The Coming FCF Giant Known As EOG Resources

Mar. 05, 2018 4:20 AM ETEOG Resources, Inc. (EOG)11 Comments
Callum Turcan profile picture
Callum Turcan


  • Going over EOG Resources' 2017 performance and 2018 expectations.
  • A lot of free cash flow at $60 WTI enables debt reduction and strengthens the balance sheet.
  • Higher capex budget funded by organic cash flow generation, not debt issuance, will stimulate additional production growth.

EOG Resources, Inc. (NYSE:EOG) is generally considered one of the best unconventional upstream oil & gas players in the business, and its financials back it up. Last year, the firm posted almost $2.6 billion in net income! But that includes the gain from the tax law as its deferred tax liability decreased by a huge amount after the tax cut bill was signed into law. Factor that out and EOG Resources still earned an adjusted $648 million for 2017, $401 million of which was earned in Q4. Let's dig in.

Free Cash Flow

During its Q4 2017 conference call, EOG Resources' management team noted that:

"In 2017, we [EOG Resources Inc] grew high return U.S. oil production 20%, paid the dividend, reduced our debt, and generated over $200 million in free cash flow."

Let's dig into that a little bit. It depends on how you define free cash flow, which for many/most publicly traded oil & gas firms excludes changes in working capital. EOG Resources generated $4.265 billion in net operating cash flow in 2017, but that includes negative working capital effects of $965 million.

That isn't a "normal" build in the sense that EOG needs to invest almost $1 billion a year in working capital to support its operations; the real figure is much lower than that. A growing upstream firm does need to invest in working capital, for instance, by building up an inventory of wellheads, well casings, proppant, and other D&C-related materials in order to bring more wells online per year. Even so, most annual working capital changes are due to timing effects and that won't necessarily show up next year.

When it comes to evaluating upstream firms with numerous big long-cycle projects, working capital builds are material because that cash flow won't return for some time, but small

This article was written by

Callum Turcan profile picture
Associate Director of Research, Co-Editor of Valuentum's Newsletters, Portfolio Manager-----Valuentum (val-u-n-tum) [val-yoo-en-tuh-m] Securities Inc. is an independent investment research publisher, offering premium equity reports, dividend reports, and ETF reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area. Valuentum is not a money manager, broker, or financial advisor. Valuentum is a publisher of financial information.-----Please read our Disclaimer that applies to all articles published on Seeking Alpha:

Disclosure: I/we 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.

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