Tuesday, December 2, 2014
Looking For An Oil Play? Check out EOG
EOG is one of the largest independent oil and natural gas companies in the United States. With premium acreage in the Eagle Ford, Bakken and the Delaware Basin, EOG has been the fastest-organic growing major oil producer in the US. Over the past 5 years, the company has increased daily oil production by a CAGR of 39%, making EOG the largest crude oil producer in the lower 48. Even more impressive is the company has achieved this remarkable growth while maintaining strict financial discipline by working within its operating cash flow.
EOG's performance over the past several years is nothing short of amazing. Combined with some of the best acreage in the Eagle Ford and Delaware Basin and the company's technical expertise at successfully drilling wells, EOG has emerged as the leader in the US shale oil revolution. Over the last 4 years, the company has the highest annual organic crude oil growth in its large cap E&P peer group. Sustaining high-double digit year-over-year growth is easy for a small cap E&P company, but when you're talking about high-double digit growth on over 200 MBbld, it's clear how efficient and effective EOG has become.
For E&P companies to stay relevant and successful, they must continually increase production, while keeping costs down. The past few weeks have been extremely hard on oil producers, as the price of oil is in a free fall. The OPEC's recent decision not to cut production is a clear sign that they intend to keep the pressure on US oil producers in the hope that any sustained low oil prices will cripple the industry, so they can maintain their market dominance. While some US producers with ugly balance sheets and high production costs may suffer and eventually go out of business, EOG is a model of efficiency that has evolved to endure anything OPEC can throw at it. Aside from being one of the largest independent oil producers in the shale industry, EOG is also one of the low-cost producers.
EOG is the model company in the US shale industry. It has maintained the highest organic growth relative to peers, and is also one of the lowest-cost producers. In addition, EOG has one of the cleanest balance sheets, with $5.9 billion in outstanding debt and $1.5 billion in cash. The company has a low net debt-to-total capitalization at 20%, and continues to work to lower it. EOG also has some of the best acreage assets in the Eagle Ford and Delaware Basin.
What really sets EOG apart from its competitors is its efficiency. The fact that the company can produce a 10% after-tax return on all of its US assets at $50/barrel, and that its largest oil producing assets can produce a 10% after-tax return at $40/barrel, should help investors sleep at night.
The sharp decline in oil prices has scared away traders and investors with short time frames, giving long-term investors a great entry point. At $86/share, EOG is cheap. It has a P/E under 16 and an EV/EBITDA of just over 6. In the short term, the price will remain volatile, but any drop can be viewed as a way to lower your position price. Fundamentally, EOG is an extremely strong company that has the ability to endure a price war. Investors shouldn't be scared away by the current conditions. They should look at EOG as a best-of-breed company with a strong history of industry-leading performance and a management team dedicated to returning value to shareholders in a financially responsible matter. In my previous articles, I encouraged investors to wait for a pullback before buying Lockheed Martin, 3M, Automatic Data Processing and Becton, Dickinson, but I believe investors can pull the trigger on EOG at any time. If oil continues to fall, investors can increase their position knowing the company will remain profitable and a good long-term play. The stock also appears to be oversold and is trading near support levels.