- EOG Resources delivered a good 4Q '19, which fell short of expectations. The company announced a fourth-quarter 2019 net income of $636.52 million, or $1.10.
- EOG Resources' oil production exceeded the high end of its guidance range during the fourth quarter. Total production was a record of 850.3K Boep/d, up 11.1% from last year.
- The company got approvals from the board of directors to increase the quarterly dividend by 30% to $0.375 per share.
- EOG Resources offers a rock-solid balance sheet with substantial growth potential.
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Image: EOG rig from EOG Resources
The Houston-based EOG Resources (NYSE:EOG) is one of the top-tier U.S. shale players that I regularly cover on Seeking Alpha. The company was spun out from Enron in 1999.
I like EOG because of its pragmatic management that has followed a rigorous strategy over the years that resulted in steady growth and a remarkable accomplishment.
EOG Resources offers a rock-solid balance sheet with substantial growth potential. It makes the stock an excellent long-term candidate, especially after the massive correction that the oil sector suffered last week.
This oil company is another perfect example of my basic strategy attached to the entire oil sector. The investment thesis is quite simple.
First, you identify a reliable company with a solid track record producing excellent cash flow, in which you are confident to invest and accumulate for the long term.
A company with a good dividend yield is even better, and the company is progressing in this domain. EOG Resources is paying a lower dividend yield compared to one of its direct competitor Occidental Petroleum (OXY), but seems reasonable and fits what the company can afford to pay. In contrast, OXY is paying a dividend, which is well over what its free cash flow is generating and is likely to cut soon.
Second, you have to be willing to trade about 30% to 40% of your position by using short-term volatility. It is an essential part of the strategy and will provide you with better control of your investment. Furthermore, it will help reduce the loss due to the risk of being caught in a massive correction.
The chart below is showing a 20% differential between EOG and OXY, mostly attributable to the ill-timed Anadarko acquisition.
What makes EOG a good business?
The company is primarily producing oil and gas from the U.S. shale or 94.5% of the total output in 4Q '19.
As we can see, production in the USA has been increasing significantly while international production slowly declined.
|Production per Region in K Boe/d||2Q'18||3Q'18||4Q'18||1Q'19||2Q'19||3Q'19||4Q'19|
|United States of America||644.4||695.0||715.5||722.0||760.4||784.2||803.6|
Bill Thomas, the CEO, said on the conference call:
"In times of uncertainty, EOG's sustainable business model is well suited to navigate a volatile environment. In fact, we are more confident in EOG's future today than we've ever been in the history of the Company. With our strong balance sheet and flexibility, EOG is better positioned now, both financially and operationally to weather the storms than it's ever been in the past."
The U.S. shale has dramatically transformed the U.S. oil and gas production, turning the U.S. into the number one oil producer in the World. A massive oil price correction now threatens this expansion due to the effect of the coronavirus outbreak on the world economy.
EOG holds a multi-basin premium portfolio, which is very appealing and growing fast (e.g., Bakken, Eagle Ford, Delaware basin, Woodford oil, Wyoming, and Powder River Basin).
The company's assets in the Delaware Basin (Permian), which produced 174K Boep/d in 2019, are the fastest-growing assets for the company. Furthermore, the company is active in setting up an oil gathering system and terminal web with ultimately up to five connections to downstream markets.
Source: from EOG Presentation
Ezra Yacob, EVP, Exploration, and Production, said in the conference call:
"We were able to reduce well costs across the Company by approximately 7% and that's really the number one driver of converting those well locations and that's something we've done over the past four years is be able to lower well cost every year through not just reduced contract pricing, but dominantly through our increased operational efficiency and applying innovative technologies and capturing different parts of the value chain."
EOG Resources - 4Q '19 Balance Sheet: The Raw Numbers
|Total Revenues and others in $ Billion||4.238||4.781||4.575||4.059||4.698||4.303||4,320|
|Net Income in $ Million||697||1,191||893||635||848||615||637|
|EBITDA $ Million||1,805||2,428||2,064||1,853||2,192||1,887||1,568|
|EPS diluted in $/share||1.20||2.05||1.54||1.10||1.46||1.06||1.10|
|cash from operating activities in $ Million||1,942||2,190||2,085||1,608||2,687||2,062||1,807|
|Capital Expenditure in $ Million||1,684||1,649||1,302||2,000||1,563||1,491||1,368|
|Free Cash Flow in $ Million||-257.7||540.4||783.1||-392.7||1,123.6||570.8||438.9|
|Total Cash $ Billion||1.01||1.27||1.56||1.14||1.16||1.58||2.03|
|Long-term Debt in $ Billion||6.43||6.43||6.08||6.08||5.18||5.18||5.18|
|Dividend per share in $||0.185||0.22||0.22||0.2875||0.2875||0.2875||0.375|
|Shares outstanding (diluted) in Million||580.4||581.6||580.4||580.2||580.2||581.3||579.5|
Source: EOG Resources PR and Morningstar
Trends And Charts: Revenues, Earnings Details, Net Debt, Free Cash Flow, And Upstream Production
1 - Total Revenues and others were $4.32 billion in 4Q '19
EOG Resources delivered a good 4Q '19, which fell short of expectations. The company announced a fourth-quarter 2019 net income of $636.52 million, or $1.10 per share, compared with the fourth-quarter 2018 net income of $893 million, or $1.54 per share.
- Lease and Well expenses decreased to $334.5 million from $346.4 million a year ago.
- Transportation costs rose to $208.3 million from $196.1 million a year ago.
- Gathering and Processing costs went up to $127.6 million as compared to the year-ago quarter’s $112.4 million.
As of December 31, 2019, EOG Resources announced net proved reserves at 3,329 million barrels of oil equivalent (MMBoE), representing a year-over-year increase of 14%.
2 - Free cash flow
The free cash flow for the fourth quarter of 2019 was a gain of $438.91 million, and for the year 2010, a total of $1.741 billion.
Free Cash Flow to Equity ("FCFE") or FCF is calculated by subtracting Capital Expenditures to Cash from Operating Activities. Free Cash Flow to Equity is the amount of cash available to be eventually distributed to shareholders. It must be sufficient to cover the dividend and allow debt reduction.
The dividend is now $1.50 per share yearly or a yield of 2.7%, which is still low and is way below the industry average. It is the primary weakness of the company and should be around $2.50 per share, at least to attract dividend-oriented investors, which is reasonable after looking at the FCFE.
Note: The company indicates a free cash flow of $1.9 billion.
Tim Driggers, the CFO, said in the conference call:
"The most tangible output of this strategy is the payment of a regular dividend. The payment of a growing sustainable dividend is the best way to return cash to shareholders and is an integral part of our successful business model, high-return reinvestment."
3 - Oil-equivalent production and other
EOG Resources' oil production exceeded the high end of its guidance range during the fourth quarter. Total production was a record of 850.3K Boep/d, up 11.1% from last year, and up 1.9% sequentially. 94.5% of the total output comes from the U.S., as you can see in the chart below.
EOG relies heavily on crude oil, which represents 44.9% of the total output.
The price of oil (composite) realized by the company this quarter was $57.13 a barrel, down 3.9% from a year ago and down less than 1% sequentially. Cash operating costs were standing at $9.37 for 2018 and are expected to go even lower to $8.76 in 2019 and are expected to be $8.60 in 2020.
The primary production driver was the company's position in the Delaware Basin with 51 wells online (gross) and South Texas Eagle Ford with 67 wells online in 4Q '19.
4 - Net debt and cash
Net debt is now $3.6 billion, and the net debt-to-EBITDA is 0.48x. Net debt to total capitalization ratio for 4Q' 19 was 13%. Thus, an excellent debt profile.
Tim Driggers, the CFO, said in the conference call:
"We retired $900 million in debt. Cash on the balance sheet at year end was $2 billion and total debt was $5.2 billion for a net debt-to-total cap ratio of 13%, down from 19% at the end of 2018. Below is indicated the bonds maturities from 2018 to 2021 (presentation)."
5 - EOG 1Q' 20 and full-year 2020 Production/CapEx Guidance
Source: EOG Presentation
The company increased its 2020 spending forecast to between $6.3 billion and $6.7 billion on capital projects, versus $6.2 billion and $6.4 billion in 2019.
The company's U.S. production will be 845.2 to 900.4 K Boep/d.
The company expects production for 2020 between 886.2K Boep/d and 950.1k Boep/d.
Conclusion And Technical analysis
EOG Resources beat its fourth-quarter oil production targets. It is the fourth quarter in a row that the company beat production expectations with a reduced CapEx.
A vast inventory of premium drilling wells in the Bakken and Eagle Ford plays is set to drive oil production in 2020.
The takeaway for 2020 is the company call for 10% to 14% crude oil growth and a capital budget of $6.3-$6.7 billion in 2020.
It is precisely at this detail that I find some weaknesses in the company's business model. I call it an unquenchable need to grow production in a weakening environment run by oversupply and dismal commodity prices.
Why deplete the company's inventory to grow oil & gas production instead of stockpiling the cash on the balance sheet?
In a time of winter, you do not dance bare chest in the snowy storm. Instead, you stay home and keep your energy for better days. Then, time to get a nice nap and stop spending on growth when the World is telling you to downsize for the time being.
Technical Analysis (short term)
EOG has experienced a decisive support breakout of the symmetrical wedge pattern at the end of February. The new trend, in my opinion, is now a descending channel pattern with line support at $48.75 and line resistance at $65 with higher resistances at $74.90 and $86.25 if oil prices can turn very bullish all of a sudden, which is quite unlikely after what happened on Friday between OPEC and Russia.
The strategy is quite simple. First, look at the oil prices like a hawk. Then, if no change next week, expect a retest of the lower resistance at $48.75, where it is a good idea to start accumulating. The first sell target is around $65-$68, where I think selling 30% of your position could work well.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EOG over 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.
I am trading short term the stock but I may start a long term position at or below $49
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