EUR 850.00 For Business Accounts Only

Morningstar | EOG Adds Two More Years of Premium Runway

EOG delivered production of 702 thousand barrels of oil equivalent per day in the second quarter, keeping the firm on track to hit prior targets for full-year production growth and capital spending. The firm tightened its oil growth forecast to 17%-19% (previously 16%-20%) but reduced its unit cost reduction to 6% (from 7%). Nevertheless, adjusted EBITDA and adjusted earnings per share were comfortably ahead of consensus forecasts. The average selling price of its U.S. crude was within a few basis points of the West Texas Intermediate benchmark, highlighting the advantage of diversification among several top-tier shale plays and marketing primarily to the Gulf Coast, which attracts premium pricing.

The highlight of the release was the addition of 1,500 net locations to the company’s premium drilling inventory. To qualify, these sites must be expected to generate an internal rate of return in excess of 30% at $40/bbl. We commend management for resisting the temptation to lower the bar in the face of significantly stronger oil prices, given our view that the current environment is unsustainable. The additions were primarily in the Powder River Basin, which does not typically offer the same stellar economics as name-brand plays like the Permian or Bakken, but as EOG applies the premium criterion uniformly we believe these locations can compete for capital without compromising the cost advantage that underpins EOG's narrow moat. At the current run-rate the inventory increase translates to an additional two years of potential activity, making this the second year in a row that the firm has added more premium drill sites than it has used up.

This addresses one of our key concerns about the stock, which is that the firm's runway of low-cost inventory is quite a bit shorter than the peer average. We will incorporate these new locations, with the rest of the firm’s operating and financial results, shortly. After this first look, our fair value estimate is unchanged.