Is EOG Resources A Good Investment?

Jul. 2.14 | About: EOG Resources, (EOG)

Summary

The favorable environment in the commodities segment and growing production levels will continue to fuel the growth of the company.

New wells in the Permian region are showing exceptional yield levels, which will result in lower cost basis for EOG.

Lower cost and rising commodity prices will result in enhanced margins for the company.

EOG Resources (NYSE:EOG) is one of the most attractive stocks in the Energy sector. The stock has shown robust growth of 41.63% year-to-date. Over a two-year period, the stock has shown a tremendous growth of over 161%. The company operates in the following four business segments:

  1. Crude oil and condensate
  2. Gathering, processing and marketing
  3. Natural Gas
  4. NGL

According to the revenues reported for last year, the crude oil and condensate segment is the largest segment for the company, and accounts for about 58% of the total revenue; the second-largest segment is the gathering, processing and marketing segment, with 25% share in total revenues - the other two segments account for the remaining revenues. In this article, we will discuss the company's fundamentals, and focus on its future growth and the resources it has to back this growth.

A Look at the Fundamentals

EOG's revenues are growing at a rapid pace - over the last three years, revenues have grown at a compounded annual growth rate of 56.4%. During 2014, the company expects its revenue growth rate to be around 16%. While in 2015, it expects this growth rate to be around 6%. If we take out an average yearly growth rate of revenue for the past 3 years, i.e. 56.4%, it comes out to be close to 19%. According to the anticipated level of growth this year, we believe the company is doing well. While in 2015, the decrease in growth rate could be a result of problems at Permian Basin, which we will discuss later in this article. (Source: SEC Filings)

Over the last 3 years, the adjusted earnings of EOG have grown by about 40%. This represents an average yearly growth of about 13%. This year, earnings of the company are expected to grow further, at a much higher rate. According to the consensus estimate of analysts, the company's earnings will grow at about 28% year-over-year in 2014, and by another 11% in 2015.

Increase in Production Volume

Last year, EOG had a production volume of 235,000 barrels of oil per day in the U.S., which represents year-over-year growth of 42% in 2013. At the end of last year, the company gave production guidance for 2014 of 11.5% year-on-year growth. These growth figures were in anticipation of an expected growth of 27% in production of crude oil. After hitting higher production volumes than expected, i.e. 45%, as reported in its first-quarterly report, EOG Resources raised its crude oil production guidance to 29% and its total production guidance to 12%. Now, let us look into how it will achieve this growth in production volume.

At the end of the first quarter, EOG Resources announced that its five new wells in the Eagle Ford are extracting 13,000 barrels of oil per day, with extremely efficient yield levels of 91-97%. If we compare it with the per day levels of 466 wells that EOG Resources had in the Eagle Ford in 2013, which were producing between 2,314-3,071 barrels of oil per day, this addition will make a sizable contribution to the production volumes for the current year. The company further plans to add 49 new wells in the Eagle Ford in 2014, which will grow the production volume by about 5%.

The good thing about the Eagle Ford is that the extraction efficiency is greater than any other shale play. This means that the company will be hitting higher production volume at a reduced cost. This will increase the profit margin of the company. The increase will also be contributed by its assets in the Permian Basin. However, the yield levels are much lower in the Permian compared to the other two regions. The company expects 20% of growth in total oil production from this region.

Conclusion

EOG's production growth is strong, and the pricing environment in the commodities sector is favorable for the oil & gas companies. We believe that EOG will continue to grow in this favorable environment. The oil-heavy portfolio of the company will allow it to benefit from rising crude oil prices. Also, the NGL segment will show strong growth as the demand for NGLs continues to grow from the Asian markets. We believe EOG is a solid long-term growth pick and the stock will be trading at a much higher level in a year's time.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.