EUR 850.00 For Business Accounts Only

Morningstar | EOG Beats Guidance and Squeezes Even More Bang for the Buck From Its Wells

EOG delivered production of 749 thousand barrels of oil equivalent a day in the third quarter, which was 25% higher than in the year-ago period and near the high end of guidance (oil volumes were up 27% year over year and exceeded the high end of guidance). As a result, the firm’s financial results were stronger than expected, with adjusted EBITDA and adjusted earnings per share coming in at $2,317 million and $1.75 respectively (consensus estimates were $2,183 million and $1.53). The firm also generated over $500 million in free cash flows in the period, a feat that it can repeat every quarter while oil prices remain at current levels. In addition, we anticipate excess returns on invested capital from EOG this year, for the first time since 2014 (when the recent crude downturn began).

On the conference call management highlighted further reductions in drilling costs, especially in the Eagle Ford, Bakken, and Delaware Basin plays. That’s noteworthy now that oil prices have recovered, as most operators are starting to see costs creep higher. The company anticipates further improvement in 2019, and has locked in 65% of its anticipated 2019 service needs at prices it considers favorable (scale is a component of EOG’s competitive advantage, as it adds negotiating power with suppliers). The firm also compressed its lease operating expenses for a second consecutive quarter. After incorporating these cost improvements in our model we have raised our fair value estimate slightly to $109 per share (which is higher than the current price, following the recent slump).

The stock’s recent decline could be interpreted as a buying opportunity. But bear in mind that our high uncertainty rating is also unchanged because of the ongoing volatility in oil markets (our uncertainty-adjusted rating is unchanged at 3 stars). We still take a negative stance on crude because of the potential for shale to overwhelm the market if producers are left unchecked, and our midcycle forecast is still $55/bbl for WTI. The justification in “Oil Prices Are Unsustainably High, Stretching Energy Valuations” is still valid, even though the recent sell-off in energy stocks means many of the bearish conclusions no longer apply. In any case, EOG is one of the few narrow-moat rated industry cost leaders that can still thrive in a lower price environment. We anticipate sustainable excess returns on invested capital, as well as annual free cash flows of at least $2 billion over the next 10 years.