Nov. 5 (Bloomberg) — As crude prices plunge below $80 a barrel and billions are erased from the market value of energy companies, there’s one U.S. oil producer that most analysts still think makes a good buy.
EOG Resources Inc., formerly a part of the old Enron Corp. empire, has emerged as the most-recommended stock in the oil industry. The Houston-based company is the only shale producer expected to generate more cash than it spends both this year and next after oil fell to a three year low this week, according to data compiled by Bloomberg.
Investors spooked by the heavy debt carried by most U.S. producers are flocking to companies that generate so-called free cash flow. That’s a rare quality among those drilling in booming shale fields that require steady spending to boost output.
“Their track record is hard to argue with,” said Brian Youngberg, an analyst at Edward Jones in St. Louis who, along with 33 others, rates EOG a buy. “Production last quarter was up 19 percent. It’s hard to find a company anywhere near that, and EOG has an A-rated balance sheet.”
The company yesterday reported double-digit production growth for the seventh consecutive quarter and said net income more than doubled to $1.1 billion in the July-to-September period. Shares rose 6.5 percent to $96.10 at the close in New York, the biggest one-day gain since May 2013.
EOG’s success underscores the mixed fortunes in U.S. shale fields, where many companies that helped create an unprecedented oil supply increase now have little to show for it in extra cash. The producer, which one analyst called the “Apple of Oil,” has relied on a strategy that includes owning its own sand mine and rail terminals, savvy scouting for new drilling prospects and a mastery of petroleum engineering.
Most-Recommended
An estimated 85 percent of analysts who follow EOG recommend buying shares, more than any other oil company on the Standard & Poor’s 500 Index, according to data through October compiled by Bloomberg. When Goldman Sachs Group Inc. lowered its forecast for U.S. crude prices to $74 a barrel for next year on Oct. 26, only one oil shale driller maintained a buy recommendation: EOG.
An index of U.S. companies on the S&P 500 that explore for and produce oil and natural gas has lost more than $100 billion in value since June, falling yesterday to a combined market capitalization of $398 billion from $501 billion at the end of the second quarter.
RBC Asset Management Inc. has kept EOG as one of its top energy holdings amid the oil price slide.
Growth Prospects
“We still want to pick a company with the best growth prospects based on inventory, but the company approaching that growth with the best balance sheet,” said Chris Beer, a portfolio manager who co-manages a global energy fund at RBC Asset Management Inc. in Toronto.
EOG has become exhibit ‘A’ for energy industry experts arguing why the shale boom — a technological phenomenon that grew up on high oil prices — will be able to survive in a downturn. Originally known as Enron Oil & Gas Co., EOG was spun off from its parent in 1999, before Enron collapsed under allegations of fraud and corruption.
Chairman and Chief Executive Officer William Thomas yesterday boosted EOG’s growth target for oil even in the face of a market slump, with U.S. crude reaching a three-year low on lower Saudi Arabia export prices and surging North American output.
The company produced the equivalent of 614,100 barrels of oil a day in the quarter, up from 526,400 a year earlier.
Lowest Costs
With oil prices at $80 a barrel, EOG gets a 100 percent rate of return in its primary drilling areas in Texas and North Dakota, Thomas told investors today on an earnings conference call. The company would see a 10 percent return in Texas’s Eagle Ford formation with prices at $40 a barrel. EOG doesn’t plan to scale back drilling plans or growth projections amid lower prices, he said.
Part of the reason is that it developed its own mine and processing plants for sand, a key ingredient of successful fracking jobs whose value has skyrocketed amid the boom. The company also operates its own rail terminals and leases a fleet of rail cars to ensure that its oil, particularly in North Dakota’s Bakken formation, finds the market with the highest price.
But EOG’s biggest advantage is in its land. The company is renowned for its stealth in acquiring large positions in promising new drilling areas well before their potential is recognized by the broader market, said Ed Hirs, who teaches courses on energy economics at the University of Houston.
Sweet Spots
In Texas’s Eagle Ford, which now produces almost as much oil as Qatar, EOG through 2010 developed its position for about $450 an acre. Similar land in that area, now recognized as being in the “sweet spot” where geology is better suited to yield abundant oil and gas, sold for $20,000 an acre in 2011, according to an analysis by Wolfe Research in New York.
Paul Sankey, a Wolfe analyst, has described EOG as the “APPL of oil,” referring to the trading symbol for Apple Inc.
“As with Enron, EOG infuriates competitors due to a mixture of results and superior attitude,” Sankey said in a note to investors Sept. 24. “Unlike Enron, EOG actually delivers. Like Apple, it feels as if everyone is long but there is still more to come.”
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