Buy-recommended EOG Resources (EOG) is priced close to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $92 a share. Fourth quarter results released late February 9 matched our expectations from three months ago for total unlevered cash flow (Ebitda). Cash flow and reserve life support NPV in an industry context. NPV takes account of a 24% increase in year-end reserves, but not volume growth in 2010 beyond the lower bound of management’s guidance.
All of the increase and more in proven reserves was in the undeveloped category as a result of new guidelines from the U.S. Securities and Exchange Commission. The new rules allowed EOG to book large amounts of proven undeveloped reserves in shale gas formations including the Barnett in Texas, Haynesville in Louisiana, Marcellus in Pennsylvania and Horn River in British Columbia.
Meanwhile, the trend is up for natural gas futures for the next twelve months with the February 12 settlement at $5.88 a million btu compared to the 40-week average of $5.46. At the same time, an uptrend in stock price signified by EOG trading above its 200-day average of $81 a share helps justify a continued positive rating. Nonetheless, when a buy-recommended stock appreciates to a McDep Ratio of 1.0 and it remains a Buy, we suggest rebalancing to limit portfolio weight to average.
Originally published on February 15, 2010.