Key Takeaways:
EOG reported good 2Q18 earnings and provided an update to their 2018 outlook. The full year production guidance was raised to 717.5MBoe/d – with capex unchanged – but it is now just in line with consensus. 3Q18 oil production guidance is ~1% below consensus but 4Q18 oil production implied guidance is above expectations. They still target to reduce costs by 5% this year. EOG continues to increase its dividend, pushing 2018’s increase to 31%, way above their historical average of 19%. This is a good sign that management has a positive view of the future cash flows of the company.
2H18 should see a ramp up in production and earnings thanks to:
· new discoveries: 2 new additions to its premium drilling portfolio that can earn 30% after tax return at a $40/bbl
· improved efficiency in lateral drilling (see chart “maximizing NPV” below)
· Addition of 1,600 premium locations in the Powder River Basin (Rockies): this could become a key growth driver for EOG
After review of our model, we are raising EOG’s price target to $136 from $124. No change in position size (2.53%).
EOG Thesis:
- EOG is attractively valued relative to future cash flow growth and return potential
- As the leading North American Oil production company, EOG is well positioned to benefit from (1) Secular growth in US shale production and (2) Cyclical rebound in global oil production/oil prices
- We view EOG as a high quality company within a highly cyclical industry – EOG has generated 13% annual Returns on Invested Capital over the past 10 years and offers industry leading cash flow growth potential
- Though not immune, EOG’s stock protects better than most energy stocks on the downside due to its high quality nature – strong balance sheet, ROIC, & cash flow generation
- As such, we view EOG as offering the potential for superior risk-adjusted returns over a market/commodity cycle
$EOG.US
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Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
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Boston, MA 02109
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