EOG: Well-Positioned For The Long-Term

EOG’s (NYSE:EOG) success is due to their focus on being a low-cost and high-return producer in the industry, as well as their commitment to sustainability through minimizing their emissions. This focus on sustainability and financial performance allows EOG to create value for their shareholders over the long term.

In order to achieve their goals, EOG has a consistent strategy that is designed to maximize shareholder value. This includes a focus on disciplined growth and the generation of significant free cash flow. The company also places a strong emphasis on culture, as they believe that a positive and supportive culture is essential for driving success. Overall, EOG is dedicated to creating sustainable value for their shareholders and stakeholders through all stages of the industry cycle.

EOG has a stringent investment hurdle rate, requiring a 60% return on investment using a flat price of $40 for oil and $2.50 for natural gas. This focus on returns drives the company’s investment decisions and helps ensure that they are continuously improving their multi-basin portfolio.

EOG is also known for its capital discipline and strong balance sheet. The company is committed to returning at least 60% of their annual free cash flow to shareholders, demonstrating their focus on creating value for their shareholders. In addition, EOG has a strong track record of strong environmental, social, and governance (ESG) performance.

The company is decentralized, with a focus on organic exploration and technology leadership. This decentralized approach allows EOG to be agile and responsive to changes in the industry, helping them to maintain their position as a leader in the energy sector.

Focused on long-term sustainable value creation

EOG has a constructive view on natural gas fundamentals in the medium to long term. This is demonstrated by their long-term supply deal with Cheniere and their lower hedged profile on natural gas volumes in 2023 compared to 2022. During their 3Q22 earnings call, the company provided guidance for low double-digit year-over-year volume growth in 2023, including low single-digit oil growth. This growth is expected to be driven by higher activity at Dorado and the Powder River Basin, as well as a higher mix of deeper targets in the Delaware Basin Wolfcamp play, which have a higher percentage of natural gas.

This increase in natural gas volumes is expected to have a positive impact on EOG’s per unit cost structure. Despite the significant increase in gas volumes in 2023, EOG has noted that they have adequate takeaway capacity to flow their volumes at attractive margins. However, the company will need to add additional gathering infrastructure in the Utica region and may use trucks to transport oil in the basin in the short term.

EOG has expanded its operations to include seven significant resource basins with the addition of the Utica Combo in Ohio. This diverse portfolio of high-return plays positions the company for long-term, sustainable value creation.

Operating in multiple basins provides EOG with a number of competitive advantages. It allows them to allocate capital to the highest-return projects across a diverse range of future well locations. In addition, operating in multiple basins fosters innovation by allowing diverse, high-performing teams to share new ideas across the company. This creates a culture of continuous improvement and helps EOG to maintain their position as a leader in the energy industry.

Exploration unlocks organic growth

EOG expensed $53M towards exploration in Q3 2022 and continued exploration and development is a key pillar of EOG’s strategy in 2023. EOG will focus its incremental drilling efforts primarily on the Dorado and Delaware basins, while also shifting its northern drilling program towards the Powder River basin. This focus will help the company to transition from oil to natural gas production, with gas production expected to grow at least 20% year-over-year in FY23. EOG’s expertise in shale and unconventional resources, as well as their experience in shallow water conventional drilling through their Trinidad & Tobago development, positions them well to build towards a focus on liquified natural gas (LNG).

EOG stands for good ESG

EOG is committed to being a responsible operator and being part of the long-term energy solution. As part of this commitment, the company has several initiatives focused on reducing their environmental impact. These include expanding closed-loop gas capture, eliminating routine flaring, implementing continuous leak detection using iSense technology, and testing leaner fuels to reduce combustion-related emissions.

EOG is also focused on reducing capture through the launch of a carbon capture and storage (CCS) pilot project and by prioritizing concentrated CO2 emissions locations for CCS. The company is also evaluating additional locations for CCS implementation. Finally, EOG is evaluating projects and other options to offset any remaining emissions. Overall, these efforts demonstrate EOG’s commitment to sustainability and their role as a responsible operator in the energy industry.

Rewarding investors through regular dividends

EOG has been committed to sustainable dividend growth, recognizing that regular dividends can protect cash returns for shareholders through industry cycles. The company has a low-cost structure and a high-quality well inventory, both of which contribute to the sustainability of their dividend. In addition, EOG has a strong balance sheet, which further supports their ability to pay dividends consistently.

EOG has a strong track record of delivering cash to shareholders through price cycles, with a commitment to returning $1.9 billion annually to shareholders through their regular dividend. This commitment to returning cash to shareholders is a key aspect of EOG’s focus on creating value for their shareholders over the long term.

EOG is committed to increasing their cash return to shareholders, with a minimum of 60% of their annual free cash flow being dedicated to shareholder returns. This includes a sustainable dividend growth as well as additional cash return through special dividends and opportunistic share repurchases.

The company also looks for low-cost property bolt-on opportunities, rather than engaging in expensive mergers and acquisitions. This focus on cost-effective growth helps EOG maintain their position as a low-cost, high-return producer in the industry. Overall, EOG’s commitment to maximizing shareholder value through a combination of dividends and share repurchases demonstrates their dedication to creating long-term value for their shareholders.

EOG is a well-positioned name to own over the long-term

EOG represents a strong long-term holding in the energy industry due to their premium drilling strategy, which is expected to deliver differentiated returns on capital at mid-cycle pricing or higher. EOG’s strong balance sheet, low-cost structure, and diverse portfolio of high-return plays make it well-positioned to weather any potential downturns in the energy industry and continue delivering value to shareholders over the long term.

EOG has taken several shareholder-friendly actions, including increasing their base dividend significantly and paying special dividends. This increase in the dividend reflects the company’s confidence in it’s ability to sustain strong operating performance over the long term. In terms of portfolio renewal, EOG management has expressed optimism about the potential to unlock new premium drilling opportunities through their exploration program, without pursuing expensive large-scale M&A.

EOG currently trades at a premium to its peers. In my opinion, EOG has earned this premium through a laser-like focus on shareholder returns, operational execution and organic value creation. EOG becomes a compelling buy if its multiples begin to approach Devon Energy