EOG Resources: Don’t Miss This Investment

EOG Resources (EOG) reported its first quarter 2016 results on May 5th. The company posted a net loss of $ 471.8 million compared to net loss of $ 169.7 million a year ago. Adjusted non-GAAP net loss for the first quarter 2016 was $ 455.4 million, or $ 0.83 per share, compared to adjusted non-GAAP net income of $ 16.8 million, or $ 0.03 per share, for the same prior year period.

Impressive growth

Despite the reported loss, EOG Resources had a strong first quarter with regards to its operating results, focusing capital in areas which generate premium rates of return.
The company completed its first economic enhanced oil recovery (EOR) test inthe  U.S. horizontal shale reservoir, concluded four pilot projects with 15 producing wells in the Eagle Ford, added new reserve potential having costs of single digit per barrel, and extended its horizontal technology gains. EOG Resources ultimately exceeded the US oil production and cost reduction targets and delivered a 30 % ROI even on $40 per barrel oil price that prevailed during the quarter.

During the first quarter of 2016, lease and well expenses decreased 29 % and transportation costs decreased 12 % compared to the same prior year period, both on a per-unit basis. Total general and administrative expenses decreased 7 % compared to the first quarter 2015, excluding expenses related to a voluntary retirement program.

Apart from cost reduction, the capital efficiency improvements were also a main focus of the company’s strategy. EOG Resources decreased its exploration and development expenditures (excluding property acquisitions) by 61 % in the first three months of the year. Despite that, the total crude oil and condensate production declined by only 10 % while the total natural gas production decreased just 3 % compared to the same quarter of last year.

EOR technique, a breakthrough:

The company’s internally developed EOR process in the Eagle Ford proved successful in those three-year long pilot projects and generated significant increases in crude oil production with relatively low capital cost. EOG anticipates many benefits from the application of this new technology. These benefits include high incremental net present value and rates of return on investment, low finding and operating costs, lower production decline rates, increased reservoir recoveries, and reduced severance tax rates.

However, the EOR technique developed by the company is not suitable in most other horizontal oil plays. It is the unique geologic properties of the Eagle Ford shale that are ideally suited for the company's proprietary EOR techniques.

Cash Flow and liquidity:

The company’s total outstanding debt stands at $ 7.0 billion while it had a total cash of $ 668 million on the balance sheet at the end of the first quarter. So that means a net debt of more than $ 6.3 billion and a net debt-to-total capitalization ratio of 34 %.

EOG’s debt is not huge compared to the cash it holds. And the company did generate a bit of cash ($ 291.6 million) from operations even in the first quarter which saw oil dive below $ 27 per barrel, setting new 13-year lows, at least twice, on 20th Jan and 11th Feb. According to the EIA, the spot price of WTI oil averaged the lowest for each of the first three months since 2004. The average prices were $ 31.68 in January, $ 30.32 in February and $ 37.55 in March. EOG is one of the lowest cost oil producers. Now, that the prices have recovered to above $ 45 per barrel and with its expenses and CAPEX in check, EOG must be able to generate much higher cash flows in the quarters to follow. Thus the liquidity of EOG’s balance sheet should further improve.

Further, EOG Resources is also in a very advantageous position by virtue of having one of the largest numbers of drilled but uncompleted wells (DUCs) in the industry. It will be having 230 net DUCs by the end of the current year, which is going to include a large chunk of premium wells. This is an important development as it will allow EOG to tap the opportunities that the future increase in oil and gas prices will offer.

Outlook:

EIA has improved its forecast for oil prices to an average of $ 40.32 in 2016 and $ 50.65 in 2017. The increase was attributed to improving economic numbers, global supply disruptions, falling US output, and low rig count. Now, EOG’s premium wells can generate 10 % after tax returns at an oil price of $ 30 and 30 % at an oil price of $ 40 per barrel. So, one can imagine the returns at the prices projected by EIA for the remaining year and then the next year.

Conclusion:

EOG has posted an operationally strong result for the first quarter. It has shown huge declines in its operating expenditures and CAPEX, with enhanced oil recovery also proving to be an efficiency booster. The liquidity position of EOG is quite comfortable since it is generating some positive cash from operations and does not have too much debt piled up. The EIA outlook also favors this low-cost producer.  Hence, EOG is a stock to bet on in this sector that is still being brutally thrashed.
Published on Jul 14, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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