- EOG Resources closed trading Thursday 12% below its 52 week high.
- EOG Resources is a solid value play at this level.
- Long term investors looking for an energy investment should consider a position.
EOG Resources (NYSE:EOG) is one of the largest oil and natural gas producers in the United States, with proven reserves in the U.S.A, Canada, Trinidad, the UK and China. EOG shares hit an all time high of $118.89 in June and July before declining about $15 per share to a recent low of $103.57. Towards the end of that pullback I wrote an article explaining why the shares were near attractive levels. After a short lived bounce to $110, Thursday's closing price of $104.60 and any further decline are great entry points and here is why:
The Recent Decline in Energy Prices has put pressure on EOG shares:
Understandably, lower energy prices would have some affect on EOG Resources. EOG has over 2 billion barrels of oil equivalents in its reserves, and billions more in the property that they own. I believe this article does a good job explaining the recent decline in crude oil. Money managers are reducing their exposure to crude, the US Dollar is strong, and the summer driving season is behind us. But if crude gets too low in price, OPEC will start to slow production to keep the price up. I think this will be the case if oil falls below $90. Natural gas has also fallen 20% since June. Even though I believe the time to buy natural gas may be approaching, the recent price decline has most likely added some pressure to EOG shares. If natural gas prices do turn around from the recent 20% decline (4 of the last 5 late fall-winter seasons prices have risen), that would certainly be a positive for EOG shares. This is why I think the decline in EOG Resources shares due to the recent decline in energy prices should be used as a buying opportunity for long term investors. Energy prices fluctuate with demand, seasons, geopolitical risk, etc, but in the long term, this price decline should not affect EOG as a company.
Value in EOG's Growth:
Take a look at these growth projections:
|Free Cash Flows||+11.8%||+15.9%||+10.8%|
EOG shares are trading at a 16.4x Forward P/E as of the close on September 4th. For a company that is putting out double digit growth numbers across the board, I think the 16.4 Forward P/E is low and represents value in these shares. The S&P 500 is currently trading near 16x next year's earnings, with average earnings growth around 6%. In comparison, EOG has almost the same Forward P/E, but almost double the expected earnings growth over the next 3 years.
The Fundamentals Haven't Changed:
In my opinion, EOG Resources is the best of breed in the energy industry. The last article I wrote about EOG (link in first paragraph) mentioned several catalysts for the company - none of which have changed.
1. Vertical integration: EOG is vertically integrated within the industry. They produce their own fracking sand and ship their own oil through the railroads that they own. This gives them a great competitive advantage in the industry.
2. They have diversified properties all over the world with billions of barrels of undrilled reserves. This includes the Eagle Ford - the largest onshore oil reserve ever discovered in the US, where EOG is the largest landowner by far.
3. EOG is also starting to downspace their wells. This means placing wells closer to each other and increasing production without risking the wells pumping the same oil. This is a proven technique and EOG is in the first inning of this process.
I believe EOG is a buy at these levels. I added to my position a few weeks ago near the low in the $103's and just added again in the $104's. The lower the shares go, the stronger the buy. Temporarily low energy prices may have affected the shares, but the long term prospects of the company are unchanged.
Additional disclosure: I am long EOG Resources as part of a balanced long term portfolio. Before you make any investment decisions, consult your own financial advisor to determine what strategy is right for your situation.