We maintained our Neutral recommendation on EOG Resources Incorporated (EOG) on Dec 27, 2013. EOG Resources is one of the best independents in the E&P sector with its attractive growth profile, huge inventory of drilling opportunities, upper quartile returns and a disciplined management team. Though EOG has made some progress in expanding internationally, it is still largely a North American producer, lacking substantial international diversification. EOG carries a Zacks Rank #3 (Hold).
EOG continues to demonstrate solid execution in its key growth assets, particularly in the Eagle Ford and Bakken plays. The company’s large portfolio of high-return projects and strong technical competence are the key factors that would lead to its success over the long term.
Notably, the company’s key skills lie in early identification of prospective areas through its technical expertise at low acreage prices, thus driving organic growth and delivering attractive returns on capital employed.
EOG Resources’ increasing interest in oil is appreciable in a favorable price environment. It will be augmented by its deep focus on major oil and liquids rich plays, while holding core natural gas and Combo acreage in the Barnett, Leonard and Wolfcamp plays for the long term.
EOG revised its full-year 2013 crude oil production growth target to 39% (up from 35% earlier), indicating the third successive year of significant double-digit increase in volumes. On the strength of its high margin, domestic crude oil production, the company also expects total production of 217.1 thousand barrels per day (MBbls/d) to 220.3 MBbls/d, up from the prior range of 208.0 MBbls/d to 219.6 MBbls/d.
However, EOG’s results are particularly exposed to fluctuations in the U.S. natural gas markets, since natural gas accounts for almost half of the company’s reserves. Infrastructure risk remains as EOG generates production in the high-growth sections of the U.S. In addition, as is the case with all E&P companies, EOG’s results are vulnerable to historically volatile prices in world energy markets.
Stocks That Warrant a Look
While we expect EOG to perform in line with its peers, one can consider Zacks Ranked #1 (Strong Buy) stocks Harvest Natural Resources Inc. (HNR), Transocean Ltd. (RIG) and Tesco Corp. (TESO) as good buying opportunities for the short term.