EOG Resources Stays Neutral - Analyst Blog
March 15 2012 - 10:00AM
Zacks
We maintain our Neutral
recommendation on EOG Resources Inc. (EOG). The
company’s better-than-expected fourth quarter 2011 results and
attractive growth profile were partially tempered by its natural
gas weighted production and reserves base.
EOG reported stellar fourth-quarter
2011 results on the back of an almost 54% growth in crude oil
production, which was aided by significant contributions from the
South Texas Eagle Ford play followed by the Fort Worth Barnett
Shale Combo. EOG Resources’ growing emphasis on liquids is
reflected through the growth in its liquid production volume.
We believe liquids rich production
growth is likely to facilitate significant future cash flow for EOG
and will be further augmented by its deep focus on major oil and
liquids rich plays, such as the South Texas Eagle Ford play and the
Fort Worth Barnett Shale Combo, as well as Colorado Niobrara,
Oklahoma Marmaton, West Texas Wolfcamp, Neuquen Basin and New
Mexico Leonard.
The company boosted its capex
guidance by 9.5% to $7.5 billion for this year. As much as 90% of
its drilling capital is directed toward liquids plays, while 10% is
allocated for dry gas drilling. Total organic liquids production
growth is expected at 30%, versus the company’s prior expectation
of 27% for 2012. The primary driver will likely be production in
Eagle Ford, Barnett and Permian.
Again, EOG appears on track to meet
its $1.2 billion divestiture target and below 30% net debt to
capitalization ratio at year-end 2012. The company has already sold
natural gas related properties and now anticipates selling up to
$800 million in non-operated liquids assets during 2012, reflecting
the weak natural gas price environment. In the current scenario of
declining natural gas prices, most of the independent exploration
and production companies are tilting their portfolio toward
oil-based assets and divesting gas-based assets. Notably, we view
redirecting capital from non-operated assets to its premier play as
logical, given the company’s estimation of its after-tax return on
investment in the Eagle Ford at 80%.
However, the company’s results are
particularly exposed to fluctuations in the U.S. natural gas
markets, since natural gas accounts for more than three quarters of
the company’s reserves. Moreover, though EOG has made some progress
in expanding internationally, it is still largely a North American
producer, lacking substantial international diversification.
EOG Resources, which competes with
Chesapeake Energy Corporation (CHK),has a Zacks #3
Rank (Hold rating) for the short term.
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
EOG RES INC (EOG): Free Stock Analysis Report
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