Company Reports

We raise our EOG fair value estimate to $124 from $120. During the second quarter, the narrow-moat-rated firm enjoyed a slight production beat, both relative to guidance and our prior expectations, on higher-than-expected oil and natural gas liquid volumes. We had earmarked roughly 1,045 thousand barrels of oil equivalent per day in total production or Mboe/d versus the nearly 1,048 Mboe/d EOG printed. Aside from favorable mix relative to expectations, EOG’s lower operating expenses also surprised to the upside.

EOG's capital allocation strategy sits somewhat alone relative to other US exploration and production, or E&P, players. While the consolidation bug has bitten its peers and the integrated majors, EOG principally focuses on organic exploration efforts. And, like other US E&P peers, EOG has embraced a capital allocation policy that emphasizes returning cash to shareholders, yet retains a willingness to invest in modest production growth. Finally, in an industry that overextended itself during the shale revolution, EOG pivoted sooner than most in becoming a low-cost provider. EOG's enviable asset mix, including its leading position in the Delaware Basin, position the firm as a premier shale player with industry-leading returns on capital.

The complexity of OPEC’s meeting outcome from June 2 should not obscure our view that it continues to operate from a position of weakness in an oversupplied market, pointing to near-term oil price weakness. We anticipate oil prices are more likely to hit $70 a barrel (WTI) and perhaps below $65 by the end of 2024. OPEC has three separate cuts in progress at the moment, totaling 5.86 million barrels per day. A groupwide cut of about 2 million barrels per day was originally set to expire at the end of 2024 but was extended to the end of 2025. Similarly, a 1.7 million barrels per day voluntary cut by certain members was also extended to the end of 2025 from the end of 2024. Finally, a second 2.2 million barrels per day voluntary cut by certain members was extended in full for another quarter, as it was due to expire at the end of June, before gradually being phased out by September 2025. Undervalued options have been harder to find in the energy space recently, but we favor SLB, Enbridge, TC Energy, APA, and Exxon Mobil.

Following narrow-moat-rated EOG's first-quarter results, we raise our fair value estimate by roughly 3% to $120. The raise was due to a slight production beat and time value of money. Total daily production came in at nearly 1,029 thousand barrels of oil equivalent relative to guidance of 1,020 mboe/d.

EOG's capital allocation strategy sits somewhat alone relative to other US exploration and production, or E&P, players. While the consolidation bug has bitten its peers and the integrated majors, EOG principally focuses on organic exploration efforts. And, like other US E&P peers, EOG has embraced a capital allocation policy that emphasizes returning cash to shareholders, yet retains a willingness to invest in modest production growth. Finally, in an industry that overextended itself during the shale revolution, EOG pivoted sooner than most to becoming a low-cost provider. Combined with an enviable asset mix, including a leading position in the Delaware Basin, these factors position EOG as a premier shale player with industry-leading returns on capital.

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

After taking a fresh look and revisiting our forecast, we reduce our fair value estimate for EOG by roughly 9% to $117 from $129. Our revised FVE implies enterprise value/EBITDA multiples of 5.3 times and 5.2 times for 2024 and 2025, respectively. However, we retain our narrow moat, Exemplary capital allocation, and Medium uncertainty ratings. Our new forecast assumes slightly lower cycle times and initial rates of production in certain basins, particularly with newer vintages. That said, we're also assuming longer lateral lengths and lower near-term capital expenditures, which offset these impacts.

EOG's capital allocation strategy sits somewhat alone relative to other US exploration and production, or E&P, players. While the consolidation bug has bitten its peers and the integrated majors, EOG principally focuses on organic exploration efforts. And, like other US E&P peers, EOG has embraced a capital allocation policy that emphasizes returning cash to shareholders, yet retains a willingness to invest in modest production growth. Finally, in an industry that overextended itself during the shale revolution, EOG pivoted sooner than most to becoming a low-cost provider. Combined with an enviable asset mix, including a leading position in the Delaware Basin, these factors position EOG as a premier shale player with industry-leading returns on capital.

Narrow-moat EOG’s revenue, earnings, and free cash flow outperformed our expectations during the fourth quarter. However, we were modeling too many rigs in our forecast, even as its well efficiency continues to improve. These changes fully offset one another in our model. Therefore, we maintain our $129 fair value estimate.

EOG is one of the largest independent oil and gas producers. Most of its production comes from US shale fields, with a small contribution from Trinidad. The firm differentiates itself by finding prospective areas before peers catch on, enabling it to secure leasehold at attractive rates, rather than overpaying for land after the market overheats. It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. The focus now includes the Powder River Basin and a new natural gas play in southern Texas called Dorado.

EOG is one of the largest independent oil and gas producers. Most of its production comes from U.S. shale fields, with a small contribution from Trinidad. The firm differentiates itself by finding prospective areas before peers catch on, enabling it to secure leasehold at attractive rates, rather than overpaying for land after the market overheats. It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin and a new natural gas play in southern Texas called Dorado.

Narrow-moat EOG delivered production of 998 thousand barrels of oil equivalent per day in its third quarter, up 8.5% year over year and 3% sequentially. The firm exceeded the high end of its guidance (issued last quarter) by 1% and raised its outlook for fiscal 2023 to 982 mboe/d at the midpoint (versus 978 mboe/d previously). This places EOG firmly on track to conclude fiscal 2023 on solid footing, and we expect further improvements in 2024 as declining producer activity, rising domestic demand, and incremental LNG export capacity facilitate more favorable natural gas pricing. We’re raising our fair value estimate to $132 from $121 following the results, implying shares trade at a slight discount at the time of writing.

EOG is one of the largest independent oil and gas producers. Most of its production comes from U.S. shale fields, with a small contribution from Trinidad. The firm differentiates itself by finding prospective areas before peers catch on, enabling it to secure leasehold at attractive rates, rather than overpaying for land after the market overheats. It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin and a new natural gas play in southern Texas called Dorado.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

EOG is one of the largest independent oil and gas producers. Most of its production comes from U.S. shale fields, with a small contribution from Trinidad. The firm differentiates itself by finding prospective areas before peers catch on, enabling it to secure leasehold at attractive rates, rather than overpaying for land after the market overheats. It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin and a new natural gas play in southern Texas called Dorado.

EOG delivered production of 970 thousand barrels of oil equivalent per day in the third quarter, which was 3% higher sequentially and 5% higher year over year. This compares with the previously guided range of 940-975 mboe/d. Oddly, despite this quarter's outperformance, the firm's full-year production forecast was lowered by 1%, and with no commensurate reduction in the capital budget. This was attributed to the deferral of the completion of some gas-focused wells in the Dorado play, with management sharing our view that 2024 is likely to be a better environment for natural gas prices than 2023 (due to activity declines among producers, rising domestic demand, and incremental LNG export capacity).

We're raising our fair value estimate for narrow-moat EOG to $108 from $97, after incorporating the firm's first-quarter financial and operating results. The increase was primarily driven by lower-than-expected processing and transport costs, coupled with a sequential (and maintainable) decline in unit general and administrative costs. We have also factored in a small dip (5%) in well cost per foot starting 2024, given that steel prices have moderated, several upstream firms are anticipating service markets will soften in the back half, and EOG remains laser-focused on getting more value through productivity and efficiency gains. Supporting the last point, management discussed its improved completion design in the Permian, with 39 wells in the test averaging a performance upgrade of about 20%. While the new technique is only applicable in certain parts of the play, management expects to roll it out more broadly this year. The impact on production was taken into account with the firm's volume guidance, which we think the firm can meet or exceed. But the potential for cost savings was not previously accounted for in our model.

EOG is one of the largest independent oil and gas producers. Most of its production comes from U.S. shale fields, with a small contribution from Trinidad. The firm differentiates itself by finding prospective areas before peers catch on, enabling it to secure leasehold at attractive rates, rather than overpaying for land after the market overheats. It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin and a new natural gas play in southern Texas called Dorado.

EOG surpassed expectations on most metrics in the first quarter of 2023. Firmwide output was 943 mboe/d, exceeding the high end of guidance. While firmwide crude volumes and Trinidad natural gas volumes were both above the midpoint of guidance, the outperformance was primarily driven by higher-than-expected NGL and natural gas production in the United States. Accrued capital expenditure was within budget, and unit operating costs were generally lower than expected (for the latter, lower commodity prices were a contributing factor, but the release also highlighted better pipeline utilization and lower compensation expense). As a result, the firm's financial results were ahead of Street estimates (adjusted earnings per share was 8% higher than consensus according to Factset).