EOG Stock Appears To Have Priced In Its Strong Fundamentals

EOG: EOG Resources logo
EOG Resources

[Updated 2021/08/04]

The shares of EOG Resources (NYSE: EOG) have observed a 20% correction in the past month as benchmark prices dropped with the easing of production curtailments by OPEC. The company did not slash dividends in the past year as its assets continued to generate returns despite an uncertain crude oil demand. This has largely been due to the company’s premium drilling strategy and just $2 billion of asset impairments in 2020. The company is committed to maintaining a strong balance sheet and returning capital to shareholders in the coming years. Thus, the company remains a good pick for stable dividend returns. The second-quarter revenues are expected to significantly improve over the prior-year quarter, resulting in strong earnings expansion. Trefis highlights the quarterly trends in revenues, earnings, stock price, and expectations for Q2 2021 in an interactive dashboard analysis, EOG Resources Earnings Preview.

How did EOG Resources perform in the first quarter?

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In Q1, EOG Resources reported a 30% (y-o-y) growth in operating revenues (excluding gains and gathering & processing revenues) assisted by relatively flat production volumes and higher realized prices. The company reported 779 MBOED of crude oil, natural gas, and other chemicals production, a decline of just 3% over Q1 2020. Given the improvement in average realized price from $46/bbl in Q1 2020 to $58/bbl in Q1 2021, the net income surged from $10 million in Q1 2020 to $677 million in Q1 2021. Last quarter, the company reported $1.8 billion of operating cash, invested $917 million in property, plant & equipment, repaid $750 million of debt, and returned $219 million to shareholders as dividends.

[Updated 2021/05/05] – Will Premium Drilling Strategy Propel EOG Resources Stock This Year?

Last quarter, EOG Resources (NYSE: EOG) shifted toward a more aggressive capital conservation plan to sustain dividend growth and maintain a strong balance sheet. The company is targeting $2.4 billion of free cash flow generation at an average WTI benchmark price of $50. After slashing the capital expenditure budget by 50% from $6.1 billion in 2019 to $3.2 billion in 2020, the company plans to maintain the lower capital spending target this year while keeping the total production volumes relatively similar to 2019 levels, supported by the premium drilling strategy. As operational efficiency targets boost cash generation, the company has announced a 10% dividend growth for 2021. Given the stability in benchmark prices due to production curtailments by OPEC+, EOG’s earnings are likely to get a boost from top-line expansion and operational efficiencies. Trefis highlights quarterly revenue trends for the company along with our estimates for Q1 2021 and the full-year 2021 in an interactive dashboard, EOG Resources Earnings Preview.

A closer look at key financial and operational parameters

After shifting to the premium drilling strategy, which focuses on extracting oil from wells that generate higher returns, the company has been able to increase its dividend by 124% since 2016. Notably, the total cash cost per Boe (barrel of oil equivalent), which includes lease & well, general & administrative, and other cash cost heads, declined by 9% from $13.64/Boe in 2016 to $12.39/Boe in 2020. Moreover, the company is targeting a 5-10% lease and well cost reduction from $3.85/Boe in 2020 to $3.50/Boe in 2021. Thus, stable benchmark prices coupled with an aggressive operational cost reduction plan are likely to expand EOG’s earnings this year.

Will EOG stock grow further?

EOG stock declined from levels of around $77 in February 2020 (pre-crisis peak) to levels of around $34 in March 2020 (as the markets bottomed out), implying EOG stock lost 55% from its approximate pre-crisis peak. With the lifting of restriction measures and OPEC mandated cuts, the stock gained 123% to reach $76 at present. In the recent ministerial meeting, OPEC has not eased production cuts and plans to gradually increase supply by 0.35 mb/d in June and 0.44 mb/d in July subject to demand growth and macroeconomic stability. Currently, the OPEC consortium’s production is down by 6.5 mb/d, nearly 7% of global production, from the reference level.

While EOG Resources remains a good investment, it is helpful to see how its peers stack up. Check out EOG Resources Stock Comparison With Peers to see how EOG compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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