EOG Resources (EOG) has been a star performer when it comes to strong stock upside. The company’s stock has gained by 41% in the last one year and is currently trading at $108. I am of the opinion that the long-term rally in the stock has just commenced and this article discusses the reasons for considering EOG Resources as a good portfolio stock. GuruFocus rates (business predictability rank) EOG Resources as a healthy 3.5-star.
Overview On The Company
EOG Resources is one of the largest independent crude oil and natural gas companies in the United States with proved reserves in the United States, Canada, Trinidad, United Kingdom and China. EOG Resources had a total production of 186mmboe in 2013 and total proved reserves of 2,1119mmboe for the same period. Approximately 94% of the company’s proved reserves were located in the United States, 4% in Trinidad, 1% in Canada and the remaining 1% in other international locations.
For 2013, the company had net operating revenue of $14.5 billion and a net income of $2.2 billion. Further, the company also paid a dividend of $0.75 per share, which increased from $0.68 in 2012 and $0.64 in 2011.
Key Investment Positives
Rich Assets And Focus On High Return Plays
The Eagle Ford continues to prove itself as one of the best resource plays in the world. EOG Resources is the biggest oil producer in the Eagle Ford play with year-end net volumes of approximately 142 thousand barrels per day. In 2013, EOG Resources completed 466 net wells yielding a direct after-tax rate of return in excess of 100%.
Besides the Eagle Ford, EOG Resources is also developing the Williston Basin, Powder River Basin and Permian Basin, among others. All these are liquids rich assets and have the potential to provide strong long-term production growth.
As the chart below shows, EOG Resources is focused on the assets providing high after-tax rate of return. This strategy will be value creating in the long-term.
In 2014, the company has added 10 years of high return drilling inventory in the DJ and Powder River Basins. This includes 735 net locations with estimated potential reserves of 400mmboe. Therefore, the company has a strong drilling schedule in these two high after-tax return plays. Further to this, the company also added 2,300 high rates of return net drilling locations in Eagle Ford and Rockies in 2014.
Positive Sales Mix
What I like particularly about EOG resources is that the company’s sales mix has changed over the years in an excellent manner. In 2006, the company’s North America sales mix was 21% liquids and 79% natural gas. In 2013, the company’s North America sales mix was 88% liquids and 12% natural gas. Also, in 2014, the company expects the sales mix to remain at 88% liquids and 12% natural gas.
I am bullish on oil & natural gas, but I am more bullish on oil prices and I therefore believe that the sales mix is positive for the company. As EOG Resources is operating in liquids rich assets, the company sales mix will remain at favourable levels going forward. Over the last four years, the company’s organic crude production growth CAGR has been 40% and the strong trend is likely to continue.
In the last three years, EOG Resources has spent nearly $6.5 billion to $7.0 billion annual on exploration and development expenditures. As a result of the investments, the company proved increased from 1,810mmboe in 2012 to 2,119mmboe in 2013.
Even in terms of production, the total production has increased from 154.3mmboe in 2011 to 186mmboe in 2013. The positive impact on proved reserves and production is directly related to the big investments by EOG Resources in the last few years.
For 2014, the company’s planned investment is in the range of $8.1 to $8.3 billion. Another year of big investment will ensure that production growth and proved reserves growth remains robust. EOG Resources also has a long-term drilling inventory and I expect high level of investment to continue and these investments will translate into higher cash flow and dividends.
For big size investments to continue, strong fundamentals are important. I will therefore look into the key fundamentals and conclude on the company’s financial flexibility.
For 1Q14, EOG Resources had a debt to capitalization of 27% and a net debt to capitalization of 21% with EOG Resources having $1.7 billion in cash as of March 2014. Therefore, from a balance sheet perspective, EOG Resources still has a high financial flexibility and the company can leverage for growth.
EOG Resources has generated robust operating cash flows and this is a big positive from a fundamental view. The company’s operating cash flow has increased from $2.7 billion in 2010 to $7.3 billion in 2013.
Further, in 2013, the company generated positive free cash flows and the same trend was evident for 1Q14 when the company generated an operating cash flow of $2.3 billion against a capital expenditure of $1.8 billion.
On an annualized basis, EOG Resources is on track to generate operating cash flows in excess of $8 billion for 2014 and the big investments for 2014 will be covered by the company’s cash flows. Therefore, EOG Resources looks strong fundamentally.
EOG Resources has grown at a strong pace in the last few years and the company is likely to continue growing at a strong pace over the next few years aided by big investments in rich assets.
From an investment perspective, the stock looks attractive at an EV/EBITDA of 7.98. Analyst estimates suggest that the company’s earnings growth will be at a strong 38% in 2014 and investors can consider exposure to the stock, which has strong growth ahead.
However, as broad market sentiments are turning bearish, it is always advisable to buy the stock in staggered lots than on bulk. This will help investors average out if the stock declines considerably from current levels.