We maintain our Neutral recommendation on
EOG Resources Inc.
) − a Houston, Texas-based major independent oil and gas
exploration and production (E&P) company, with operations in
the U.S., Canada, offshore Trinidad, and the U.K. North Sea.
CHESAPEAKE ENGY (CHK): Free Stock Analysis
EOG RES INC (EOG): Free Stock Analysis Report
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The company's liquids rich production growth profile as well as
huge inventory of drilling opportunities remains somewhat tempered
by its natural gas weighted production and reserves base.
The company is one of the best independents in the E&P sector
with its attractive growth profile. It continues to execute well on
its key growth assets, particularly in the Eagle Ford and Bakken
plays. Its confidence in the Eagle Ford remains high. Even with the
implementation of tighter well spacing earlier this year,
individual well performance remains outstanding. EOG Resources'
second quarter registered solid earnings growth on the back of a
striking improvement in productivity at the Eagle Ford and Bakken
EOG Resources' focus on an oil-weighted production profile is
appreciable and will be further augmented by its deep focus on
major oil and liquids rich plays, such as the South Texas Eagle
Ford play and the Fort Worth Barnett Shale Combo, besides Colorado
Niobrara, Oklahoma Marmaton, West Texas Wolfcamp, Neuquen Basin and
New Mexico Leonard.
The company hiked its total production growth target to 9% from 7%,
while maintaining its capex guidance at $7.4-$7.6 billion for the
year. Solid drilling results during the first half of the year
encouraged EOG Resources to increase its full-year crude oil
production growth target to 37% from the previous 33%.
Moreover, EOG Resources, like its peer
Chesapeake Energy Corporation
), is keen on its asset divestiture program. This brings greater
focus to the liquid-rich plays of both these companies. Through
June 30, 2012 the company monetized approximately $1,112 million
worth of assets. The company expects asset sales of approximately
$1,200 million to $1,250 million for 2012.
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 and reserves base amid a weak
commodity price environment. About 39% of 2011 net proved reserves
were crude oil and condensate and natural gas liquids and 61% were
natural gas. During the second quarter 2012, natural gas prices
were down roughly 40% and natural gas liquids prices were down
almost 35.0%, on a year-over-year basis.
Unless the outlook for natural gas prices improves, we expect the
stock to perform in line with the market as well as the sector in
the coming quarters. The company retains a Zacks #3 Rank, which is
equivalent to a shot-term Hold rating.