The One Where EOG’s Stock Tanked

EOG Resources’ stock took a bath Feb. 23 after a rare earnings miss, rattling analysts. One questioned if EOG is “like Narcissus.”

EOG also reported it plans 40 fewer net well completions in 2024 while increasing lateral length 10%.

The stock was down as much as 6% from a $116 per share close Feb. 22 to $109 per share the morning of Feb. 23, while others were mostly unchanged. Nearing close on Feb. 23, shares were about $111.

For variety in the price comparison among EOG’s fellow oily E&Ps, Hart Energy selected large independents Devon Energy and Marathon Oil; midcaps SM Energy and Vital Energy; and super-independents ConocoPhillips and Occidental Petroleum.

In addition to earnings, fourth-quarter free cash flow was lower than expected due to lower natgas prices.

But analysts said in reports they were more disappointed in EOG’s outlook: less oil production growth, more natural gas growth and greater spending—particularly on midstream gas build-out in the Delaware Basin and the South Texas Dorado play.

EOG did not share the same sentiments. CEO and Chairman Ezra Yacob said in the company’s earnings call the morning of Feb. 23 that “EOG’s business has never been better and our financial position has never been stronger.” The overall 2023 results “reflect our value proposition at work.”

‘Who to believe?’

Stephen Richardson, analyst with Evercore ISI, questioned EOG’s tack in a note titled “A Question of Who to Believe” after the earnings report dropped. “Few companies in this industry are more satisfied with their assets, processes and track record than EOG,” he wrote.

Other independents are consolidating, Richardson noted, while EOG has rarely acquired producing properties in its 25 years since full separation from Enron Corp. in 1999.

Some recent M&A deals are for E&Ps that many, including Evercore, “thought would never transact.” Among them are decades-old Hess Corp., Pioneer Natural Resources and Endeavor Energy Resources.

EOG’s absence has been acute, Richardson wrote.

So “the question we ask is if EOG is like Narcissus staring admiringly at its own remaining inventory in the Permian and Eagle Ford—clearly a little long in the tooth from the perspective of others—and relatively new additions that have their idiosyncrasies—Dorado [and Ohio oil-window] Utica—and shunning the opportunities available from the acquisition market,” he wrote.

EOG’s peers are locking in inventory to secure future opportunity, he said. “EOG stands alone in the conviction that improving the existing assets plus extensions via organic exploration is the right path.”

So “who to believe? Are the returns available via inorganic M&A much worse than what EOG can deliver with the drillbit?”

Analysts were placated last year as EOG’s pure wildcatting was adding to inventory, although that was “unsatisfying for the market looking for big, chunky, brand-name resource extensions,” Richardson continued.

And EOG has a propensity for reinvestment in its assets “with disregard for the optics in regard to budgets,” while focused on the potential for returns.

But “the return profile—at least visible from here—is not eroding,” he concluded, and added that he expected some investors and analysts may “still take their shots” at the stock.

‘Tough update’

EOG reported its 2023 finding and development (F&D) costs were $7.20/boe; for proved developed reserves, F&D was $10.50/boe.

Total proved reserves grew 6%, including 607 MMBoe from extensions and wildcats. Net additions from any source—excluding lower oil, NGL and natgas prices—replaced 2023 production 202%.

The oil price fell 19% in 2023; natgas, down 60%; and NGL, down 37%.

Spending in 2024 will be some $6.2 billion, EOG reported, including $4.3 billion in drilling and completions (D&C) for 600 net wells.

UBS Securities analyst Josh Silverstein described EOG’s news as a “tough update.”

While cash flow per share was higher than expected, results from the Utica and Delaware Basin were “solid.” The 2024 outlook is for free cash flow growth and guidance is for less oil production and more spending.

“And the shareholder-return profile continues to be less definitive,” he added.

His outlook is positive for the stock, “but we believe EOG should get more aggressive with shareholder returns, especially with the 560 basis-points percentage underperformance vs. the [S&P E&P] XOP year to date.”

EOG’s expected 2024 production growth—to about 1.035 MMboe/d—comes roughly 80% from more natgas and NGL in the mix. Oil will be about 489,000 bbl/d—less than half the more than 1 MMboe/d EOG is forecasting for 2024.

‘Underwhelming’

TPH & Co. analyst Matt Portillo called EOG’s 2024 expectations “underwhelming.”

He added, “We found it interesting that EOG will be shifting more capital towards gassier horizons in the Permian as it cuts back on oily Wolfcamp development in 2024 while also cutting Powder River Basin capital.”

In the Powder, EOG announced it will drop a rig (thus 10 fewer well additions) in favor of sending more money to its Utica wildcatting.

EOG expects to bring 20 net new wells in Ohio online in 2024 compared with six in 2023.

The companywide 2024 program will consist of 27 rigs (down four) and eight frac spreads (down from 10). The reduced D&C will result in bringing 600 net new wells online, compared with 640 in 2023, Portillo wrote.

J.P. Morgan Securities analyst Arun Jayaram added, though, that EOG plans to increase lateral length 8% in the Delaware Basin and 20% in the Eagle Ford. In the former, six-month cumulative production from new wells is expected to grow to 38 boe per lateral ft., compared with 36 boe/ft in 2023.

Gabriele Sorbara, analyst for Siebert Williams Shank, noted the fourth-quarter miss and reduced 2024 expectations, but maintained a "buy" rating on EOG.

The EOG stock-price hit “is likely to be short-lived,” he wrote, “as EOG has a history of executing with one of the best capital returns frameworks in the sector—at least 70% of free cash flow returned to shareholders annually—and a pristine balance sheet in a net-cash position.”

Cash on hand is $5.3 billion.