Summary
- One of the last L-48 shale producers to report, EOG will release its Q4 and full-year 2022 results next Friday before the market opens.
- Today I'll give investors a sneak-peak preview as to what to expect from one of the best shale operators in the business.
- In addition, I will discuss the outlook for oil and gas prices going forward, as well as EOG's dividend.
EOG Resources ( EOG ) is generally regarded as one of the most technically innovative and efficient shale producers in the business. With Q3 average daily production of 919,200 boe/d, it's also one of the largest. With a breakeven price below $40/bbl WTI, and at the relatively high current price of oil, EOG was able to turn that production into $2.3 billion of free cash flow in Q3 and pay out a $1.50/share special dividend. Today I'll take a look at what to expect from EOG when it releases its Q4 and full-year 2022 report before the market opens next Friday. I'll also look at what to expect from oil and gas prices and the dividend going forward.
Consensus Estimates
The graphic below shows current consensus EPS estimates for EOG per Yahoo Finance:
Yahoo Finance
Of note is that 90 days ago the consensus EPS estimate for Q4 was $3.89 and it has fallen steadily to the present time. Much of that is simply due to the fact that the price of WTI declined from over $90/bbl at the start of Q4 (early October) to close out the year and the quarter around $80/bbl:
MarketWatch
Note: Red annotation by the author.
In addition, note that earnings reports on Tuesday from shale producing peer Devon Energy ( DVN ), and again Wednesday from Marathon Oil ( MRO ), were relatively disappointing as Winter Storm Elliot was blamed for curbing production. Devon had previously warned that severe winter weather would cut Q4 output by ~2% , but also said Q1 volumes would be "temporarily impacted by infrastructure outages in the Delaware Basin, timing of wells placed online and ethane rejection" and flat vs Q4.
In the case of MRO, the storm was blamed for ~5K net bpd of oil production decline - primarily in the Bakken shale.
Combined with the weekly EIA Petroleum Report released Wednesday morning that showed commercial crude oil inventories grew by a whopping 16.3 million bbls week-over-week and refineries ran at a low capacity utilization rate of only 86.5% due to significant maintenance related shut-downs, and news of a Congressionally mandated release of an additional 26 million bbls from the Strategic Petroleum Reserve ("SPR"), and the stock of all three companies traded down Wednesday - with Devon really taking it on the chin due to its weak forward guidance:
Perhaps a bigger concern for EOG going forward is the crash in the price of domestic natural gas:
MarketWatch
As I advised investors in my recent Seeking Alpha article on APA Corp ( APA ), Natural Gas Is Down, But Not Out . As pointed out in that piece, I expect the price of domestic natural gas to stay low until new LNG capacity comes online in 2024 and beyond. So, this will likely be a tough year for EOG on yoy nat gas realization comparisons (ignoring any hedging impacts). Note that in Q3 , EOG's dry-gas volumes equated to ~245,000 boe/d, or ~27% of total production. Likewise, NGLs prices (like propane) have also cratered, and those volumes were another ~23% of EOG's production. The point is, in Q3, only ~50% of EOG's production was oil.
With all that bad fundamental news, note that EOG stock is still up 3.3% year-to-date, refinery maintenance won't last forever and is in preparation for what should be another big driving season, and the SPR releases will likely wind down after the latest announced release due to intense political criticism. Plus, the Biden administration's SPR refill policy ( at or below $67-$72/bbl ) will put a floor under the price of WTI going forward. Note that the mid-range of that "refill price" is more than 2x EOG's breakeven price.
The Dividend
EOG is in a great position to reward shareholders with excellent dividend income because at the end of Q3 it had net-debt of a positive $188 million. And, as mentioned earlier, EOG's breakeven price is so low, that it will print cash for shareholders in Q4 and for this year as well.
Indeed, as shown in the Q3 presentation , and unlike peer ConocoPhillips ( COP ) which has decided to greatly over-emphasizing share buybacks over the dividend, EOG has been richly rewarding shareholders with excellent dividends directly into their pockets:
EOG Resources
As can be seen in the graphic, EOG's total dividend payments (base+special) for 2022 were $8.80/share, or 67% of FCF. Given the current stock price of $128.53, that equates to a TTM yield of 6.85%. As I have previously cautioned my Seeking Alpha followers numerous times, most financial websites - including Seeking Alpha and Yahoo Finance - are having trouble reporting shale producers' yields given their variable dividend policies. Indeed, both those sites have EOG's yield at 2.57% (i.e. they neglect the variable/special dividends and consider only the current base dividend of $3.30/share).
Summary and Conclusions
Given EOG's shareholder friendly management team, its low breakeven point (the company has 6,000 "double premium" drilling locations that deliver in IRR of 30% at WTI=$40/bbl and $2.50/Mcf nat gas), and the no-debt profile, I expect EOG to declare another special dividend in the neighborhood of the last one - or ~$1.50/share.
However, going forward - and in consideration of the plunge in natural gas and NGLs pricing - I suspect EOG will have trouble repeating the $8.80/share in dividends paid out last year. That being the case, the current 9.2x forward P/E seems to be a fair value in my opinion. I say that because COP is trading with a forward P/E = 9.9x - but it has higher margin LNG assets in its portfolio that EOG doesn't have.
Pioneer Natural Resources ( PXD ), perhaps EOG's closest direct comparison in the shale patch, trades at a forward P/E of only 7.2x, that despite paying out over $25/share in dividends last year. From that standpoint, EOG could be considered over-valued.
I suspect that 2024 will be better than 2023, because that's when the true potential of EOG's new natural gas play (Dorado) will likely be realized (see EOG: A Natural Gas Kicker ). Bottom line: I reiterate my HOLD rating on EOG and suggest that EOG shareholders enjoy the dividends this year while considering they may have to be patient and wait until 2024 for some decent stock price appreciation.
For more of a long-term perspective, I'll end with a 10-year total returns comparison of EOG, COP, PXD, and DVN:
For further details see:
EOG Resources: What To Expect From Next Week's Q4 Report