EOG Resources, Inc. is an independent oil and gas company headquartered in Houston, Texas.. It is one of the largest crude oil and natural gas exploration & production (E&P) companies in the US with proved reserves in the US and Trinidad. As of 4Q23, EOG's daily average production amounted to c.1.0mmboepd and net proved reserves comprised of 41% oil and condensate, 22% natural gas liquids (NGLs) and 37% natural gas.
Investment Overview
Premiumisation strategy is unique. After successfully implementing “premium” wells strategy (focused on wells that can generate at least 30% after tax rate of return at US$40/bbl WTI oil, US$2.5/mmbtu Henry Hub natural gas, and US$16/bbl NGL prices) in 2016-2020, EOG is now implementing “double premium” wells strategy (doubling the return hurdle from 30% to 60%). The “double premium” strategy has enabled EOG to generate higher cash flow and faster investment payback; lower WTI breakeven prices (from US$81/bbl in 2016 to US$42/bbl in 2022 for 10%+ yield in ROCE); and significantly reduce finding & development (F&D) costs. To ensure sustainable operations, EOG is implementing its in-house developed system, iSenseSM (a continuous leak detection technology to reduce methane emissions) across its portfolio and also launched a carbon capture & storage pilot project.
Focus on Ohio Utica combo play for growth. EOG has allocated US$6.2bn in capex for FY24 (slightly higher than FY23 capex to deliver 7% total production growth, including 3% oil production growth. In 2022, EOG uncovered a new premium play, the Ohio Utica combo (405k net acres on the western edge of the Marcellus and Utica shales), and advanced two emerging plays, the South Texas Toronto and Southern Powder River Basin (reduced drilling time by 10% with improved bid and drilling motor performance). The company progressed several exploration prospects including the Northern Powder River Basin. EOG has also expanded its LNG agreements, estimated to take effect in 2026, to 720,000mmbtu per day and 900,00mmbtu per day from 2027, with pricing diversification. EOG has also commenced construction on a new 36-inch gas pipeline from the field to the Aqua Dolce sales point near Corpus Christi, Texas, to help capture the value chain, support expanded LNG export price exposures, and broaden capacity to reach the entire Gulf Coast corridor.
Competitive cash returns play with zero gearing. EOG has low-cost structure, high-quality well inventory, and strong balance sheet to support dividend sustainability. The company maintained a strong balance sheet with net cash position at end-FY23. Free cash flow (FCF) in FY23 amounted to US$5.1bn and paid out US$4.4bn to shareholders via US$3.4bn dividends and US$1.0bn share repurchases. At strip pricing of US$75 per barrel for WTI crude and US$2.50 per mcf for Henry Hub natural gas, EOG forecasts free cash flow generation of around US$4.8bn in 2024, not too different from FY23 levels. The company enhanced its minimum level of shareholder return commitment to 70% of FCF from 60% earlier. EOG has US$4.0bn remaining authorization in place for opportunistic share repurchases. EOG will retain the flexibility to use surplus FCF for opportunistic bolt-on acquisitions.
We have a BUY call on EOG with a TP of US$155. Our TP is implying a forward FY24 P/BV multiple of 2.8x, premised on +1.5 S.D. valuations, given high ROEs of close to 25% with zero gearing, amid elevated oil & gas price environment. The company's low-cost resource base, industry-leading balance sheet and commitment to increasing cash returns position it well to continue generating sustainable investor value. The strong balance sheet also positions EOG to evaluate opportunities to consider bolt-on acquisitions and add low-cost acreage to its multi-asset portfolio.
Risks
Key risk is lower-than-expected commodity prices. The higher commodity prices (eg. crude oil, natural gas, NGLs) has helped EOG to deliver superior earnings, thus significant drop in commodity prices may affect company performance. Valuations may also be impacted by relatively low scores on environmental pillar in ESG factors, owing to emission intensive operations.
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