EOG price target raised by RBC Capital - Nov 11
Posted: Fri Nov 11, 2022 1:27 pm
RBC Capital Markets: November 11, 2022
EOG Resources, Inc.
Analyst Discussion with Management
Our view: EOG hosted a discussion with analysts yesterday. Most questions
focused on operations and the new premium plays; comparatively last
year's meeting was almost entirely on shareholder returns. We think this
pivot is largely a function of analysts/investors becoming more confident in
EOG's shareholder strategy, although there was still some debate on how
to best allocate FCF. Management's macro view was largely constructive
on both oil & gas, but they did indicate the potential for some softness in
gas around 2024. We increase our PT by $3/share to $158 reflecting some
Utica potential and the strong CF outlook.
Key points:
EOG emphasized the 60% FCF payout is a minimum, especially in a
strong commodity environment. The special dividend is the FCF outlet and
buybacks are targeted for large market dislocations, where equity valuation
is significantly disconnected to the oil & gas macro. Management believes
EOG's trading multiple does not reflect its full value potential, but at this
point the returns from investing in the business are extremely strong and
make more sense compared to buybacks. Special dividends will remain
flexible because there was no appetite to lock into a formulaic output. We
think EOG's 2023 dividend could amount to $9.68/share, up 7% YoY and
representing a 7% yield. This would amount to a 65% payout of FCF.
Cash is not burning a hole in its pocket. EOG's net debt is now negative with < EOG virtually debt free is amazing to me!
cash swelling to $5+ billion, and we think that trends toward $10 billion
over the next couple of years. EOG plans to maintain $2 billion for daily
working capital needs but also have additional fire-power for its $5 billion
stock buyback authorization and strategic opportunities.
Well performance continues to impress. Well productivity degradation
has become an industry topic, but EOG does not appear to have those
issues. The company's strategy has focused on understanding the science
(porosity, geoscience, frac barriers, etc) and targeting the optimal landing
zones at the right spacing. This has lead to optimal development of the
reservoir tanks that maximizes operation efficiencies and NPV.
Industry constraints and inflation likely to persist. The 2023 budget could
have a 10% inflation factor (albeit likely a conservative target), adding to
the 7% seen in 2022. This is still half the increase compared to industry. EOG
mitigates costs by self sourcing supplies, taking D&C technology in-house,
and improving operational productivity.
Exploration and R&D are a core tenet. This has both evolved and expanded
its leading edge technology and brought new development such as the
Utica, PRB, and Dorado. Management still see opportunities in the onshore
US, that typically reside in known oil & gas producing regions.
EOG Resources, Inc.
Analyst Discussion with Management
Our view: EOG hosted a discussion with analysts yesterday. Most questions
focused on operations and the new premium plays; comparatively last
year's meeting was almost entirely on shareholder returns. We think this
pivot is largely a function of analysts/investors becoming more confident in
EOG's shareholder strategy, although there was still some debate on how
to best allocate FCF. Management's macro view was largely constructive
on both oil & gas, but they did indicate the potential for some softness in
gas around 2024. We increase our PT by $3/share to $158 reflecting some
Utica potential and the strong CF outlook.
Key points:
EOG emphasized the 60% FCF payout is a minimum, especially in a
strong commodity environment. The special dividend is the FCF outlet and
buybacks are targeted for large market dislocations, where equity valuation
is significantly disconnected to the oil & gas macro. Management believes
EOG's trading multiple does not reflect its full value potential, but at this
point the returns from investing in the business are extremely strong and
make more sense compared to buybacks. Special dividends will remain
flexible because there was no appetite to lock into a formulaic output. We
think EOG's 2023 dividend could amount to $9.68/share, up 7% YoY and
representing a 7% yield. This would amount to a 65% payout of FCF.
Cash is not burning a hole in its pocket. EOG's net debt is now negative with < EOG virtually debt free is amazing to me!
cash swelling to $5+ billion, and we think that trends toward $10 billion
over the next couple of years. EOG plans to maintain $2 billion for daily
working capital needs but also have additional fire-power for its $5 billion
stock buyback authorization and strategic opportunities.
Well performance continues to impress. Well productivity degradation
has become an industry topic, but EOG does not appear to have those
issues. The company's strategy has focused on understanding the science
(porosity, geoscience, frac barriers, etc) and targeting the optimal landing
zones at the right spacing. This has lead to optimal development of the
reservoir tanks that maximizes operation efficiencies and NPV.
Industry constraints and inflation likely to persist. The 2023 budget could
have a 10% inflation factor (albeit likely a conservative target), adding to
the 7% seen in 2022. This is still half the increase compared to industry. EOG
mitigates costs by self sourcing supplies, taking D&C technology in-house,
and improving operational productivity.
Exploration and R&D are a core tenet. This has both evolved and expanded
its leading edge technology and brought new development such as the
Utica, PRB, and Dorado. Management still see opportunities in the onshore
US, that typically reside in known oil & gas producing regions.