EOG Resources Faces Challenges Amidst Market Volatility

An energy company focused on crude oil and natural gas, EOG Resources (NYSE: EOG) saw minimal changes in its stock price this year. In contrast, the S&P 500 has climbed 23%. EOG’s peer, Chevron Corporation (NYSE: CVX), has mirrored this stagnancy, while ConocoPhillips has experienced a decline. What lies ahead for EOG stock?

An Unpredictable Market

EOG operates in a capital-intensive sector subject to market cycles. Recent months have seen EOG’s stock impacted by macroeconomic concerns and weaker earnings. Its performance may remain lackluster in the near term, largely linked to commodity prices. Despite hopes for economic growth and pro-growth policies from the new U.S. administration, oil prices have stagnated due to a stronger U.S. dollar and high domestic output. EOG plans to increase its total debt to between $5 billion and $6 billion over the next 12 to 18 months. Investors should pay close attention to these debt levels as rising interest rates could present challenges. Currently, EOG’s earnings multiple stands at about 10x, lower than its five-year average of around 13x. However, the company may see growth in crude oil and natural gas liquids production, especially from areas like Delaware, Dorado, and Utica.

Quarterly Performance Highlights

In its third-quarter report, EOG surpassed analyst expectations with a non-GAAP EPS of $2.89, beating the forecast of $2.77, and reported revenue of $6.0 billion. While this revenue represents a 4% decrease from the previous year, it exceeded expectations by $20 million. GAAP earnings were $1.67 billion, or $2.95 per share, down from $2.03 billion, or $3.48 per share, from last year’s third quarter. In response to the results, EOG’s management announced a 7% dividend increase and authorized an additional $5 billion for share buybacks. Crude oil production rose nearly 8% year-over-year to 1.07 million barrels of oil equivalent per day (boe/day), while natural gas liquids production grew by 10% to 254,000 boe/day.

Cash Flow and Future Projections

EOG is expected to surpass its minimum cash return commitment of 70% of annual free cash flow and last year’s 85% return rate. In the third quarter, the average price for crude oil dropped 8% to $76.95 per barrel, and the natural gas price fell 30% to $1.84 per Mcf. EOG’s crude oil and condensate volumes saw a 3% increase, reaching 493,000 boe/day, up from 483,000 boe/day last year.

A Historical Perspective

Over the past three years, EOG stock returns have varied significantly, with annual performances much more erratic than those of the S&P 500. The returns included 89% in 2021, 57% in 2022, and a decline of 2% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, which comprises 30 stocks, has consistently outperformed the S&P 500 each year. This portfolio provides greater stability and improved returns compared to the benchmark index, highlighting a less turbulent investment experience.

Looking Ahead

For fiscal year 2024, we forecast EOG’s revenues at $19.5 billion, representing a 12% year-over-year increase and an EPS of $11.49. Consequently, we have adjusted EOG’s valuation to approximately $135 per share, based on the expected EPS and an 11.8x price-to-earnings multiple for the upcoming fiscal year. This forecast indicates a 14% upside from the current market price as of December 19.

Comparative Insights

A comparison with EOG’s peers is useful for assessing its performance metrics. Insights into EOG Resources and its competitors become foundational for understanding the broader energy market dynamics.

[1] Returns as of 12/19/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.