S&P Energy is the only sector not to return double-digit growth year-to-date in 2019 and has significantly underperformed the broader market over the past decade.
This decade-long underperformance can largely be attributed to weak commodity pricing during the period as a result of the rapid growth in U.S. production capacity due to the technological advances that enabled the U.S. shale expansion. The sector’s general inability to withstand prolonged periods of volatility in commodity pricing due to weak balance sheets among the S&P Energy components has led to about 400 total bankruptcies dating back to the last oil bust in Q4 2015.
As the S&P 500 P/E multiple approaches the mid-twenties and continues to rise into the new year, EOG is an attractive, well-capitalized, free-cash-flow-generating, crude oil and natural gas producer with major production areas located in New Mexico, North Dakota, Texas and Wyoming.
EOG stands out among the S&P Energy components given:
(1) the strength of its balance sheet (EOG's debt-to-total capitalization ratio was approximately 20% as of September 30, 2019),
(2) management's commitment to long-term dividend growth (EOG increased the quarterly cash dividend on its common stock 30.6% effective beginning with the dividend paid on July 31, 2019) and,
(3) substantial discretionary cash flow from operations (estimated to be approximately $7.2B for the full year ending 2019 including deferred tax liabilities and before capital expenditure, which is projected to be $6.2B to $6.4B for the full year ending 2019.)
At a share price in the mid-80's, EOG trades at a price-to-discretionary-cash-flow multiple of approximately 12x. Further, the company's strong balance sheet enables EOG to withstand future periods of oil and gas price depression.
EOG reported net debt totaling $3.6B against oil and gas properties valued at $30.2B. With net debt representing just 50% of annual discretionary cash flow from operations, EOG is positioned to
