An Analyst Darling
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In late May, EOG Resources (NYSE: EOG) was placed on Goldman Sach’s conviction buy list replacing giant Exxon Mobil (NYSE: XOM). If the stock reaches Goldman’s price target of 149, that would represent about a 56% increase from current levels. Similarly, FBR Capital raised its target on EOG from $125 up to $140. UBS has joined the party as well, raising the stock to a buy on June 18. If everybody thinks it’s a buy, who is left to buy it?
EOG is an international oil and natural gas explorer and producer, with holdings in the U.S., Canada, China, Argentina and the Caribbean. The company increased its year-on-year natural gas liquids production by 48% in 2011 and its crude production by 52%. In announcing its upgrade of EOG, Goldman cited particularly its holdings in the Eagle Ford Shale in Texas and Wolfcamp Shale in the Permian Basin. EOG is the biggest oil producer in Eagle Ford, in the Barnett Shale near Ft. Worth, and also in North Dakota’s Bakken Shale.
In an analysts call, EOG CEO Mark Papa was also very positive on Eagle Ford, which is mainly a crude play. “The Eagle Ford continues to be our 800-pound gorilla in terms of crude oil growth, and we still believe our position is the largest domestic net oil discovery in 40 years and generates the highest direct (after tax rate of return) of any current large hydrocarbon play,” according Papa. In the same call, EOG reported that its rate of Bakkan production is actually increasing, despite an earlier prediction that it would fall off this year. EOG ships its Bakken production by rail to its St. James, Louisiana terminal. The first crude arrived in April 15th of this year. Rail shipments are expected to have a capacity of 70,000 barrels by the end of the year.
Papa also discussed the company’s plant in Wisconsin that produces sand for hydraulic fracturing—he said that having their own sand plant saves them $500,000 on the cost of a well. The company is developing another sand mine in Cook County, TX.
EOG is partnering with Apache (NYSE: APA) and Encana (ECA) in the Canadian Kitimat Liquid Natural Gas Project. The partners hope to export natural gas to Asian countries through the Pacific Trail Pipeline, which recently gained approval from the British Columbia Environmental Assessment Office for a one-third expansion. The pipeline transports gas from Northeast British Columbia to the coast at Kitimat for export. Apache recently discovered a massive natural gas field in the northeast—“probably the best shale gas reservoir in the world,” according to vice president John Bedingfield. The Kitimat operation will face competition from Shell (NYSE: RDS-A) which also plans to build a liquid natural gas (LNG) terminal on the British Columbia coast. Shell is partnering with China National Petroleum and Korean Gas. Prices for gas in Asia are up to six times that of North America, so both of these terminals are likely to be wildly profitable.
EOG seems to be hitting on all cylinders recently. It’s first quarter earnings were more than double those of the year earlier quarter. Its crude oil and condensate production were up 49%, but up 61% in the United States. Its U.S. natural gas production actually declined, however. This was by design, given the company’s pessimistic outlook on natural gas pricing near term. Natural gas prices are near decade lows and are likely to remain under pressure, at least until exporting begins in earnest, around 2015, when Cheniere’s (LNG) Sabine Pass export terminal becomes fully operational.
It’s easy to make a bull case for EOG based on its holdings in Eagle Ford, its increased production in the Bakken shale, its nimble management, and its long term potential in natural gas. More than two-thirds of the analysts who cover the stock have it listed as a buy or as an outperform. The company is expected to earn $4.82 per share in 2012, which is projected to increase to $6.15 in 2013. The company’s five year growth rate in earnings is high, at 20.85%.
On the other hand, EOG pays a relatively paltry dividend, yielding less than 1%. The company’s growth rate is already reflected in its price to earnings ratio (PE), which at about 20 is high for an oil company. By contrast, Exxon Mobil trades at a PE of 10, while BP (BP) trades at a PE of only 5.
EOG has been doing everything right and long-term it is an excellent holding, but there are still some risks here. Investors should closely monitor the price of oil, which has been dropping even as we enter the peak summer driving season. The reasons for the drop seem to be a slackening in growth prospects for China added to fears about Europe enduring a prolonged recession, given its financial problems.
With that said, I think EOG will continue to perform well in the short and long-term. The company's diverse holdings, especially with the hot Eagle Ford shale, will keep investors happy.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.