While the Trump Administration is scrambling to advance its geopolitical agenda on trade wars and sanctions, crude oil prices continue their upward climb and we have chosen EOG Resources ( EOG) as our top horse in the energy supremacy race. While investors are still looking for various reasons to own energy stocks within the sector, EOG has a differentiated formula that makes it an outstanding choice relative to its peers.
WTI crude oil has held above $65 since April 2018 and we think the commodity will be range-bound close to $70 per barrel until the end of the year. Brent has held above $70 per barrel and we expect an upward trend above $75 a barrel from now until year-end. This gives us a comfort level that the most U.S. producers will continue to run conservative budgets focused on efficiency. We think EOG will lead the pack.
EOG is a the fifth-largest component of the Energy Select SPDR ETF ( XLE) with a 4.6% weight, right below oil majors like ExxonMobil ( XOM) , Chevron ( CVX) , ConocoPhillips ( COP) and Schlumberger ( SLB) . EOG is also part of the SPDR S&P Oil & Gas Exploration & Production ETF ( XOP) , albeit by a smaller percentage of 1.81%. XOP is a good hedge against the overall oil and gas exploration and production sector.
EOG has a multi-year outlook of 15-25% growth in crude oil production. That is combined with an attractive +20% dividend growth plus close to $3 billion of debt reduction over the next four years.
EOG stock is up 26% over the last 12 months, outperforming the S&P 500 by 10 percentage points. This trend is likely to continue as the company delivers on its strategies. Only investments in crude oil ETF, via the US Oil Fund ( USO) have outperformed all indices over the same period of time, by 43%.
EOG is forecasted to hit the 1 million barrels of oil equivalent per day (BOE/d) in 2020. With its Eagle Ford acreage still holding over 10 years of premium inventory at its current development pace and the Delaware Basin assets producing well over the mark, we see EOG able to maintain its current pace while generating significant positive free cash flow over the next four-to-five years.
EOG recently announced two new premium resource plays in the Powder River Basin in Colorado, in the Mowry Shale and the Niobrara Shale. The key to success for EOG has been the right mix of lower well costs and appropriate production designs in diversified basins.
Finally, EOG's cost structure has significantly improved and its debt reduction give it more opportunity to grow or opportunistically add assets down the path. EOG has proven track record of picking up cheap assets.
