Selling EOG from Focused Equity

We are selling EOG from the Focused Equity portfolio – EOG is now less than 0.80% of the portfolio and not a meaningful position size.

 

While EOG has an unlevered balance sheet and a well-funded production growth program– those quality attributes will not help an E&P company when the biggest global player decides to drastically cut prices to gain market share (Saudi Arabia). While we can compare this oil price decline to 2014-2016, this time is different as we have a supply push (Saudi Arabia + Russia) combined with a demand cut (less travel due to coronavirus).

 

It is very likely that US E&Ps cut their production guidance for 2020 if oil prices remain below $40/barrel. While E&Ps can lower their drilling costs as a way to improve their margins, they ultimately remain dependent to a commodity price that is manipulated by a major player who is also a low-cost driller. So even if EOG can sustain its FCF with lower oil prices thanks to its premium strategy, the industry itself is unattractive and presents many political risks that are impossible to forecast.

 

Our thesis for holding EOG was to have exposure to the near term cyclical upswing in the US energy sector. We see the risks greater than the benefits at this point. Proceeds of the sale will be redistributed into other holdings of Focused Equity. We will follow up with an email regarding allocation of proceeds.

 

#researchtrades

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com