Despite the turmoil in the commodity markets, 2016 has been a good year for EOG Resources ( EOG ). The US-based oil and gas producer's stock has rebound more than 50% since the beginning of the year, while most of its competitors have seen a deterioration in their valuation. The company has not only topped its peers but has also outperformed the S&P 500 Index (Energy Sector), which has recovered only 22% during the same period. Apart from delivering strong capital appreciation, the energy company has been a strong value stock generating a high dividend yield, even in the ongoing commodity downturn. Thus, the company has been a safe bet for the investors looking for a regular dividend income as well as a capital uptick.
Source: Google Finance; US Energy Information Administration ( EIA )
But as the outlook for commodity markets improve, the investors are getting anxious about the alpha that the company can generate in 2017. Based on our estimates, we believe that company will continue to be a top performer even in the coming year on the back of the following key drivers:
Higher Production Growth
At a time when a majority of the oil and gas players are restricting their drilling and exploration activities due to the sluggish price environment, EOG recently acquired Yates Petroleum Corporation to increase its presence in the Delaware and Permian Basin. The deal has increased the company's resource estimate in the Delaware Basin from 2.35 billion barrels of oil equivalent (boe) last year to close to 6 billion boe at present. This sudden jump in the company's resource estimate has enabled it to raise the outlook for its oil production growth over the next four to five years. Earlier, the company had expected to expand its oil production at 10%-20% between 2017 and 2020. However, now, the oil and gas company aims to grow its oil output by 15%-25% over the same period, assuming that the crude oil prices become sticky in the range of $50-$60 per barrel. With the commodity markets showing signs of recovery post the OPEC deal, we expect EOG to benefit from its expansion plans and continue to grow at a fast pace.
EOG's Oil Production Forecast
Cost Reduction Measures To Result In Better Performance
While a number of oil and gas companies had to file for bankruptcy in 2016 owing to the weak oil prices, EOG was among the few that continued to hold a strong ground. In fact, the oil and gas major showed drastic improvement in its results over the last nine months, growing its revenue from $1.3 billion in the first quarter of the year to $2.1 billion in the latest quarter. Further, the Houston-based company's operating profits also recovered strongly during the period. For instance, the company was making losses of $640 million in the March quarter of this year, which reduced to less than $200 million in the September quarter. This rebound in profitability was driven primarily by the bounce back in commodity prices, coupled with the company's consistent efforts to bring down its operating costs. To put things in perspective, EOG has managed to bring down its cash operating costs per unit from $17 per boe in 2014 to a little over $12 per boe in the year to date.
Given the impressive results from the company's cost cutting initiatives, EOG has revised its completed well cost targets for its major basins. In the Bakken region, the oil and gas producer has witnessed significant cost efficiencies and aims to record well costs of $4.8 million in 2016, almost 27% lower than its prior guidance of $6.1 million. Also, in the Eagle Ford basin, EOG now expects its completed well costs to be around $4.5 million, lower than its previous target of $4.8 million. While some of these cost efficiencies may disappear when the commodity prices bounce back, the majority of these are permanent in nature and will provide a cost edge to EOG in the long term.
Increased Focus On Premium Locations Will Improve Returns
The Yates deal not only added to EOG's resource base and acreage, it has augmented the company's plans to improve its well productivity by building a strong inventory of premium locations. A premium drilling location, as defined by EOG, is a location that generates a direct after-tax rate of return of at least 30%, assuming crude oil prices to be at $40 per barrel. This deal has added roughly 1,740 net premium drilling locations to the company's existing4,300 premium drilling locations. As a result, the company will now have a total of roughly 6,000 premium drilling locations, implying a drilling inventory of more than 10 years.
EOG's Premium Drilling Locations (Post Yates' Deal)
An inventory of premium drilling locations of over a decade has placed EOG is a sweet spot to generate higher returns for its shareholders even in a soft price environment, and can prove to bea huge upside to its valuation when the commodity markets finally recover.
Thus, we believe that EOG Resources is entering 2017 with high quality and high margin assets, capable of delivering industry leading returns. This, coupled with the company's exceptional execution skills, will enable it to outperform its rivals in the coming year, too.
Have more questions about EOG Resources ( EOG )? See the links below:
- EOG Resources 3Q'16 Results To Show Improvement Driven By Higher Price Realizations
- Why Is EOG Resources Acquiring Yates Petroleum Corp.?
- Why Has EOG Resources' Capital Efficiency Improved Despite The Commodity Downturn?
- Here's Why We Are Bullish On EOG Resources
- EOG Resources' 2Q'16 Earnings Improve On The Back Of Higher Price Realization And Production
- How Will EOG Resources' Production Trend Over The Next Few Years?
- How Will EOG Resources' Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- How Will EOG Resources' Revenue Move If Crude Oil Prices Average At $50 Per Barrel Till 2018?
- EOG Resources Posted Weak 1Q'16 Results Driven By Ongoing Commodity Downturn
- Expect Another Weak Quarter From EOG Resources On The Back Of Depressed Commodity Prices
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email firstname.lastname@example.org
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for EOG Resources
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