Updated: Jun 12, 2022
On May 5th EOG Resources (EOG) reported Q1/2022 financial results which were ahead of estimates and highlighted by adjusted EPS of $4.00 (consensus $3.70) and CFPS of $5.75 (consensus $5.57). Quarterly production was in line with oil production at 450.1 Mbbl/d or 883.3 Mboe/d (including NGL production of 190,300 bbl/d and natural gas production of 1.457M mcf/d). FY/2022 production guidance (nearly 900M boe/day on average) was maintained as was the capex budget ($4.3B-$4.7B). Though cost guidance was revised somewhat higher (between 2%-3% higher for leases, transport, processing and G&A) due to on-going inflationary pressures, the most telling part of the earnings release was the announcement of a plan committed to returning 60%+ of annual FCF. Finally responding to investor pressure (the majority of largecap E&P peers have already committed to a similar type capital return plan, consisting of a special dividend and opportunistic share repurchases), this announcement was a long awaited welcome change. With the new framework and assuming $95/bbl WTI and $3.25/Mcf LT, the company pointed to an impressive $4.8B+ of total capital returns expected in FY/2022. Note that the regular dividend alone (yield of 2.4%) is in the upper range when compared to peers.
Given the recent underperformance relative to peers, the capital return announcement was be taken positively by the market. We feel that the risk/reward on EOG Resources at this point is worth holding as its time for the shares to catch up to peers. And for the slightly longer term, energy will continue to outperform in light of the current volatile market dynamics.
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Given the recent underperformance relative to peers, the capital return announcement was be taken positively by the market. We feel that the risk/reward on EOG Resources at this point is worth holding as its time for the shares to catch up to peers. Given the current market volatility brought upon by inflation concerns, interest rate hikes and geo-political uncertainty, energy has been the only sector with substantially positive YTD returns. Being one of the largest independent O&G producers in the US, we feel that now is the time to hold shares. The company has a pristine balance sheet (over $4.0B in cash in treasury) and is involved with massive acreage in all the right places such as the Permian, Williston, Powder River and Eagle Ford. The pipeline is highlighted by Dorado, with 30 net completions so far in 2022, the potential remains for a potential 20+Tcf natural gas play.