Stock Spotlight

EOG: energy efficient

 

Over the last five years, energy producer EOG Resources ($124; EOG) has put together an impressive operational resume:

• Increased production 33% while reducing per-unit costs 17%.

• Generated more than $20 billion in net income and free cash flow.

• Returned $13 billion to shareholders while reducing total debt more than 40%. During that five-year period, the regular dividend rate increased 350%, not taking into account a stream of special dividends.

EOG’s operational excellence hasn’t translated into stock-market returns recently — the shares generated a negative total return of 14% over the last 12 months. The energy sector as a whole has underperformed, in large part because of declines in oil and natural-gas prices.

Still, we appreciate how EOG is positioned to deliver both consistent production growth and efficiency improvements. The stock is rated Buy.

Surprising results

In the September quarter, EOG earned $3.44 per share, down 7% but $0.45 above the consensus. Revenue fell 18% to $6.2 billion, but also topped analyst targets. Energy production increased 9%, while per unit operating costs fell 5%. While oil and natural-gas prices rose in the September quarter from June-quarter levels, they were down 10% and 69%, respectively from a year earlier. That explains why sales and profits fell despite EOG’s efficiency gains.

The company sets an aggressive hurdle rate on development — new projects must generate a 30% after tax return assuming oil at $40 per barrel and natural gas at $2.50 per thousand cubic feet. EOG says these cost advantages position it to maintain production at current levels and fund its $2.1 billion in annual regular dividends even if oil prices fall to $45 per barrel, 42% below current levels.

Looking ahead

Starting in 2024, EOG will commit to returning at least 70% of annual free cash flow to shareholders, up from an earlier pledge of 60%. Including a special dividend of $1.50 per share declared early this month, EOG expects to return 75% of free cash flow this year, or roughly $4.1 billion.

In November, EOG raised its regular dividend 10%, yielding 3.0%. More special dividends seem likely, as 70% of the 2024 consensus for free cash flow equates to $7.30 per share, roughly twice the regular payout. Over the last three years, EOG paid out eight special dividends totaling $11.30 per share.

Rich resources

EOG controls resources equal to 10 billion barrels of oil equivalent, with just $5 per barrel in average finding and developing costs. That’s about 30 years of low-cost inventory at EOG’s current production rate. This resource position, coupled with the company’s proven ability to grow production while lowering costs, boosts our confidence in future prospects.

EOG Resources Inc., 1111 Bagby St., Houston, TX 77002, (713) 651-7000, www.eogresources.com.

 

 

 

 

Quadrix Scores

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.