EOG: A Smart Play On Energy Rebound
by Jay Allen
In the following article, I will explain why investors interested in the E&P industry should consider adding EOG Resources (EOG) to their portfolio. EOG Resources is one of the most appealing investments among the independent U.S. E&P firms. EOG Resources had a strong second quarter that enabled the firm to raise its 2012 guidance. EOG is the largest and most productive firm in the Eagle Ford play, and has a number of other promising ventures under way in other U.S. territories, Canada and abroad as well. I believe EOG Resources is positioned for strong growth organically as natural gas and oil prices are expected to rebound in 2013. EOG Resources has been its operations and revenues every quarter each year.
EOG Resources is comparable to other U.S. based independent E&P firms with market caps between $20 billion and $40 billion like Noble Energy (NBL), Apache (APA), Anadarko Petroleum (APC) and Devon Energy (DVN). EOG Resources currently has a lower price-to-earnings ratio than Noble Energy. Both Devon Energy and Apache have a lower price-to-earnings ratio than EOG Resources. Among all of these firms, EOG Resources has the second-highest price-to-sales and price-to-book ratios, trailing only Noble Energy. At around 0.61%, EOG Resources has the second-lowest dividend yield among these firms; Anadarko’s is around 10 bps lower. At around 20.85%, EOG Resources has the highest sales growth over the past five years among these firms.
EOG Resources has the second-highest sales growth in the past quarter year-over-year (YOY), trailing only Noble Energy. EOG Resources has the third highest return on equity behind Apache and Devon Energy. EOG Resources’ current ratio is around 1.1 and its quick ratio is around 0.87. At around 0.38, EOG Resources has the second-lowest debt-to-equity ratio among these firms. EOG Resources has the highest gross margin alongside the third-highest operating margin and net margin among these E&Ps. At around 1.08, EOG Resources has the second-lowest beta among these firms while it is the only one of the firms to have positive growth in its stock YTD through mid-August. EOG Resources is also the closest to meeting its 52-week high while the stock has increased around 11.7% since its last earnings release.
According to the recent quarterly report from EOG Resources, net operating revenue in the second quarter of 2012 was over $2.9 billion an increase YOY from over $2.57 billion. In the first half of 2012, net operating revenue was over $5.71 billion, an increase YOY from over $4.46 billion. Operating income in the second quarter was over $692 million, an increase YOY from over $588 million. Operating income in the first half of 2012 was over $1.25 billion, an increase YOY from over $860 million. Net income in the second quarter was over $395 million, an increase YOY from over $295 million. Net income in the first half of 2012 was over $719 million, an increase YOY from over $429 million.
Crude oil and condensate revenue in the first half of 2012 increased 58% YOY to over $2.6 billion. This was due to a 51% increase YOY in crude oil and condensate deliveries as well as 4% increase in price YOY to $98 per barrel. LNG revenue for the first half of 2012 increased 5% YOY to $348 million due to a 43% increase in deliveries partially offset by a 22% YOY decrease in price to $38.27 per barrel. Natural gas revenue for the first half of 2012 decreased 39% YOY to $457 due to 4% YOY decrease in deliveries and 36% YOY decrease in price to $2.54 Mcf. EOG divested acreage in the Rocky Mountain, Upper Gulf Coast and Canada territories for over $1.1 billion, its expects to total $1.25 billion to $1.5 billion from divestures by year’s end.
Production in the second quarter enabled EOG to increase its 2012 target for crude oil production growth from 33% up to 37% and its target for liquids growth from 33% to 35%. In the second quarter, crude oil and condensate production increased 52% YOY, while total liquids production increased 49% YOY. Without increasing expenditures, EOG was able to increase its total growth production target from 7% to 9% for 2012. This is partially driven by the premium pricing realized from the crude-by-rail system to the St. James facility and the new marketing opportunities in the Houston area from the completion of the Enterprise Products Partners L.P. crude oil pipeline. EOG will also make final investment decision regarding its 30% interest in the Kitimat LNG Terminal and Pacific Trail Pipelines in Western Canada.
Around 86% of U.S. revenue was from crude, oil condensate and LNG; this was mostly due to the success in the Eagle Ford play. Production here has increased by 52% YOY alongside new efficiencies that require fewer rigs. EOG will decrease its rigs to 20 while increasing its projected wells by 30 to complete 330 by 2013. The Eagle Ford is the largest oil discovery in 40 years and EOG is the largest producer here, 86% of its production was from oil in the second quarter. EOG has 16 wells here producing 2,500 to over 4,800 barrels per day; no other operators currently have any wells that rival this production in Eagle Ford. It also started delivering oil from its Bakken play to the St. James facility in April 2012.
EOG Resources has made investments in highly productive territories for both liquid and natural gas exploration. EOG Resources had also made effective investments in pipelines in order to improve its operations and bottom line. Despite low commodity prices in 2012, EOG Resources has had a promising year by effectively improving its productivity in conjunction with its total assets through effective drilling programs. EOG Resources is positioned to experience substantial growth as liquid prices continue to increase and once the natural gas market begins to rebound from the recent lows.