Investors in EOG Resources (NYSE:EOG) were hardly reacting to the company's second quarter results. While revenues came in a touch light versus consensus estimates, amidst rather sizable mark-to-market losses on derivative contracts, earnings were a bit better than anticipated.
I like EOG's management, its track record, growth and somewhat appealing relative valuation. Yet given the huge-run up in the shares over the medium term time frame, I am not jumping the bandwagon to initiate a position at current levels.
I am hoping for a slightly bigger correction, to perhaps initiate a position in the $90-$100 region, which would imply a 20 times trailing earnings multiple for the business.
Second Quarter Highlights
Revenues for the second quarter came in at $4.19 billion, a 9% improvement compared to last year. Despite the increase in sales, total revenues fell short compared to consensus estimates at $4.25 billion.
At the same time, earnings rose by just 7% to $706.4 million. Amidst a fairly flat outstanding share base, earnings per share rose by eight cents to $1.29 per share on a diluted basis.
Adjusted non-GAAP earnings advanced to $1.45 per share. This earnings metric excludes mark-to-market adjustments on commodity derivative contracts, which had a negative impact of $0.27 per share on reported earnings on an after-tax basis. Non-GAAP earnings came in ahead of consensus estimates at $1.36 per share.
Looking Into The Quarterly Performance
As other energy companies have reported earlier this earnings season, operational revenues have been relatively solid as this has been partially offset by hedging losses.
Crude and condensates sales rose by 30% to $2.62 billion, making up the majority of reported revenues. Natural gas liquids sales were up by 39% to nearly $248 million while sales of natural gas were up by 10% to $509 million. These strong operational achievements were largely made undone for by mark-to-market losses on derivative contracts. These losses totaled nearly $230 million versus a $191 million revenue contribution last year.
There were no being surprises along the income statement, although operating income growth of nearly 5% trailed reported revenue growth quite a bit. This was made up for by declining interest payments, therefore still resulting in a modest improvement in earnings.
Total production rose by nearly 17% to 591,000 barrels of oil-equivalent. Nearly half of this production took pace in oil, a 31% increase compared to last year. The increased relative importance of oil was crucial in higher operational revenues. NGL production was up by 22% to little over 79,000 barrels of oil-equivalent, while natural gas production was relatively stable.
EOG Resources ended the quarter with $1.2 billion in cash and equivalents. Total debt of roughly $5.9 billion results in a net debt position of about $4.7 billion.
With 549 million shares outstanding, and shares trading at around $107 per share, the equity in the business is valued at nearly $59 billion.
On a trailing basis, EOG has now posted sales of little over $15.5 billion. Earnings came in at $2.4 billion for this period, valuing equity in the business at 3.8 times trailing sales and 24-25 times annual earnings.
Continued Focus On Future Growth
In a recent investor presentation, EOG stresses its track record in horizontal drilling, great capital efficiency, production growth and shareholder returns. All of this is being achieved while operating with a very modest debt ratio.
These continued opportunities cost a lot of cash however, with the company's capital expenditures budget for 2014 being pegged at $8.1-$8.3 billion.
Even after announcing its second dividend hike for the year, the company actually sees room for another dividend hike next year. Between 2009 and 2014, EOG is expecting to increase oil production from 55,000 barrels of crude to an anticipated 285,000 barrels for this year. Further growth is anticipated in the period 2015-2017 as crude oil and NGL production is seen in the double digits while natural gas production is anticipated to be flat.
EOG has many excellent qualities. For starters it is very much focused on oil, is very profitable and it shows a great increase in production combined with a very strong track record.
This confidence is displayed by management which announced another 34% increase in its quarterly dividend. Although the quarterly dividend of $0.1675 per share, provides investors with a dividend yield of just 0.6%, the company is actually growing its dividends rather quickly.
Back in May of this year, I last took a look at EOG's prospects. I was very pleased with the operational achievements of the company in recent years. Despite a recent 10% correction, shares are still up more than quarter so far this year.
At the time I found that a 22 times forward earnings ratio is expensive in the oil and gas sector, yet the strong track record and growth rates can justify this valuation combined with strong management and relatively low leverage. No big surprises were revealed to me in the latest earnings report, as such I reiterate my intention to acquire shares at around 20 times earnings. This translates into a target price range of about $90-$100 per share, a region in which I anticipate to be a buyer.
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.