EOG Resources: The Right Play Now (NYSE:EOG)

In that location’s a vastness here and I believe that the people who are born hither exhale that vastness into their soul. They dream large dreams and recall large thoughts, because there is nada to hem them in.” ― Conrad Hilton (On Texas)

Today, nosotros take a deeper wait at big energy producer whose stock has sold off along with natural gas and oil prices in contempo weeks. With reasonable valuations, an insider purchase in the stock in January and a big dividend yield, the share merited farther investigation. An analysis follows beneath.

Company Overview:

EOG Resource, Inc. (NYSE:EOG)
is a Houston-based contained oil, natural gas, and natural gas liquids [NGLS] exploration and production company with proved reserves of 3.75 billion barrels of oil equivalent [BOE] as of December 31, 2021, almost exclusively in the U.South. A pioneer in horizontal drilling into shale formations, the visitor’s reserves breakout ~42% crude oil, 36% natural
gas, and ~22% NGLs. EOG was formed in 1985 every bit Enron Oil & Gas, went public in 1989, and was spun out of the infamous Enron Corporation in 1999 with a simultaneous change to its current moniker. Shares of EOG trade around $118.00 a share, equating to a market place cap just shy of $70 billion.

The visitor’s lease holdings are located in some of the most prolific basins in the country, including three plays in the Delaware Basin of West Texas and New Mexico (which currently comprise approximately one-half its overall product), its Eagle Ford oil and Dorado gas plays of South Texas, as well every bit the Powder River Basin of the Rocky Mountain region. The basins offer multiple transportation options and markets in which to sell. From these properties (and a tiny offshore play in Trinidad), the company produced 247.viii meg barrels of Boe during the first nine months of 2022 (YTD22), representing an 11% increase over YTD21.

Approach

With performance invariably tied to the market place pricing of its underlying commodities, management endeavors to outperform its peers by employing the most stringent investment hurdle rate in the industry, needing opportunities to produce a minimum 60% after-tax rate of return bold apartment $40 oil and $ii.fifty natural gas pricing – in what it refers to as its double premium strategy – in guild to movement forward with a project. This approach is made possible past EOG’s multi-bowl portfolio, which information technology leverages by allocating resource conditioned upon the most advantageous basin-level dynamics, enabling it to realize higher crude oil prices vis a vis its peers – typically $2.l to $3.00 per barrel – and (to a certain extent) influence said basin-level dynamics. On the expense side, it utilizes land-of-the-art seismic engineering and well stimulation modeling to drive higher product and more than efficient resource deployment, resulting in lower per Boe costs. The prior sentence may sound like average marketing nonsense, merely EOG functions in a decentralized fashion with each basin team operating independently and subsequently sharing its learnings with the other teams and then the company can get more efficient in the field. Equally a result, the company has lowered its operating and other expenses on a Boe basis from $28.xc in FY16 to $22.80 in FY21 and to $21.72 in YTD22.

Although EOG grows (and can go along to grow) organically in its already established properties with ~11,500 undrilled premium locations, information technology announced a 395,000 net acre position in the Utica play of the Appalachian Basin in Ohio, bringing its significant resource basin total to seven in November 2022. Additionally, EOG acquired ~135,000 mineral acres in the southern portion of the geography. The full cost of entry was less than $500 million.

With regard to its shareholders, the visitor is committed to returning at least threescore% of its free greenbacks catamenia, typically via regular and special dividends.

Stock Price Performance

With its multi-bowl portfolio, EOG has been consistent from an operational standpoint, growing production every year since 2016 (salvage pandemic 2020) at a CAGR of 8.4% — assuming the FY22 production forecast range midpoint provided on the company’s 3Q22 earnings report proves prescient. That said – and not surprisingly – it has been a rollercoaster ride for shareholders. After achieving an all-fourth dimension high of $131.sixty in July 2018, shares of EOG began a slide that accelerated into a freefall with the onset of the pandemic and subsequent unprecedented machinations in the oil markets. After nadiring at $27.00 a share in March 2020, its stock rode the upwards spike in oil prices supercharged by the Russian-Ukrainian disharmonize and further boosted by its consequent functioning in the face of higher labor costs and supply chain issues, eventually setting an all-time high of $150.88 a share on November 4, 2022.

3Q22 Financials & Outlook

That date is 1 24-hour interval subsequent to the release of the visitor’due south 3Q22 earnings, on which it posted non-GAAP earnings of $3.71 a share on acquirement of $7.59 billion versus $ii.16 a share (non-GAAP) on revenue of $4.77 billion, representing increases of 72% and 59%, respectively. Versus Street expectations, the results were mixed, with the bottom line coming in $0.02 a share light and the top line exceeding past $610 million. Product was up 9% to 84.6 1000000 Boe, versus 77.vii one thousand thousand in the prior year period. Function of the slight shortfall in earnings was due to well costs (materials and labor) that are expected to increase 7% in FY22.

Although there is no official FY23 forecast from management, it hinted at a 10% increase in this line particular. As such, the visitor volition likely reallocate resources away from the Delaware Basin in FY23 to basins where price aggrandizement is non as all-encompassing, portending flat production from its largest producing property in FY22. Along with lower natural gas prices due to warmer than usual temperatures in the U.Due south. and Europe, this cost inflation outlook was the single biggest contributing gene to the recent over 20% pullback in EOG’south share price.

Balance Sheet & Analyst Commentary:

That said, the company did raise its regular quarterly dividend 10% from $0.75 to $0.825 a share while distributing its fourth special dividend of the yr – this time $ane.50 a share – bringing its total payout in FY22 to $viii.80 a share for a return to shareholders equal to ~67% of free cash period. Its balance sheet is in pristine shape, reflecting a cyberspace cash position: greenbacks of $five.3 billion versus debt of $5.1 billion.

Over the past five weeks, half dozen analyst firms including JPMorgan and Barclays have reissued/initiated Buy/Outperform ratings on the stock. Albeit, a few had pocket-sized downward toll target revisions. Price targets proffered range from $140 to $166 a share. RBC Uppercase maintained its Concur rating on the stock, notably with a $158 a share price target. On average, annotator firms
expect
the company to earn $13.93 a share (non-GAAP) on revenue of $26.5 billion in FY22, followed by $14.24 a share (non-GAAP) on revenue of $26.6 billion in FY23.

Managing director Michael Kerr, who between his personal account and family unit trust owns over 11 million shares of EOG, invested an additional $2.6 million on January 12, 2023, purchasing 20,000 shares at $130.49.

Verdict:

With the flexibility to allocate capital to the highest return opportunities in its portfolio, in that location is fiddling question in EOG’southward ability to deliver low-unmarried digit oil supply growth (high-single digit Boe growth) in a manner that is economically beneficial to shareholders. The question becomes overall free energy circuitous demand, which will drive pricing and is really anyone’south estimate. That said, even though recession fears and a hawkish Fed loom over the commodity markets, the need to replenish the Strategic Petroleum Reserve should put some sort of floor nether oil prices.

If analysts are correct on their FY23 earnings forecast (and assuming no wild swings in working capital or a surge in capex), EOG is in a position to return approximately $eight.l a share in the form of dividends in FY2023, translating to a yield of 7.2% at current trading levels. That return in and of itself is enough to consider investment. However, this return can exist additional with a
covered call
strategy that too will provide downside protection. I remember that is the correct play on EOG Resource at current trading levels.

If a human being’s from Texas, he’ll tell y’all. If he’s not, why embarrass him by asking?“― John Gunther

Author’s notation:
I nowadays an update my best small and mid-cap stock ideas that insiders are ownership only to subscribers of my exclusive marketplace,
The Insiders Forum.
Our model portfolio has nearly
TRIPLED
the return of its benchmark, the Russell 2000, since its launch.  To bring together our customs and proceeds admission to our market chirapsia returns, only click on our logo below.