EOG Resources Stock: Is Now the Time to Buy or Sell EOG Stock?
Oil prices are slipping below $100 per barrel as several nations tap into their emergency oil supplies. But natural gas prices are still climbing, up over 60% this year. Is now the time to consider adding EOG Resources stock, a natural gas leader, to your portfolio? Or is it too late after running over 70% this past year?
For one thing, EOG Resources (NYSE: EOG) benefits from rising commodity prices. The rise in energy prices is helping raise profit margins, leading to higher free cash flow (FCF). As a result, investors are seeing big returns this year.
At the same time, the Federal Reserve is moving aggressively to tame the wave of inflation. Will this affect EOG Resources stock? Let’s look at what to expect from the company as we advance.
The State of the Energy Market
As one of the largest independent natural gas exploration and production (E&P) companies globally, EOG resources plays a vital role in the world’s energy supply. Today, we see how necessary this commodity is as energy prices soar, leading inflation to its highest level in years.
The Energy Select Sector SPDR ETF (NYSE: XLE) leads the market this year, up 34%. Nevertheless, energy stocks are outperforming as investors look to take advantage of the supply crunch.
As inflation rises, consumers are left with less to spend in other areas of the economy. Not only in the U.S. but European nations are also struggling with soaring energy costs as they look to reduce imports from Russia.
Gas and oil play a vital role in the economy, so leaders are looking for new solutions. That being said, U.S. gas firms are now meeting with European leaders to ensure a smooth transition.
Yet it can take years to increase production to meet the significant demand. On top of this, with several nations tapping into their strategic reserves, they will need replacing. With this in mind, E&P companies are likely to play a critical role going forward.
Why You Should Consider EOG Resources Stock
EOG Resources is a hydrocarbon exploration firm focusing on onshore gas production. The company has operations across the U.S. in some of the highest returning sites. Not only that, but they also have wells in Trinidad and Tobago.
Before the pandemic, EOG Resources was approaching its lowest level in five years. Rather than investing in oil, investors crowded into renewable energy stocks to play a role in the future of energy.
As a result, EOG set its sights on delivering long-term shareholder value. For one thing, the firm established a minimum hurdle rate to detach from volatile energy prices. Using $40 oil and $2.50 natural gas as a benchmark, company investments must earn a return of at least 30%.
With oil prices still above $95 per barrel, EOG looks to double that to a 60% return. So far, the “double premium” strategy is paying off as FCF hit a record $5.5B.
On top of this, the firm managed to reduce well costs by 7%. So, investors are seeing the returns between decreasing well costs and higher profits. In November, EOG Resources raised its dividend by 82% while paying a $2 a share special payout. Then again in Q4, EOG announced a special dividend of $1 per share.
Strong Q4 Earnings Despite Bottom-Line Miss
Despite missing Wall Street’s bottom-line estimates, EOG Resources Q4 earnings were impressive.
- EPS: $3.09 vs $3.21 Est.
- Revenue: 6B vs $5.8B Est.
It was a record quarter for the company in several aspects. The firm’s investments in high return wells are trickling down to its bottom line. CEO Ezra Yacob commented, “The outstanding fourth-quarter results cap off a tremendous year for EOG – record earnings, record free cash flow and return of cash that places EOG among the leaders in our industry.”
Also, by strategically paying down debt ($5.1B vs. $5.8B Q4 2020), EOG is now negative net debt by $100M. Net Debt-to-total Capitalization (D/C), a measure of leverage, has also decreased significantly. A lower D/C ratio can suggest strong fundamentals.
Nonetheless, with over $5.3B in cash and $5B in long-term debt, EOG can cover its costs. At the same time, the firm is not immune to the rising costs.
Total operating expenses also rose greatly as equipment and labor are more expensive. In the 4th quarter, operating expenses reached $3.5B growing 41% from $2.4B in Q4 2020.
Risks to Consider
The oil and gas industry is known for its cyclical nature, meaning economic changes heavily influence the market. In other words, cyclical stocks go through major ups and downs. They can rally in a short period of time and then give back those returns over the next several years.
With this in mind, below are a few risks to consider if you are looking to buy EOG Resources stock.
- Oil is a cyclical industry. Before the pandemic, many oil firms were negative FCF as oil prices collapsed with new energy projects promising clean energy.
- The oil industry is competitive. When oil prices rise, new investments are often made to increase production. New entrants and other competitors also see it as an opportunity.
- Costs are rising. Oil prices and profits are not the only things on the rise. The equipment needed to produce and maintain the wells are also increasing. It can eat into margins if the trend continues, diminishing FCF levels.
Another key thing to consider is the long-term view of the oil industry. The oil industry is booming right now, with the world realizing oil and gas are some of the most critical commodities driving the economy.
However, will this supply strain force nations to find alternatives? After the Russian invasion, the E.U Commission President stressed the need to “accelerate the clean energy transition.” After adding, “the quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent.”
EOG Resources Stock Forecast: Buy or Sell
The oil boom could last for years while nations scramble to find alternatives. So far, the higher oil prices are creating record earnings and FCF. As a result, EOG Resources stock is nearing all-time highs of over $129 a share.
If the boom continues, look for EOG stock to breakout into ATH territory as profits continue funneling FCF to investors. Nobody knows how long and if the supply will meet demand. But if supply catches up, we could see another reversal as it has throughout history. With this in mind, buying EOG Resources stock is still a risk.
Then again, it’s more than likely the U.S. and other nations will make it favorable for oil companies to increase production. In the short term, we could see this as another catalyst. In the long run, keep an eye on gas and oil prices for clues to where EOG stock heads next.
About Pete Johnson
Pete Johnson is an experienced financial writer and content creator who specializes in equity research and derivatives. He has over ten years of personal investing experience. Digging through 10-K forms and finding hidden gems is his favorite pastime. When Pete isn’t researching stocks or writing, you can find him enjoying the outdoors or working up a sweat exercising.