EOG: A Large Cap Leader in New Horizontal Oil Plays
A one-day drop in stock price of 9% presents opportunity, we believe, in Contrarian Buy-recommended EOG Resources (EOG) at a McDep Ratio of 0.78. Reduced natural gas drilling and delays in oil well completions caused the company to lower its growth forecast. The new forecast matches the more cautious projection we had been using. Moreover, third quarter results [see transcript] released late November 2 matched our expectations from four months ago for total unlevered cash flow (Ebitda). More importantly, delays for the next year do not cause us to change our NPV of $120 a share.
A shortage of fracturing service that has intensified in the past quarter accelerates an industry shift to higher profit oil drilling from lower profit natural gas drilling. Well-positioned for that transition, EOG is a large cap leader in new horizontal oil plays including the South Texas Eagle Ford and the North Dakota Bakken. Those two areas offer a combined 1.3 billion barrels of unproven resource potential much of which management expects to prove in the next several years.
The main risk may be timing with EOG stock in an apparent downtrend as it trades below its 200-day average of $99. Yet, low financial risk, signaled by a 0.14 ratio of debt to present value, combined with low McDep Ratio and capable management overcome short-term stock price concern in our opinion.
Originally published on November 4. 2010.
AI
