EOG Resources: Robust Liquidity Enables Prioritization Of Value Over Volume

Summary

• Independent E&Ps with strong balance sheets and low leverage offer the best exposure to play the inevitable oil price recovery. EOG Resources is our highest conviction pick of the group.
• EOG has shored up its already robust liquidity position through the issuance of $1.5bn in senior notes maturing in 2030 and 2050, a very impressive result, given current market conditions.
• This privileged liquidity position has enabled EOG to approach strategic portfolio decisions about production through the lens of value creation rather than desperation for cash.
• 90% of EOG's shut-in production is cash flow positive at $10 WTI. The decision to defer production was therefore based on NPV maximization.
• EOG will be well-positioned to ramp up crude production into a rising price environment, with Goldman Sachs forecasting a recovery to $65/bbl by 4Q21.

Three weeks ago, we initiated coverage of EOG Resources ahead of Q1 earnings as a "strong buy" at $40: Cash-Generator EOG: Shale As It Should Be. Since publication, the share price has risen 20%, driven in part by a recovery in WTI prices to nearly $25/bbl.

We confess we did not anticipate the speed of this recovery, but nonetheless find it unsurprising as investors are beginning to wise to the fact that large, independent E&Ps with strong balance sheets and low leverage offer the best exposure to play the inevitable oil price recovery.

This central pillar of our investment philosophy has been made more evident in recent weeks by the turmoil surrounding the now-infamous United States Oil Fund ETF (USO). HFI Research - a Seeking Alpha service we rate very highly - wrote a good article on the subject here: If You're Betting On Higher Oil Prices, USO Is Not The Right Vehicle

Cutting a long story short, there is no investment vehicle of which we are aware that enables you to buy and hold front-month WTI or Brent and hold it without exposing you to a negative roll yield in a contango'd market. As new investors to the oil patch come to terms with this, the ability to buy low-cost operators with a history of value creation and capital discipline at bargain prices will quickly disappear.

We're therefore taking this opportunity to reiterate our "strong buy" view on EOG Resources following its Q1 earnings release, which we felt hit all the right notes. Given its robust liquidity profile, the decision to defer production is logical and should substantially increase the NPV of its portfolio as prices begin to recover into 2021.

We believe there is very significant upside from current levels for long-term investors who can weather short-term volatility. We

Analyst’s Disclosure:I am/we are long EOG, PXD. 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.