Performance
Company Background: EOG resources (EOG) is among the largest players in the U.S. energy sector, specializing in the production of crude oil and natural gas. As such, the company can be categorized under the larger oil and gas industry, which is coming off one of its strongest years. The industry earned record profits in 2022, providing sufficient cash flows to fund future research and strategies. As such, we are recommending a buy at this time for EOG resources, chiefly due to EOG’s own expansion and acquisitions.
Company Information
Price: 114.76
52 wk-range: 89.96-149.10
YTD Return: -11.4%
IPO Date: March 2011
Mkt Cap: 67.4 Billion
Shrs Ostd: 5.79 B
Thesis 1: In October of 2022, OPEC announced that they would cut production of Oil by almost 2 million barrels a day, with immediate effects on global markets. The members of OPEC control 40% of the world’s production of crude oil, which means that these supply cuts have led to a sharp increase in oil and gas prices. This is good news for American companies in the industry such as EOG; as the oil they produce automatically becomes more valuable and allows the company to generate more profit. With OPEC not relenting on their production cuts and socioeconomic relations between the U.S. and Saudi Arabia continuing to worsen, American oil companies will continue to rise in value.
Thesis 2: Fundamentally, EOG has an optimistic view for the future of the oil/natural gas industry. This is perhaps best demonstrated by their long term supply deal with Cheniere energy, another energy giant headquartered in Austin, Texas. When the deal was agreed in 2019, Cheniere agreed to sell a great deal of natural gas to EOG, instantly increasing their supply and consequently, their influence in the industry. Although initially focusing on Oil, this deal helped EOG break into the steadily performing natural gas industry. In February of 2022, this deal was extended, reiterating both parties’ commitment to the original idea. However, the amended deal has also helped EOG triple the original amount of natural gas that was given to them.
Thesis 3: EOG’s value as a security is also tied to their expansion as a company. In 2023, they are expected to engage in increased activities within the Dorado and Powder River Basin, as well as the Delaware Basin, locations which have a higher percentage of natural resources, underlining their expansion within their industry. As a result, in their 3Q22 earnings, the company provided guidance for low double digit year-over-year volume growth in 2022, reflecting their own financial confidence. The increase in natural gas volumes will also directly benefit EOG’s per unit cost structure, with the company stating that they will have adequate takeaway capacity to flow their margins at better margins.
Valuation: EOG’s current price target is valued at an average of 114.76, proving a possible upside 27% upside on an investment. The company’s 8.31 P/E provides incredible value when compared to its peers in the industry, especially with its potential to expand and grow within its sector in the future. The stock’s RSI, Relative Strength Indicator, oscillated to 36.88, trending strictly downward, indicating a technical status of “oversold”. The company’s revenue topped $25 billion in 2022, with a strong net income of $8.1 billion. The stocks upward movement in the coming months will be catalyzed by technical factors, strong fundamentals, and expansions of existing infrastructure.
Risks: Although EOG represents an attractive proposition for any investor, there are a few inherent risks associated with it. First and foremost, one risk that could present itself with EOG is the obsolescence risk, with the democratic run federal government continuing to push for renewable forms of energy. However, many people underestimate the country’s dependency on fossil fuels; in fact, according to the BP statistical review, fossil fuels supplied over 83.3% of U.S. energy within the last year. The scale of fossil fuel control over the country means they do not face an obsolescence risk in short or medium terms, and the time needed to replace them means they do not face great risk in the long term either.