We reaffirmed our Neutral recommendation on
EOG Resources Incorporated
) on Sep 13, 2013. The company's large portfolio of high-return
projects and strong technical competence are its key long-term
drivers. However, EOG's results are particularly exposed to
fluctuations in the U.S. natural gas markets, since natural gas
accounts for almost half of the company's reserves.
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EOG is one of the best independent companies in the E&P
sector with its attractive growth profile, huge inventory of
drilling opportunities, upper quartile returns and disciplined
management team. EOG continues to demonstrate solid execution in
its key growth assets, in particular the Eagle Ford and Bakken
EOG's increasing interest in oil is appreciable in a favorable
price environment. It will be augmented by its deep focus on
major oil and liquids rich plays, while holding core natural gas
and Combo acreage in the Barnett, Leonard and Wolfcamp plays for
the long term.
The company revised its full-year 2013 crude oil production
growth target at 35% (up from 28% earlier), which stands as the
third successive year of significant double-digit increase in
volumes. On the strength of its high margin, domestic crude oil
production, the company also expects total production of 208.0
MBbls/d to 219.6 MBbls/d, up from the prior range of 193.0
MBbls/d to 211.2 MBbls/d.
EOG is keen on its asset divestiture program as it brings greater
focus to the liquid-rich plays. For 2013, the company had
targeted to sell approximately $550 million worth of assets,
including crude oil, liquids-rich and natural gas producing
properties. EOG has, however, already achieved closure of $580
million, exceeding its target in the second quarter. We view
redirecting capital from non-operated assets to its premier play
Although we view EOG as a favorable pick, the risk-reward pay-off
for the company is still uncertain in the near future due to its
natural gas weighted production, as well as cost overruns. Other
risks faced by EOG are its dependence on individual well
performance, unsuccessful drilling, and cost overruns on projects
with a long gestation period.
Other Stocks to Consider
EOG carries a Zacks Rank #3 (Hold). However, Zacks Ranked #1
(Strong Buy) stocks -
China Petroleum & Chemical Corp.
Stone Energy Corp.
) - are good buying options for the short term.