EOG Resources (EOG) Update from RBC Capital

[dan_s]

October 13, 2023
EOG Resources, Inc.
Quarterly Check-Up: 3Q23

Our view: Will there be a three-peat? We are not sure another round of
stock buybacks occurs in 3Q23, although there seems to be a chance. Our
model assumes returning to a variable dividend amounting to $0.80-0.85/
share, which is in addition to and matches the $0.825/share fixed dividend.
Key investor debates are M&A/exploration focus, well productivity trends,
infrastructure capital spending, and relative OFS cost rate of change.

Key points:

• Our 3Q23 EPS/CFPS estimates increased by $0.36/$0.40 to $3.05/$5.01,
reflecting higher commodity prices and oil production. Oil realizations
benefit from the upward commodity move and EOG is unhedged allowing
full exposure. Our estimates are firmly above the $2.94/$4.85 consensus
estimates driven by slightly higher commodity pricing. We also raised our
2023-2025 estimates reflecting RBC’s recent commodity deck update.

• We model 3Q23 production at 982 Mboe/d (476 Mb/d oil), above
the midpoint of the 954-991 Mboe/d (467-479 Mb/d oil) guidance
and similar to the 981 Mboe/d (476 Mb/d oil) consensus forecasts.
Productivity is strong in core area development that provides confidence
in the 2023 guidance, led by oilier Permian Wolfcamp activity. Eagleford
productivity should improve in 2H23 as activity pivots back to core areas.

• We expect 3Q23 capital spending of $1.6 billion, inline consensus, but
below the midpoint of the $1.56-1.76 billion guidance. We calculate FCF
generation of $1.3 billion and a capital reinvestment rate at 55%.

Channel Checks & Investor Topics:

• EOG remains committed to its 60% minimum of FCF; we think that nears
70% for 2023. On buybacks, management highlighted that decisions
are not solely focused on where EOG trades in isolation, but also
related to relative market fundamentals. Given the improving oil market
fundamentals, we could infer that there were buybacks. There were
smaller and shorter downside moves in EOG shares during 3Q23, so we
are more biased to a pivot back to dividends.

• EOG is focused on exploration and organic acquisitions. Larger corporate
M&A is more challenging with many opportunities broadly marketed and
include a large value for PDP. Any M&A transaction needs to immediately
compete for capital and have competitive full cycle returns. Management
believes the risk-reward tends to be better on organic exploration. EOG's
robust $5+ billion cash balance is not targeted for strategic M&A, but
for opportunistic buybacks and other initiatives. The cash position also
provides good income given higher interest rates.

• Service cost reduction look more modest. EOG's costs increased only 7%
in 2022, compared to 20% for peers, and are expected to only increase
by 10% in 2023. The company targets higher-quality equipment where
pricing volatility is lower. The company could provide some early context
on 2024 costs during 3Q23 earnings, similar to last year.

• EOG's first four-well Utica pad is online and initial data is possible.

[dan_s]

TipRanks: "Truist Securities analyst Neal Dingmann raised the price target on EOG Resources (NYSE: EOG) to $165.00 (from $160.00) while maintaining a Buy rating."

My current valuation stays at $150.00, which compares to TipRanks' price target of $152.38.

Based on my forecast, EOG's "Base + Variable" dividends should total $8.00/share in 2024.

At the time of this post, EOG was trading at $133.95