Is Now the Time to Sell EOG Resources Stock?

EOG Resources [stock_market_widget type="inline" template="generic" color="default" assets="EOG" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] got off to a solid start this year, but the stock has taken a beating of late thanks to the decline in oil prices. This is despite the fact that the company delivered impressive first-quarter results on the back of strong production growth.

The Expectations from EOG

EOG Resources’ revenue is expected to increase 5% year over year during the second quarter to $4.46 billion. However, analysts expect the company’s earnings to decline by a penny to $1.36 per share for the quarter.

This is not surprising as EOG’s average realized oil price could be lower year over year during the second quarter. That’s because in the year-ago period, EOG Resources’ average realized crude oil price came in at $67.93 per barrel of oil equivalent. But the price of WTI oil has averaged below that level in the second quarter of 2019.

As a result, a potential increase in production on EOG’s side will be offset by lower oil prices, affecting the company’s bottom-line performance. However, EOG could offset that potential weak oil pricing impact to some extent as it has historically been able to generate stronger prices than the WTI benchmark.

On the last earnings conference call, management pointed out that:

In aggregate, EOG’s realized US oil price was $1.21 above WTI in the first quarter and our US gas price was only $0.36 below Henry Hub. This is a tremendous achievement and navigating a volatile market.

But investors need to keep in mind that the stock’s performance for the rest of the year will be driven by oil prices despite the company’s efforts to improve production and lower costs. For instance, EOG’s crude oil production volumes are set to rise strongly in the second quarter.

In the prior-year period, EOG delivered crude oil volumes of 384,000 barrels per day, while this time, it is expected to deliver production of 451,000 barrels per day at the mid-point of the guidance range. So the company’s oil production is expected to increase to the tune of 17% year over year according to the mid-point of the guidance range.

So, the only thing that EOG needs now is for oil prices to rally once again. But the problem is that might not be happening soon.

The Outlook for Oil Prices is Bleak for Now

OPEC might have decided to extend the production cuts, but despite that, an oil glut is anticipated going forward. The International Energy Agency has already witnessed a surprise inventory build of 500,000 barrels per day in the second quarter as compared to an anticipated deficit of that same number.

According to the IEA:

This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand growth started to falter,” the IEA said. “Clearly, market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future.

So if supply keeps rising, don’t be surprised to see EOG Resources stock lose more value.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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