Drill, Baby, Drill (with EOG Resources)

In what I am sure is a massive shock to most of you, oil prices are still depressed. Lower oil prices means oil companies are suffering. Suffering oil companies means low stock prices. Low stock prices means value investors like me are on the hunt for deals. Simple, when you think about it. Let’s take a look at another potential value play in EOG Resources (EOG).

Quick Background:

From Scottrade:

EOG Resources, Inc., together with its subsidiaries (collectively, EOG), explores for, develops, produces and markets crude oil and natural gas. The Company operates in producing basins in the United States, Canada, The Republic of Trinidad and Tobago (Trinidad), the United Kingdom, The People’s Republic of China (China) and the Argentine Republic (Argentina), among others. EOG’s total estimated net proved reserves were approximately 2,119 million barrels of oil equivalent (MMBoe), of which approximately 901 million barrels (MMBbl) were crude oil and condensate reserves, approximately 377 MMBbl were natural gas liquids (NGLs) reserves and approximately 5,045 billion cubic feet, or 841 MMBoe, were natural gas reserves. In the Eagle Ford, the Company produced net volumes of approximately 142 thousand barrels per day (MBbld) of crude oil and condensate. The Company is also engaged in drilling in the The Rocky Mountain area.

The company was officially incorporated in 1999, using assets from Enron (the name “EOG” is an acronym for “Enron Oil and Gas”). EOG is based in Houston, Texas.

The company’s peer group includes Devon Energy (DVN), Apache (APA), and ConocoPhilips (COP).

For more basic information, check out the company’s website and the 2013 annual report.

Fun fact: An investment of $10,000 in December 2000 would be worth $66,679.79 today, all dividends reinvested. This yields a annual rate of return of 14.3%, well outperforming the S&P 500. (Source: FAST Graphs)

Investment Criteria:

Now that we know who EOG is, let’s run our screening criteria on it:

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (15 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (13.2)
• Has am EPS payout ratio of less than 70%: Yes (12.05%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, October)

• Has an S&P Quality Ranking of ‘A-‘ or better: No (B)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No

Other Bonus Ratings:

• S&P Capital IQ: 5-star Strong Buy
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 6 (optimized score of 7)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Morningstar:
  • “Narrow” moat
  • “Standard” stewardship

Financial Overview:

EOG’s dividend yield is a less-than-stellar 0.76%. The company pays out $0.1675 quarterly, for a $0.67 annual payout. However, this payout is safe for now. The payout ratio is only 12.05%, and the debt/equity ratio is 0.33. This ratio is respectable, and less than the peer group’s average of 0.5. The company is a net share issuer. After a major spike in February 2011, the total share count has drifted upwards from 508.56 million to 548.45 million today. Finally, EOG split twice in the past 10 years, two 2:1 splits in 2005 and 2014.

EOG’s current P/E ratio is 16.7. Morningstar forecasts a one-year forward P/E ratio of 39.6. As the FAST Graph above indicates, this is most likely going to be because earnings will plummet next year. I suspect the share price will follow, but not to the same extent, leading to the P/E expansion. EOG’s gross, operating, and net profit margins are pretty impressive. Compared to the peer group, they are 62.00% vs 63.10%, 29.91% vs 13.84%, and 16.63% vs 4.93%. Although the gross margin is slightly lower than I’d like, the operating margin is more than double the peer group’s. The profit margin is phenomenal, at slightly less than quadruple the combined average.

After examining FAST Graphs, EOG’s estimated earnings growth is -3.4%, and the three-year annualized rate of return is an astoundingly terrible -26.97%. Peers DVN and APA are better, but still are expected to have a negative AROR, at-15.14% and -18.80% respectively. COP has a downright refreshing AROR at 1.02%. EOG, by far, is going to be the worst hit over the next three years.

Risk Factors:

• Low oil prices – While not EOG-specific, lower oil prices could hurt the company. Protracted low oil prices could mean lower margins or profitability, less dividend growth, no share buybacks, or higher debt. None of these will crush the company, but none of these are ideal either.
• Dud wells – If EOG drills a large sequence of dud or under-producing wells, it could financially suffer.
• Environmental catastrophes – Remember the Deepwater Horizon oil spill? Yeah, if that happens to a company like EOG, it won’t be pleasant. Depending on the severity of the spill, the company could even become insolvent.

Final conclusion:

EOG does not meet my criteria at this time. The company fails my quality ranking check, and is not quite undervalued for me. I don’t particularly like how US-centric the company is, and the dividend doesn’t thrill me. And frankly, the projections for the next 3 years scare the s**t out of me. I don’t doubt it will survive the current troubles, and I do like the margins, debt, and long-term view of management. Right now, I’d rather stick with the tried-and-true big boys, like XOM, CVX, and COP (which I already analyzed here). But I will keep an eye on EOG, and if the price falls further without any significant negative fundamental changes, I may be a buyer.

What do you think? Does EOG make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: Long CVX, XOM

All data is accurate as of market close, 03/09/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.

Tags: dividend-stock-analysis, EOG, EOG Resources Inc