that provide a minimum 30% return on investment. During the third quarter, the company’s total production dropped by just 14% despite a 50% reduction in net operating wells largely due to its premium drilling strategy. We highlight the key factors driving the stock price trends over the past three years in the interactive dashboard analysis, Why EOG’s Stock Has Lost 51% Between 2017-End And Now?
EOG Resources Stock Has Been Supported By Strong Fundamentals
The company’s revenues increased by 55% from $11.2 billion in 2017 to $17.4 billion in 2019, supported by higher production and improving benchmark prices. However, the impairment and depreciation charges dragged down the net income margin in 2019 resulting in a lower earnings per share.
Despite the weakness in benchmark prices and low crude oil demand, the company generated $3.8 billion of operating cash during the first nine months of 2020. EOG’s stock has partially reached the level it was at before the drop in February and we believe that the stock still has a sizable upside potential as its current P/E multiple remains at multi-year lows. EOG’s P/E multiple changed from 24x in 2017 to 18x in 2019. While the company’s P/E is now 11x there is an upside when the current P/E is compared to levels seen in previous years.
Broader Oil Industry Outlook
After initiating mandatory production cuts in May, the OPEC+ is targeting a 0.5 mb/d increase in January 2021. To ensure price stability and monitor uneven demand trends, the OPEC+ will revisit production targets on a monthly basis. Thus, compliance among OPEC+ members is key to oil price stability in 2021. Per OPEC’s November release, the third quarter production stood at 23.8 mb/d, around 7.5 mb/d below the level observed in 2018 (fairly within the targeted range). On the other hand, the U.S. commercial crude oil and petroleum product inventories (excluding SPR) declined by 5% from 1,420 million barrels in October to 1,354 million barrels in November, supported by capacity cuts and improving demand. Thus, the Brent price is targeted to remain under $49/bbl in 2021 – nearly $6 higher than earlier estimates.
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