Morningstar | EOG Establishing Track Record for Cheaply Adding Premium Inventory
After taking a closer look at EOG's second-quarter earnings we are raising our fair value estimate to $105 per share. As we previously noted, the firm addressed one of our key concerns about the stock in the release, which is that the firm's runway of low-cost drilling opportunities is potentially shorter than the peer average. The firm now claims its inventory contains about 9,500 net premium locations, which marks an increase of over 1,600 since the previous quarter (effectively adding two years' worth of low-cost runway). Therefore, 2018 is shaping up to be the second consecutive year in which the company replaces far more premium inventory than it uses up, as it added four times as many locations as it drilled during 2017 (all without making substantial acquisitions, and thus avoiding the risk of overpaying). Going forward we now believe that there is further scope for premium additions, warranting an increase in our valuation.Notably, the premium criteria is unchanged--a location must be expected to generate an internal rate of return of 30% or better at $40 West Texas Intermediate. We would take a much dimmer view of lowering the hurdle rate to re-classify tier 2 inventory, even though oil prices have risen well above the premium threshold (to what we believe is an unsustainable peak). Fortunately, management has shown no inclination to lower the bar.
Our updated fair value estimate is still slightly below the market price due to our bearish outlook for crude. Specifically, we believe that producers have gotten carried away with current prices, which have been elevated by the potential for supply disruptions in the Middle East and Venezuela. As a result, the U.S. rig count is currently well above the "Goldilocks" level that we think is sufficient to keep oil markets amply supplied in the next few years. If left unchecked this activity could eventually reverse the current tightness and trigger more oversupply. Our EOG model assumes $55/bbl WTI.
EOG Resources, together with its subsidiaries, explores for, develops, produces and markets crude oil, natural gas liquids and natural gas primarily in main producing basins in the United States, The Republic of Trinidad and Tobago, The People's Republic of China, Canada and, from time to time, select other international areas.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.