Analyst Actions: EOG Resources Coverage Initiated With Neutral, TP of $120 at Credit Suisse

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Focus on the Franchise; INITIATING Coverage with a NEUTRAL Rating and Target Price of $120

Initiating Coverage: We initiate coverage of EOG with a Neutral rating and a target price of $120, assuming 6.5 times our 2012 EBIDA estimate and 95% of our net asset value ( NAV ) estimate. Given the capex shift to its liquids-rich plays, we concentrate our analysis on these plays, including the Eagle Ford ( EF ), which represents 35% of asset value.

Eagle Ford Is a Game Changer for EOG: With 535,000 net acres, EOG has significant acreage in the EF oil window. While it's early days in the play, analysis of horizontal and vertical wells drilled 30+ years ago strongly suggest the EF is a franchise asset that will yield a large inventory of high-return development. This is a game-changer for EOG relative to its peers.

Market Has Rewarded the Stock: The shares rerated in 2011 on the back of outstanding EF results, which derisked EOG's acreage and management's 900 MMBoe reserve estimate. Given the market's enthusiasm for EOG, we believe notable increases in reserves per well (EURs) and successful downspacing tests will be necessary to support a further relative rerating in EOG. We are not ready to make that call based on our analysis of well data and downspacing tests. However, we caution our analysis is based on a limited number of EF wells.

EUR Increase Is Not Yet Justified: Despite a step change increase in reported initial production ( IP ) rates, the average peak 30-day oil rate of last 33 wells has been 600 Bopd. This is only marginally above the rate used in our 470 MBoe type curve in the oil window. Recent results are impressive, but considering its assets as a whole, we do not think an increase in EURs is yet justified.

Downspacing Tests Are Positive, but Degradation at Tighter Spacing: Initial results from downspacing less than 130 acres look promising, but we observed meaningful degradation in second-month production at wells spaced between 500-800 ft (down 46%) versus 1,100 ft+ (down 25%). While this is not a negative result (as tests justify an increase in wells per section to at least seven from five), more limited communication between wells at tighter spacing would have been a more favorable outcome.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: EF , IP , NAV

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