EOG 3Q18 earnings results: stock weak on recent higher capex levels and lower production near term but long term thesis intact

Key Takeaways:

Current Price: $102 Price Target: $136

EOG reported better well productivity that led to oil and total production levels above expectations. Following 3Q results, the company is lifting its 2018 oil volume guidance by 1%, although total production remains below consensus (lower natural gas production). On the negative side this quarter, the 3Q18 oil production increase came with an increase in capex (and a 2018 capex guidance increase of 4%). We believe the stock is weak today as the management team is expecting slower growth in 4Q18 and 1Q19, since it plans on slowing down drilling activity. On the positive side, EOG maintained its 5% well costs reduction target in 2018 and even further reduction in 2019. FCF should also inflect positively in the coming year as capex shouldn’t increase as it did in 3Q, and capital efficiency should rise. We are not changing our price target or position size.

Delaware Basin comments:

  • cycle times continues to come down
  • Sand sourcing are increasingly from local vendors (UNP mentioned lower frack sand volume during their last call, as more companies are sourcing locally)
  • Cost reduction thanks to local sand sourcing and increased water recycling

EOG Thesis:

  1. EOG is attractively valued relative to future cash flow growth and return potential
  2. 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
  3. 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
    1. 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
    2. 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

Crestwood Advisors