EUR 850.00 For Business Accounts Only

Morningstar | Unlike Peers, EOG Plans to Maintain Spending Level Going Into 2019

EOG Resources delivered production of 765 thousand barrels of oil equivalent per day in the fourth quarter, which was 2% higher sequentially, 15% higher year over year, and within guidance. Realized pricing was generally strong, with U.S. oil volumes selling slightly above the West Texas Intermediate benchmark on average, despite challenging basis conditions in several of the regions that EOG operates in. But marketing costs were commensurately higher as well, contributing to a sequential increase in cash operating costs of almost $0.80 per barrel of oil equivalent. Overall, the firm’s financial results were slightly weaker than expected, with adjusted EBITDA and adjusted earnings per share coming in at $1.99 billion and $1.24, respectively (consensus estimates were $2.1 billion and $1.35).

EOG is bucking the trend among upstream firms of reducing capital spending in 2019. The company has set the budget at $6.3 billion at the midpoint and expects to drive 12%-16% U.S. oil output growth via 740 planned net well completions. That plan is expected to be cash flow neutral with WTI crude at $50 and will generate incremental free cash in a more favorable environment. Though management had its feet put to the fire on the conference call for this strategy, it looks reasonable to us; the company is maximizing net asset value while living within cash flows and improving an already-solid balance sheet. As the stock does not look substantially undervalued to us, share repurchases are not a better use of cash than continuing the development of the firm’s core shale assets, in our view.

We plan to incorporate these operating and financial results in our model shortly, but after this first look, our fair value estimate and narrow moat rating are unchanged.