Why EOG Resources Is Primed for a Turnaround

Shares of EOG Resources [stock_market_widget type="inline" template="generic" color="default" assets="EOG" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have been beaten down badly over the past six months thanks to tumbling oil prices. The stock is down nearly 30% over the past couple of quarters, and the recent oil price rally hasn’t been of much help from an investors’ perspective.

However, oil prices are now trading at strong levels and can potentially rise higher as per the latest data coming out of OPEC and the U.S. In such a scenario, would it make sense to take advantage of the weakness in EOG Resources stock and go long? Let’s find out.

EOG is Going All out in 2019

Despite the oil price volatility late last year, EOG Resources is pulling out all stops to boost its production once again this year. The company has categorically stated that it will spend more of its capital on “opportunistic, high quality new drilling potential” this year to grow its oil production in the range of 12% to 16% as compared to 2018 levels.

To achieve this growth, EOG has outlined capital spending between $6.1 billion and $6.5 billion for the year. The mid-point of that guidance range is around $100 million higher than what EOG had spent as capital expenditure last year. So, the company’s strategy of directing its capital into promising oil producing areas is expected to lead to impressive production growth without much of an increase in spending.

Also, EOG believes that its disciplined spending approach in 2019 will lead to higher free cash flow, improved productivity, lower operating expenses, and well costs. As a result, the company expects to fund its entire capital investment and also pay its dividend from the net cash it will generate from operating activities this year at a $50 oil price.

Why EOG’s Performance Will be Beyond Expectations

Given the higher than benchmark oil price, it won’t be surprising to see EOG deliver a higher cash flow than it originally forecasts for the year.

The good news for EOG investors is that oil prices are way above the $50 benchmark the company has set. WTI crude oil is trading at almost $62 per barrel, and it could rise further on account of improved demand and supply constraints seen around the globe.

As such, it won’t be surprising to see EOG deliver a higher cash flow than it originally forecasts for the year. Also, higher oil prices will allow the company to deliver a stronger-than-expected top- and bottom-line performance going forward.

Analysts currently expect EOG Resources’ revenue to remain almost flat year over year, while earnings per share are expected to drop from $5.54 to $4.67. However, a combination of higher production and the recent uptick in oil prices could help it break beyond those levels. That’s because EOG witnessed an average crude oil price of $65 per barrel in the U.S. last year.

U.S. crude is currently trading close to that level, and if it keeps rising in the future, then it won’t be surprising to see EOG beat Wall Street’s expectations. This is why investors looking for a beaten-down oil stock that has the potential to turn around in light of improving oil prices should definitely consider EOG Resources.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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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