2023-11-02 14:56:08 ET
Summary
- EOG Resources does not seek splashy headline-grabbing M&A deals, instead quietly and economically established positions in the relatively new Dorado and Utica Combo plays.
- The company's strategy of being an early mover and acquiring acreage at attractive prices has led to growing reserves and low finding-and-development costs.
- EOG continues to be a technology leader - developing 140-plus in-house desktop and mobile apps for its employees to optimize drilling, capex, and revenue.
- EOG had a net cash position of $615 million at the end of Q2, which bodes well for strong shareholder returns going forward.
- EOG is expected to report strong Q3 earnings before the market open Friday, with analysts estimating revenue of $5.7 billion and EPS of $2.99/share.
EOG Resources ( EOG ) is a relatively under-the-radar oil and gas company that has never sought splashy headlines and big M&A deals. Instead, the company has typically been an early mover into burgeoning shale plays like the Eagle Ford, Bakken and Permian. More recently, the company quietly accumulated large-scale acreage positions in the newer Dorado and Utica Combo plays. Today, I'll take a look at EOG's diversified portfolio, its high returns strategy based on having low finding and development costs and then being a technology leader in exploiting its acreage, and preview its Q3 earnings report, which is scheduled to be released Friday before the market opens.
The Portfolio
The slide below was taken from EOG's August Supplemental Presentation and shows EOG's domestic shale footprint:
As you can see, EOG has a strong presence in all of the major U.S. shale basins - including the Delaware Basin of the Permian, the Eagle Ford, the Bakken, and the DJ Basin. In addition, EOG quietly established leading positions in two relatively new plays: The Dorado in South Texas, and the Utica Combo - generally west of the prolific Marcellus play.
I reported on the Dorado play in a previous Seeking Alpha article (see EOG: Pumping Income From Oil With A Natural Gas Kicker ). As pointed out in that piece, Dorado is primarily a dry-gas play that's in an excellent position to provide feedstock for the growing Gulf Coast LNG export market:
As can be seen in the graphic, EOG has accumulated a 160,000 acre leasehold in Dorado and has been relatively deliberate in ramping up drilling with only a 2-rig drilling program this year. The recent firming-up in the price of NYMEX gas could entice EOG to add another rig (or two) to the play in 2024.
EOG also cobbled together a large-scale 405,000 acre footprint in the Utica Combo play and, in a most impressive fashion, did so for under $600/acre. That's reminiscent of EOG's early exploration efforts in the Eagle Ford, where it - along with ConocoPhillips ( COP ) - were early movers that scooped up acreage at very attractive prices. EOG is taking its time to understand Utica's geology, maximize drilling and completions engineering, and - as a result - only planned 10 completions in the play this year. However, if history is any indication, the Utica Combo - like Dorado - will likely become EOG platforms for strong future growth.
My point here is this: Unlike other shale operators like Conoco, Exxon ( XOM ), Chevron, and Occidental Petroleum ( OXY ), EOG hasn't made any big splashy M&A deals that grab headlines. Instead, the company continues to be an early mover that scoops up acreage at attractive prices. That leads to growing reserves and very low finding-and-development costs. Over the long term, this strategy has enabled EOG to reduce its "all-in" total operating costs per boe, which improves its average margin/boe:
To extend this advantage even further, and growing on the company's reputation as being a technology leader in the O&G shale industry, EOG has engineered 140+ in-house desktop and mobile apps for employees to use in order to optimize revenue, operating expenses, and capex:
Q3 Earnings Preview
EOG is scheduled to release the Q3 earnings report on Friday before the market opens. Current consensus analyst estimates, according to Yahoo Finance , are for revenue of $5.7 billion and EPS of $2.99/share:
That would be down $0.72/share (19%) compared to Q3 of last year, which was obviously goosed by the high O&G price environment due to Russia's conflict in Ukraine that broke the global energy supply chain. However, it would be up 12% from the $2.66/share the company earned in Q2. Meantime, this morning, COP delivered Q3 results that significantly beat on the top-line. That being the case, I would expect EOG to beat estimates as well.
For full-year FY23, analysts expect EOG to earn $11.54/share and that will grow to $13.25/share in FY24 (+14.8% yoy).
Valuation
The graphic below compares some valuation metrics of EOG vs. some of its shale peers:
Mkt. Cap | TTM P/E | Base Dividend | Base Div. Yield | |
EOG Resources | $73.8 Billion | 8.5x | $3.30 | 2.66% |
ConocoPhillips | $146.7 Billion | 11.8x | $2.32 | 1.89% |
Pioneer Resources ( PXD ) | $56.8 Billion | 10.4x | $16.47 | 6.9% |
Diamondback Energy ( FANG ) | $29 Billion | 8.4x | $6.88 | 4.32% |
As can be seen in the graphic, EOG sports a very low P/E relative to COP and PXD. That's likely because COP has greater exposure to higher Brent pricing with its Alaska and LNG assets, and also because COP is now likely perceived to have better growth prospects in the Permian after scooping up Concho Resources and Shell's assets during the pandemic downturn. And, as you know, Pioneer recently agreed to sell-out to Exxon Mobil in what I considered to be a relatively expensive acquisition (see Chevron Buys Low, Exxon Buys High - a Seeking Alpha Editor's Pick).
However, EOG has a big advantage: it had no net-debt at the end of Q2:
- Cash: $4.76 billion
- Total debt: $4.15 billion
That is, EOG actually had a net cash position of $615 million at the end of the quarter. That bodes very well for shareholders going forward, as EOG has previously committed to returning 60% of annual free cash flow to its investors. So the less interest the company pays on its debt load (or in this case, makes on its net-cash position), the more cash it will have for shareholder returns.
Summary & Conclusion
EOG is a somewhat under-the-radar O&G company that's just fine with keeping a low profile. That has enabled the company to quietly build some of the best positions in the most prolific shale basins in the L-48. The company continues to use employ technology - most lately in the form of 140+ in-house developed desktop and mobile apps - in order to efficiently exploit these assets. Expect another strong performance in the company's Q3 report, and with oil and gas prices rising toward the end of Q3, and even stronger Q4 and full-year report.
I'll end with a five-year total returns comparison of EOG, COP, FANG, and PXD:
As you can see, EOG has been the laggard in the group over the past five years, with COP and PXD leading the way. However, going forward, I would expect EOG to begin closing the gap (somewhat) as its long-term strategy begins to bear fruit.
For further details see:
EOG Resources: Quiet Accumulation Vs. Splashy M&A