EOG Resources (EOG) Update - Nov 15

[dan_s]

EOG is the largest company in the Sweet 16 and it should be a "Core Holding" in every Growth & Income Portfolio. We will be publishing an updated profile on the company early next week.

The stock is trading for about $74/share today.

Since the company released Q3 results 6 ranked analysts have published fresh reports on the company. Their valuations range from $80 to $132 (Barclays). The average price target among the 6 analysts is $99.67, which is just below the valuation that I came up with. FWIW if I assume WTI oil sells for $40/bbl in 2020, my valuation of EOG is still $85.

EOG:
> Is extremely profitable and generates a lot of free cash flow from operations. Over $1.4 Billion of FCF in 2019.
> Has a super strong balance sheet with a (total debt - cash) / equity ratio of less than 0.65. A ratio of 2.0 is GOOD and a ratio of 1.0 is EXCELLENT.
> Has a lot of "running room" with an estimated 10,500 "Premium" HZ development drilling locations that they estimate will generate over 30% ROR even if oil sells for $40/bbl. If WTI averages $60/bbl in 2020 their entire 2019 D&C program will payout next year. Read that sentence again and let it sink in. I worked at Hess Corp. for 18 years and we NEVER had a capital program payout in less than three years.

Read this:

EOG expanded its lineup of premium plays in the Delaware Basin with the addition of the Wolfcamp M and the Third Bone Spring. The drilling locations in these two plays are highly economic at a flat $40 oil price and flat $2.50 natural gas price, consistent with EOG’s definition of premium inventory. The company continues to deepen its technical knowledge of the Delaware Basin as it executes its development program. EOG collects significant amounts of data on each well, integrates it with existing models and incorporates analysis from numerous spacing and targeting tests.

EOG has identified an initial 855 net premium drilling locations in the Wolfcamp M, with estimated net resource potential of 1.0 billion barrels of oil equivalent across its 193,000 net acre position. The wells in this deeper section of the Wolfcamp formation produce roughly equal parts oil, NGLs and natural gas. Benefiting from EOG’s low well costs, Wolfcamp M wells deliver strong premium economics and exceptionally low finding costs.

To define the play, EOG has gathered extensive subsurface information and has completed six Wolfcamp M wells, including two during 2019. The Green Drake 16 Fed Com #759H was completed in Lea County, NM with a treated lateral length of 7,200 feet and a 30‐day initial production rate of 4,165 barrels of oil equivalent per day (Boed), or 2,145 Bopd, 1,070 barrels per day (Bpd) of NGLs and 5.7 million cubic feet per day (MMcfd) of natural gas. In Reeves County, TX, the State Correa #3H was completed with a treated lateral length of 9,900 feet and a 30‐day initial production rate of 2,800 Boed, or 1,175 Bopd, 845 Bpd of NGLs and 4.7 MMcfd of natural gas.

EOG has identified an initial 615 net premium drilling locations in the Third Bone Spring, with estimated net resource potential of 585 million barrels of oil equivalent across its 200,000 net acre position. EOG’s early focus in the Delaware Basin has been on development of the Wolfcamp formation, which sits below the Third Bone Spring. Each of the Wolfcamp wells has drilled through the Third Bone Spring, providing significant technical data and helping to delineate multiple targets within the play.

EOG has completed over 50 Third Bone Spring wells to date, including 10 net wells in 2019. The McGregor D 5 #592H targeted the Third Bone Spring Carbonate and was completed in Loving County, TX with a treated lateral length of 9,700 feet and a 30‐day initial production rate of 2,865 Boed, or 1,990 Bopd, 500 Bpd of NGLs and 2.3 MMcfd of natural gas. In Lea County, NM, the Caravan 28 State Com #601H and the Convoy 28 State Com #606H targeted the Third Bone Spring Sand and were completed with an average treated lateral length of 10,000 feet per well and average 30‐day initial production rates per well of 3,985 Boed, or 2,730 Bopd, 670 Bpd of NGLs and 3.5 MMcfd of natural gas.

In total, EOG added 1,700 net premium drilling locations to its undrilled premium inventory in the third quarter 2019. Taking into account approximately 640 net wells drilled to date in 2019 and updated location counts across its portfolio, EOG’s premium inventory now totals 10,500 net locations, representing more than 14 years of high‐return drilling inventory.