On Sep 25, we issued an updated research report on EOG Resources Inc. (EOG). The company is one of the best independents in the Exploration & Production (E&P) sector with an attractive growth profile, huge inventory of drilling opportunities, upper quartile returns and a disciplined management team. Though EOG has made some progress in expanding internationally, it is still largely a North American producer, lacking substantial international diversification.
EOG set its full-year 2014 crude oil production growth target at 29%. The company’s extensive portfolio of crude oil and liquids-rich resources offer far higher returns than alternative natural gas drilling investments.
For the third quarter of 2014, total production is expected between 570.7 MBoe/d and 598.1 MBoe/d, with 75.9–80.1 MBbls/d of NGL and 1,270.0–1,318.0 MMcf/d of gas. For full-year 2014, EOG expects total volume between 567.4 MBoe/d and 599.7 MBoe/d, with NGL in the 74.3–79.0 MBbl/d range and natural gas in the 1,313–1,351 MMcf/d band.
For the third quarter as well as full year, the company expects crude oil and condensate volumes in the range of 283.1 MBbls/d to 298.3 MBbls/d and 274.2 MBbls/d to 295.5 MBbls/d, respectively.
EOG continues to demonstrate solid execution in its key growth assets, particularly in the Eagle Ford and Bakken plays. The company’s large portfolio of high-return projects and strong technical competence are the key factors that would lead to its success over the long term.
Notably, the company’s key skills lie in early identification of prospective areas through its technical expertise at low acreage prices, thus driving organic growth and delivering attractive returns on capital employed.
EOG Resources’ increasing interest in oil is appreciable in a favorable price environment. It will be augmented by its deep focus on major oil and liquids rich plays, while holding core natural gas and Combo acreage in the Barnett, Leonard and Wolfcamp plays for the long term.
However, EOG’s results are particularly exposed to fluctuations in the U.S. natural gas markets, since natural gas accounts for almost half of the company’s reserves. Infrastructure risk remains as EOG generates production in the high-growth sections of the U.S. In addition, as is the case with all E&P companies, EOG’s results are vulnerable to historically volatile prices in world energy markets.
While we expect EOG to perform in line with its peers, one can consider sector stocks like Delek Logistics Partners LP (DKL), Spectra Energy Partners LP (SEP) and Sunoco Logistics Partners LP (SXL) as buying opportunities for the short term.
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