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EOG Resources Can Face The Tough Market

Mar. 10, 2020 11:02 AM ETEOG Resources, Inc. (EOG)12 Comments
Sarfaraz A. Khan profile picture
Sarfaraz A. Khan


  • EOG Resources reported an increase in profits and strong levels of cash flows for Q4-2019, but the dip in oil prices will push its earnings and cash flows lower.
  • EOG Resources, however, is a high-margin operator that can generate decent returns in a low oil price environment.
  • EOG Resources has a flexible CapEx plan, allowing the company to quickly adjust its operations and spending levels in light of oil price swings.

EOG Resources (NYSE:EOG) delivered strong levels of free cash flows in the fourth quarter, but the company is facing a tough environment as oil prices plunge to less than $40 a barrel. But a low-cost asset base, its ability to capture premium oil prices, and a flexible spending plan have put EOG Resources in a better position to handle weak and volatile oil prices than most oil producers.

Image courtesy of Pixabay

Earnings Recap

EOG Resources has recently released its fourth-quarter results in which the company posted an 8.9% increase in adjusted profits to $1.35 per share. The company benefited from an 8% increase in oil production from high-return operating areas in the US to 468,900 bpd. Its total oil equivalent production climbed 11% to 850,300 boe per day led by a 12% increase in US production to 803,600 boe per day. The company's operating costs on a per-unit basis also declined which contributed to the earnings growth.

The earnings growth was impressive considering EOG Resources experienced weak levels of commodity prices in the fourth quarter. The company realized an average price of $57.13 per barrel for crude oil, $16.23 per barrel for NGL, and $2.36 per thousand cf for natural gas in the fourth quarter, which were down 4%, 31%, and 31%, respectively, on a year-over-year basis.

EOG Resources also generated strong levels of free cash flows in the fourth quarter, enough to fully fund its capital expenditures and dividends. The company generated $2.1 billion of discretionary cash flow while its total cash capital expenditures before acquisitions came in at $1.4 billion. The company ended the period with a free cash flow of $723 million ($2.1 billion-$1.4 billion). The free cash flows covered the dividend expenditures of $167.35 million, allowing the company to end the period with more than $555 million of cash flows in excess of CapEx and dividends.

This article was written by

Sarfaraz A. Khan profile picture
Hey there, I'm Sarfaraz A. Khan - a seasoned financial writer and investor with a passion for uncovering hidden gems. I have a deep understanding of fundamental analysis and I specialize in writing about mid-cap and small-cap companies that are poised for significant growth. My investment philosophy is heavily influenced by the strategies of legendary investors like Warren Buffett and Benjamin Graham. I look for investment opportunities in companies that have strong fundamentals and can grow substantially over the long-term. I'm not afraid to venture into other areas of the market either. While I primarily write about mid and small-cap stocks, I also delve into ETFs and economic trends occasionally. I always aim to provide a balanced view and discuss risk factors in my articles so investors can make better decisions. Although I've been away from Seeking Alpha for a while, I'm excited to get back to writing and sharing my expertise with the community. Moving forward, you can expect to see two to three articles a week from me. When I'm not analyzing stocks or writing about finance, I enjoy reading about history, religion, science, economy, and following the latest developments in the energy and technology sectors.

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Comments (12)

Oil is super abundant and is a terrible investment. Long term, prices will fall below 30/bbl permanently. EOG is a guaranteed loser. Everything is going electric, and global oil reserves are way, way more abundant than future needs.
WTI @ $33/bbl today.
PT Larry profile picture
Thanks for the positive article.
Oliver Sudden Jr profile picture
Today, with EOG $39 and a fraction, the April $40 Put was $5.60 ! I sold some.
I agree that EOG is a one of the higher quality independent US energy producers, but that doesn't make the stock a buy in the current environment.

Oil prices are in the 30s this week, perhaps they'll rebound to the 50s, but we're unlikely to see $60 oil again for quite some time. The Permian producers will rush to fill any production cutbacks driven by OPEC as long as WTI is north of $55, which then offsets the impact of any OPEC cuts.

At a $45 to $55 WTI price EOG can survive as a company, but it won't generate the profit growth that attracted so many of us a few years back. WTI below $40 will be a challenge even for EOG, despite having a lower production cost than many other Permian producers.

EOG is also an efficient natural gas producer, but the pricing dynamics for US natural gas are even worse than for oil, with enormous supply surpluses and negative wellhead prices in some regions.

If you like EOG (or any of other efficient, low-cost Permian production companies), I suggest waiting a few months for the weaker producers to be forced into bankruptcy or large production cutbacks. When the desperate producers stop pumping, that will reduce supply enough to bring prices and profits back up again. Even then I doubt we'll see WTI back over $100, which is the last time producers were really making money.

Michael Mathison, CFA

Disclosure: I am neither long nor short EOG as of March 10, 2020.
"If the company gets support from oil prices, then I think it will hike dividends by 30% or higher in 2020."

are you sure you wrote this line this week?
EOG is one of the top 5 energy holdings for anyone's portfolio of dividend stocks that pay a nice dividend income while yoou just sit back & relax, knowing that your investment in EOG was a solid choice.
@novavax#1 how long have you held their stocks for?
EOG will be $10 by August.
Crude Man profile picture
Well... that depend on whether enough of their non-op "partners" remain solvent, since they heavily subsidize EOG's business by paying EOG's salaries, bonuses, and benefits, as they bill all of that out to the well level.
EmeraldRun profile picture
As far as EOG is concerned this selloff is very overdone. But it's not just market conditions that EOG longs are up against, it's also sentiment. So it's difficult to say where the bottom is.
tenbaggerZ!! profile picture
I agree. Nice analysis.

Plus all its bonds are trading above par. Speaks something about its quality and sustainability as a business. If only one shale giant survives till the end, it would be EOG.
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