EOG Resources (EOG) should be one of the big winners if crude oil rallies beyond $80/barrel, given its diversified portfolio across various U.S. basins, market cap and liquidity.
EOG is up more than 13% for the year, outperforming the S&P 500, up 8.3%, and the major energy benchmark, SPDR Energy Sector ETF (XLE) , up 3.77%. We think EOG has more fuel to go based on the following:
a) It's one of the largest U.S.-focused shale producers that large institutional investors need to own in their portfolio given market cap and liquidity;
b) It has a diversified portfolio of assets across major basins;
c) It has a 15-25% growth outlook in oil production;
d) It has 20% of Permian oil sold at premium Gulf Coast pricing (which is tied to Brent).
The last time we wrote about EOG, the stock was at $116/share. It's seen a 6% rally since then. WTI crude oil was at $65/barrel. It's now at $72 a barrel, a 10% appreciation. While crude oil has outperformed EOG, it also comes with greater volatility versus owning a stock that mid-to-long term investors may not be able to digest.
EOG has stated that it can grow at a rate of 20% until 2020 in a $50/barrel scenario, making it one of the strongest and more stable producers in the U.S. Owning EOG shares would not only be a bet on management delivering on its plan, but also would come with an embedded call option if crude oil prices rally further (EOG is not hedged as are many of the other mid/small cap producers).
A major driver for EOG stock will be the success in developing its Powder River Basin (PRB). While the Permian has been the backbone of U.S. producers, its pipeline constraints allow other basins to shine, such as the (PRB) in eastern Wyoming. While the basin produces less than 200,000 barrels of oil equivalent per day (BOE/day) it has attracted various players into it, such as Anadarko Petroleum (APC) , Devon Energy (DVN) and Chesapeake Energy (CHK) . According to a Bloomberg article, the number of rigs operating in Wyoming has risen fourfold since bottoming out at just seven in the summer of 2016.
EOG now has potential resources in the Powder of more than 2 billion BOE, which is more than 10 times the amount it had penciled in the previous quarter. The share of this basin as a percentage of EOG's inventory of premium prospects has jumped from less than 2% to 17%.
The other major basin where EOG has a footprint, is the Eagle Ford, where it is the largest oil producer and acreage-holder, where well production has expanded over 24, with 11 rigs and costs as cheap as $4.3 million per well, generating 143% rates of return at $50/barrel.
Without a doubt, EOG has the right combination of assets, technology and people that will propel them ahead of the peer group, making it the best proxy to play this geopolitically-driven crude oil rally.