EOG Resources, Inc.(EOG)

Business

EOG Resources, Inc., a Delaware corporation organized in 1985, together with its subsidiaries (collectively, EOG), explores for, develops, produces and markets crude oil and natural gas primarily in major producing basins in the United States of America (United States or U.S.), Canada, The Republic of Trinidad and Tobago (Trinidad), the United Kingdom (U.K.), The People's Republic of China (China), the Argentine Republic (Argentina) and, from time to time, select other international areas. 

At December 31, 2013, EOG's total estimated net proved reserves were 2,119 million barrels of oil equivalent (MMBoe), of which 901 million barrels (MMBbl) were crude oil and condensate reserves, 377 MMBbl were natural gas liquids (NGLs) reserves and 5,045  billion cubic feet, or 841 MMBoe, were natural gas reserves (see Supplemental Information to Consolidated Financial Statements). 

As of December 31, 2013, EOG employed approximately 2,800 persons, including foreign national employees.

Segment

Products:

• Crude Oil

• Natural Gas

• Natural Gas Liquids

Services:

• Marketing of Crude Oil and Natural Gas

Geographic scope

As of FY 2013, approximately 94% of EOG's net proved reserves, on a crude oil equivalent basis, were located in the United States, 4% in Trinidad, 1% in Canada and 1% in Other International.  Crude oil equivalent volumes are determined using the ratio of 1.0 barrel of crude oil and condensate or NGLs to 6.0 thousand cubic feet (Mcf) of natural gas.

In FY 2012, United States accounted for 84% of 2013 production, followed by 12% in Trinidad, 4% in Canada, and less than 1% for other international.

**Old and experienced management – CEO/ COO of the Company are there with the Company since 1979. Also the other executives also have more than 20+ of experience within the organization.

Ownership interest

**Top 10 institutional investors own around 44% of ownership interest in the Company.

** Institutional investors own 91.00% stake in the company

Comments on financial

# EOG's debt-to-total capitalization ratio was 28% at December 31, 2013 and 32% at December 31, 2012.  Note:  Total capitalization represents the sum of total current and long-term debt and total stockholders' equity.

Even better, the company has achieved this stunning growth without over levering its balance sheet. In fact, EOG Resources is financially sound: Its net debt to total capital ratio was just 22% as of the end of the second quarter, and its debt is rated A3 by Moody's and A- by S&P.

# Growth in shareholder equity – the Company has shown a consistent growth in the shareholders equity through their retained earnings which has grown from $3.6 billion in FY 2005 to $12.6 billion. Also the goodwill is zero.

# Strong ROE/ROCE when compared to its peers.

# Improving cash margins – The Company’s margins on a per barrel of oil equivalent basis more than doubled from $20.04 to $43.31 since 2010.

# Dividend history – The Company has strong history of dividend. EOG has a strong dividend-growth track record spanning some 15 years. The trend has accelerated in 2013-14.

# Increase in shareholder’s equity through organic growth –EOG’s management has delivered consistent, long-term track record in building shareholder equity. Through the first 2 quarters of FY 2014, shareholder equity (or book value) has grown up to $30.45 per share.

SWOT

Strength

# Oil production growth compared to its competitors. In just a few short years it surged past the likes of Chevron (NYSE: CVX  ) and Occidental Petroleum (NYSE: OXY  ) to become the top oil producer in the lower 48 states as shown in the following chart.

# Quick to adopt to change – The Company moved quickly away from natural gas as prices weakened. The Company’s dependence on natural gas came down from 47% of its production in 2010 to just 11% in FY’ 13.

EOG Resources' strong finances enable the company to rapidly seize new opportunities. The company moved quickly away from natural gas as prices weakened. In fact, it went from getting 47% of its production from natural gas in 2010 to just 11% last year. That move further enhanced the company's profitability, as its margins on a per barrel of oil equivalent basis more than doubled from $20.04 to $43.31. The other big factor contributing to the company's strong margins is its vertical integration: EOG owns frack sand mines and rail infrastructure. 

# Efficient management: The Company’s management has been efficient which is evident from the shift in business mix from a natural gas centered E&P outfit to one that emphasizes liquid hydrocarbons. The Company has grown its oil production by a compound annual rate of 40% over the past few years.

# Vertical integration – big factor contributing to the company's strong margins is its vertical integration: EOG owns frack sand mines and rail infrastructure.

# Cost advantage – The spot crude price cutoff for EOG is well below $70. This cost advantage is supported by the good management, superior technology and operational efficiency.

Weakness

# Little international exposure –EOG Resources' assets based is focused on U.S. , hence a bit more diversification would help the Company especially if exports of U.S. oil remain prohibited.

# Natural Gas Operations – EOG operates 5,360 natural gas wells as on December, 2013 when compared to the 4,209 crude oil wells. In 2013, the US region and Canada has accounted to 908 MMcfd and 76MMcfd as compared to the total production of 1,347 MMcfd. For the fiscal year ended 2013, the company realized the prices of average natural gas at the US and Canada as 3.32 $/Mcf and 3.08 $/Mcf as compared to the prices of average crude oil and condensate in the US and Canada regions accounted to 103.81 $/Bbl and 87.05 $/Bbl. Thus decline in the price of the natural gas could affect the company adversely as its 37% of net reserves in the US and Canada is natural gas reserves.

Opportunities

# Energy Demand Outlook: the US – Positive trend in energy demand in the US provides significant growth opportunities for the company in the long-run.

According to the US Energy Information Administration (EIA), natural gas supply and demand during the period 2007 and 2010 increased 7.8%, to 5.5 million barrels per day (Bbls/d) in 2010, compared to 5.1 million Bbls/d in 2007. Such increase is attributable to superior technological advances.

According to the EIA long-term projections, production of crude oil is expected to increase by 21.8%, from 5.5 million Bbls/d in 2010 to 6.7 million by 2020. EIA estimates that NGLs production could reduce beyond 2020, but is expected to remain above 6.1 million Bbls/d through 2035. The agency also estimates that beyond 2016, the US will be a net exporter of NGLs. Due to the prospects offered by the shales, natural gas production from shales is expected to increase from 5 trillion cubic feet (Tcf) in 2010 to 13.6 Tcf by 2035.

# Increasing Oil & Gas Investments – In the period to 2035, upstream investment requirements, and the need to invest to compensate for natural decline, are estimated at more than $5 trillion. Global refining investments are estimated at around $1.5 trillion, of which $280 billion is needed in existing projects, $370 billion for required additions and around $800 billion for maintenance and replacement. The major components of the new investments needed beyond the refinery gate (typically referred to as the midstream sector) relate to the necessary expansion in regional pipeline systems and tanker capacity that are essential to move volumes of crude oil and liquid products. Besides, some investments will be necessary for loading and receiving ports, and related storage capacity, and to expand the retail distribution network. Combined midstream investment for the period up to 2035 is estimated at around $1 trillion. Altogether, it results in estimated oil related investment requirement of $7.5 trillion between 2012 and 2035.

Threat

# Environmental hurdles – The Company is operating in the segment where different social and government agencies oppose the exploration. Recently in Oct 2014, two companies APC and EOG have been asked to disclose the environmental hazard their exploration interest will cause by New York Attorney general.

Oct 3, 2014 - Anadarko Petroleum Corp. (APC) and EOG Resources Inc. (EOG) agreed to disclose to investors the financial and environmental risks of fracking under an accord with New York Attorney General Eric Schneiderman, as the state contemplates lifting a moratorium on gas drilling.

# Competitive pressure – The company operates in a highly competitive market, which is influenced by price, capital, product/service quality and the capacity for innovation. The company faces competition for reserve acquisitions, exploration, licenses, concessions, and skilled personals with various other players in the market. The company’s competitors have better financial resources, staff, and other facilities than those of the company. The competitors may be able to develop and acquire more and better prospects and productive properties than the company.

# Exploration Production and Development risks – Future oil and gas exploration and production may involve unprofitable efforts, not only from dry wells but also from producing wells, when they are not commercially viable. The combination of technology and recovery cost may be higher than revenue earned from production. In addition, drilling hazards and environmental damage could lead to well shut down. Operational risks such as unexpected formations or pressure, bow-outs and fire, which could result in loss of life and damage to properties would cause production delays and permanent well shut downs.

# Commodity risk – the Company’s performance is associated with the oil and gas price. Any adverse change in the price will have a direct impact on the price.

Conclusion

** Though the Company doesn’t look compelling at the current valuation, can be added more whenever there is a price correction.

** Considering the energy independence towards which USA is moving EOG plays a big role since almost 94% of the Company’s interest E&P in within US.

**Also the Company has a low cost production capabilities with a target price of $70/B. Efficient and old management which is associated with the Company for more than 20+ years

** Consistent cash generation which they have utilized to pay dividends to the shareholders and also they have zero goodwill which shows the Company’s ability to grow organically.