EOG Update - June 6

[dan_s]

Credit Suisse has issued a new report on EOG. They rate it as OUTPERFORM with a valuation of $117/share.

We attended a sell-side analyst meeting hosted by Bill Thomas
(chairman and CEO) and Ezra Yacob (EVP, E&P) in NYC. The key
message was EOG’s aspiration to be among the best companies in the S&P
500 (not just the Energy sector) by continuing to execute on its strategy of
delivering double-digit returns/organic growth and FCF largely irrespective of
oil prices. We sensed palpable frustration from management that the
meaningful share price outperformance vs. the SPX, peers and oil prices
over the past 10 years has broken down over the past six months despite
strong financial/operating performance and no change to its capital
discipline/FCF value proposition. We note EOG has suffered the most
dramatic EV/DACF multiple de-rating among peers since 9/30 which looks
overly punitive and leaves shares trading at an increasingly compelling
relative valuation.

■ Preliminary messaging on 2020-21 oil growth appears stronger than
consensus expectations. EOG inferred 2020-21 oil growth should be in a
range of 14-18%/yr, above consensus’ 14%. We raised our 2020 oil growth
forecast to ~16% (from ~14%) and 2021-23E to ~14-15% per annum (from
~13% prior). At current strip prices, we forecast EOG will generate ~$1bn of
organic FCF surplus (after dividends) in both 2020-21.

■ Other notable highlights: (1) emphatically stressed no interest in expensive
corporate M&A; (2) highlighted several competitive advantages it sees in its
unique corporate culture (de-centralized decision making, data/analytics
infrastructure, etc.) which drive continuous cost/efficiency improvements &
improve returns; (3) unlike most US peers, does not believe “manufacturing
mode” is necessarily the optimal development approach given constantly
evolving data/analysis enabling continual efficiency improvements.

■ Compelling relative valuation on EV/DACF. Despite materially superior
ROCE, growth, and balance sheet strength, EOG now trades in line with
peers on EV/DACF (vs. its historical 2 turn premium). Our $117 target price
is based on ~7.0x normalized 2020E DACF. Risks: oil prices, execution.