1: Introduction: EOG Resources is a reliable oil US player.
This article focuses on EOG Resources (NYSE:EOG), my portfolio's third domestic oil producer. With Occidental Petroleum (NYSE:OXY) and Diamondback Energy (NASDAQ:FANG), this trio completes my extensive Permian oil portfolio, which I trade regularly.The trio's notable success and substantial ownership in Permian production establish them as one of the most influential domestic players in the Permian Basin. Major oil companies like Chevron Corporation (NYSE:CVX), ConocoPhillips (COP), and ExxonMobil (NYSE:XOM) are also important players in the region. While other oil companies meet these criteria, investors seeking stability and strong underlying fundamentals would be best served by investing in these strong names.
EOG Resources: Strong Fundamentals, But High Valuation
As we enter this new year, geopolitical factors are set to have an increasingly important impact. The incoming US President, Donald Trump, has already made waves in the market, even before officially taking office. While Trump's position on oil policy is evident, how effectively it can be implemented remains uncertain. Trump aims to increase oil production in the US, but is this goal realistic, or is it merely a political statement lacking substance? Time will tell. The outlook for gas in the U.S. seems more favorable than oil in 2025, with Europe and Asia being the primary beneficiaries. However, concerns about inflation may negatively impact oil and gas prices in 2025.
EOG Resources is particularly adapted to profit from any gas price increase, with gas infrastructure connecting production to premium markets. Also, EOG Resources enjoys three main gas sales agreements shown below:
EOG Resources: Strong Fundamentals, But High Valuation
Although we cannot control future events, we can prepare by investing in companies with strong fundamentals that consistently meet market expectations. EOG is an excellent choice that offers stability and excellence.CEO Ezra Jacob said in the third quarter conference call:
Since the end of 2020, EOG has generated more than $22 billion of free cash flow and more than $25 billion in adjusted net income. We've increased our regular dividend rate by 160%, including both regular and special dividends paid or committed to pay more than $13 billion directly to shareholders and $3.2 billion indirectly through share repurchases, all while reducing debt 35%.
EOG Resources currently distributes an annual dividend of $3.90 per share and an extra dividend that depends on its free cash flow (not allocated in 3Q24). For this quarter, the company increased the base dividend by 7%, raising it to $0.975 per share, resulting in a yield of 2.77%. Additionally, EOG Resources has announced a $5 billion share repurchase program this quarter, which will be added to the $1.8 billion that remained at the end of the third quarter.
2: The Permian Basin is the number one producer of oil in the US.
The Permian Basin is one of the most productive and longest-operating oil basins in the United States. While it has reached maturity and is approaching its peak production level, there is still the potential for some increases in production in 2025.
The EIA projects that Permian production will reach 6.6 million barrels of oil equivalent by 2025, an increase of nearly 5% year over year. Reserves suggest that substantial production will persist until 2030.
Many large oil and gas operators are now exploring tier 2 and tier 3 acreage, which tend to be more gas-heavy, to help offset the flattening production from their tier 1 acreage.While EOG Resources does not exclusively produce oil and gas in the Permian Basin like Diamondback Energy, it maintains a strong overall production in the U.S., with significant output in the Permian that was not indicated in the company's filings.
The map below from the EOG Resources website shows that the Permian basin is one of many company's producing segments.
EOG Resources: Strong Fundamentals, But High Valuation
Source: EOG website.
In addition to the two oil supermajors, Chevron and Exxon Mobil, which I will discuss later, many US E&P companies operate in the Permian. Below are a few companies that use US production versus Permian production.
EOG Resources: Strong Fundamentals, But High Valuation
3: Oil Production in 3Q24. Reaching another record.
Total oil equivalent production was 1,075.7 K Boepd in 3Q24, with production in the USA at 1,037.1 K Boepd and 38.6 K Boepd in Trinidad. As the chart below shows, EOG Resources has regularly increased its production since 2020.
EOG Resources: Strong Fundamentals, But High Valuation
EOG estimates total production will range from 1,058 to 1,067.8 K Boepd in 2024. Additionally, it anticipates production of 1,084.5 to 1,113.2 K Boepd for the fourth quarter, another record.Oil production is 45.8% of the total output, lower than Diamondback Energy's 56.2% and Occidental Petroleum's 50.5%. This emphasizes the need for EOG to secure higher gas prices.
EOG Resources: Strong Fundamentals, But High Valuation
EOG Resources is achieving better prices for its oil and gas than its competitors. In 3Q24, the EOG composite oil price was $76.92, OXY's was $75.33, and FANG's was $73.13. The difference is even more striking when it comes to gas prices. EOG's composite gas price was $2.05 per mcf, OXY's was $0.76, and FANG's was in the negative range.
EOG Resources: Strong Fundamentals, But High Valuation
EOG's key highlight is its low operating costs, significantly enhancing profit margins. In 3Q24, the total operating cost was $24.98 per Boe, achieving a composite average margin of $23.36.It is what a savvy investor should focus on when it comes to investing long-term.
EOG Resources: Strong Fundamentals, But High Valuation
Source: EOG Resources
4: EOG Resources: Solid fundamentals and no net debt.
EOG Resources announced that its adjusted earnings per share for the third quarter of 2024 were $2.89, exceeding analysts' expectations. However, earnings fell by 16% compared to $3.44 from the same quarter last year. The total quarterly revenue was $5,965 million, which did not meet estimates.
EOG Resources: Strong Fundamentals, But High Valuation
The mixed results were driven by increased oil-equivalent production volumes, which led to better-than-expected quarterly earnings. However, this boost was partially offset by lower prices for crude oil, condensates, and natural gas liquids (NGL).
The company reported a free cash flow of $2,086 million in the third quarter, a significant increase from the $1,186 million earned in the same quarter last year. Cash flow from operations amounted to $3,588 million, and capital expenditures totaled $1,502 million.
EOG Resources: Strong Fundamentals, But High Valuation
Note: The company calculates free cash flow differently. The total for the first nine months of 2024 was $4,373 million, but the company indicated $4,100 million.I refer to free cash flow compared to EBITDA ($3,196 million in 3Q24) because it directly addresses the actual cash generated by a company's operations.In my view, free cash flow (FCF) offers a more robust foundation for evaluating a company's long-term growth potential and its capability to create sustainable value. It showcases the company's ability to invest in its operations, manage debt, and reward shareholders over time.
CFO Ann Janssen said in the conference call:
Year to date, we have generated $4.1 billion of free cash flow, which helped fund $3.8 billion of cash returned to shareholders. Of that $3.8 billion, $1.6 billion was paid in regular dividends, which were complemented by $2.2 billion in share repurchases through the third quarter.
EOG Resources ended the third quarter with $6.122 billion in cash, cash equivalents, and marketable securities, an increase from $5.326 billion in the previous quarter. The company's long-term debt was approximately $3.776 billion (including current debt), remaining relatively stable compared to $3.806 billion in the previous quarter.
EOG Resources has a net cash position of $2.34 billion, which is quite impressive and unusual. In comparison, Occidental Petroleum has a net debt of approximately $24.09 billion, while Diamondback Energy has a net debt of $12.8 billion.
EOG Resources: Strong Fundamentals, But High Valuation
5: Technical Analysis.
EOG Resources: Strong Fundamentals, But High Valuation
Note: The chart has been adjusted to account for the dividend.
EOG follows a new ascending channel pattern, with resistance at $137 and support at $129.50. The relative strength index (RSI) is 57, indicating a bearish retracement in progress. Following a breakout in early January, EOG retested the previously mentioned new resistance level and is now retracing to its support.
Consider gradually selling some of your shares while the price is between $136 and $138. Depending on your position, I recommend selling about 15% to 20% in this price range and selling more if the rally has legs using the resistance as a new support buy.
I suggest using a Last-In-First-Out (LIFO) strategy for 5060% of your position, targeting a final price of around $155. This percentage is advisable due to the sector's significant volatility, which will be exacerbated in 2025.
An ascending channel is commonly regarded as a bullish continuation pattern. However, investors should pay attention to how this pattern ultimately concludes. In this case, the likelihood of a breakout or breakdown is equal, which introduces uncertainty and supports a last-in, first-out (LIFO) strategy. See the chart for more information.
I would add to my position if EOG trades below $131, specifically around $128-$129 at the 50MA.Note: You must frequently update the TA chart to remain relevant, as we operate in a constantly changing environment.
