EOG Resources (NYSE:EOG) is one of the largest U.S. oil & gas exploration and production companies. The vast majority of EOG's proven reserves are in the U.S. (92% of proven reserves) and Canada (2% of proven reserves). Most of these reserves are located in areas with well known, attractive production characteristics containing long-lived oil/gas assets. We believe that EOG has been successful in its strategy of maximizing production while minimizing operating/capital costs. This insures that EOG can generate the maximum cash flow/earnings per unit of production.
U.S. production is the primary source of EOG's production and is focused on the most well known oil and gas producing areas in the United States. Primary production areas in the United States are as follows; the Marcellus Shale in Pennsylvania, Williston Basin and Bakken Shale of North Dakota, the Unita Basin of the Rocky Mountains, the Permian Basin, the gulf coast of Mississippi, Louisiana, and East Texas, and the Barnett Shale of the Fort Worth Basin. In recent years, EOG has focused more on producing high margin liquids helping moderate the issues associated with low/volatile natural gas prices. In 2012, EOG expects a 4% increase in total production with a 28% increase in crude oil/natural gas liquids production and a 15% decrease in natural gas production. This change in the mix of production should push crude oil/natural gas liquids to about 55% of total production in 2013 compared to 48% of total production in 2012. We believe that increased liquids production will help profit margins and cash flow this year. Analysts estimate that EOG will earn $5.91/share in 2013 and $7.93 in 2014.
We believe that EOG is a good buy for the following reasons:
- EOG is selling at a relatively inexpensive forward earnings multiple of 16.0 times 2013 projected earnings.
- EOG has a solid balance sheet with $876 million in cash and a manageable debt burden with a 30.0% debt to capital ratio.
- EOG has an attractive PEG ratio of 1.07 indicating investors can buy growth at a reasonable price.
- S&P has a Buy rating on the stock (4 out of 5 stars) and a 12 month price target of $158.00 per share which is 24.5% above today's price.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.