After a flat growth year-to-date, at the current price of around $118 per share, we believe EOG Resources (NYSE: EOG), an energy company engaging in the exploration, development, production, and marketing of crude oil and natural gas, looks fairly priced at this point. The company has a capital-intensive business model which is simultaneously highly cyclical. In recent months, EOG’s stock price has been affected more by the macroeconomic outlook than its profitability. Despite high profits and a modest valuation, EOG’s stock may continue to tread water in the short term – as it is highly dependent on commodity pricing. Brent futures currently trade at ~$72 a barrel and U.S. West Texas Intermediate crude settled at ~$69 (as of September 12). However, the company’s current earnings multiple of around 9x is below its own five-year average of around 13x. To add to this, EOG is sitting on net cash and its long-term debt/equity ratio is 0.1 – indicating a robust balance sheet. In the long run, we expect the company to benefit from continued Delaware production growth and contribution from Dorado and Utica as they develop. EOG has guided higher year-over-year volumes and lower per-unit cash operating costs for the full year 2024.
The increase in EOG stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 89% in 2021, 57% in 2022, and -2% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period.
Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could EOG face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
In Q2, EOG’s revenues grew 8% year-over-year (y-o-y) to $6 billion. In addition, its net income surged around 10% to $2 billion, or $2.97 per share, from $1.6 billion, or $2.66 per share, in the year-earlier quarter. The company also paid a $0.91 per share dividend and repurchased 690 million shares during the quarter. In the first half of 2024, it generated $2.6 billion free cash flow, helping fund cash return to shareholders of $2.5 billion. EOG is on track to exceed not only its minimum cash return commitment of 70% of annual free cash flow, but also last year’s cash return of 85%. During the second quarter, its average crude oil price rose ~10% to $82.69 per barrel and its average natural gas liquids price grew 13% to $245k barrels of oil equivalent per day (boe/day). EOG’s total volumes rose 3% to 491K boe/day in Q2 from 477K boe/day a year ago.
We forecast EOG’s Revenues to be $19.2 billion for the fiscal year 2024, up 11% y-o-y. Looking at the bottom line, we now forecast EPS to come in at $12.17. Given the changes to our revenues and earnings forecast, we have revised our EOG’s Valuation to about $122 per share, based on $12.17 expected EPS and a 10.1x P/E multiple for the fiscal year 2024 – in line with the current market price.
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