EOG Resources (EOG, Financial) explores, develops, produces, and markets crude oil and natural gas with the company having net proved reserves of 2,497 million barrels of oil equivalent as of December 2014. In turbulent times for the oil and gas industry, this article discusses the reasons to be bullish on EOG Resources for the long-term.
Before talking about the fundamentals, I want to discuss the company’s stock price movement as it provides some insights on the company. From a 2014 high of $117.98, EOG Resources slumped to $83.76 by October 14. Since that time, the stock has moved in a very narrow range and currently trades at $92.71.
In my view, this narrow trading range is an indication that the stock has bottomed out and has discounted the negative of lower oil prices. When oil starts trending higher, EOG Resources is also likely to surge. Another important point that I want to mention is that EOG Resources has declined by 7.9% in the last Ă‚ year and this is an excellent stock performance considering the crisis in the oil and gas industry.
Coming to the fundamental factors that have kept the stock resilient in difficult times, EOG Resources has an excellent credit profile and this is the first reason to be bullish on the stock. In difficult times for the industry, it is good to consider exposure to stocks that have a good balance sheet and EOG Resources can be rated high on that front. The company’s Moody’s and S&P credit rating of A3 and A- respectively is an indication of the strong balance sheet fundamentals.
In terms of specifics, EOG Resources has $2.1 billion in cash position as of December 2014 along with an undrawn credit facility of $2.0 billion. Further, the company estimates debt to 2015 EBITDAX to be in the range of 1.5, and this implies that the company is certainly not leveraged on the higher side.
With strong credit metrics, EOG Resources is well positioned to continue with its robust capital expenditure program in 2015. The company has planned a capital expenditure of $4.9-$5.1 billion for 2015. While this is significantly lower than the 2014 capital expenditure of $8.3 billion, the capital expenditure is still robust and is directed towards some excellent IRR assets. These assets include the Eagle Ford, the Bakken/Three Forks and Delaware Basin Leonard among others. Investment in these assets that provide a good IRR even at lower oil prices will ensure that the company’s operating cash flow is robust for 2015. In addition, EOG Resources also has an excellent hedging position.
While these points support the near-term outlook, the company’s excellent asset base coupled with a deep drilling inventory support the long-term outlook. As of December 2014, EOG Resources had 10,000 prospective drilling locations and these locations provide a 15 year drilling inventory based on current rate of drilling. Therefore, once oil and gas prices trend higher, EOG Resources has an excellent asset base that it can exploit.
In conclusion, EOG Resources stock has shown strong resilience and this is indicative of the point that the company’s assets are excellent and have a low IRR, the company’s fundamentals are sound and the company is well positioned to navigate the low oil price crisis. These factors make EOG Resources a good stock to consider at current levels with a medium to long-term investment horizon.
