We are adding EOG Resources (EOG) to our model portfolio; we consider the stock be among the cream of the crop among fracking operators, notes Scott Chan, editor of Investing Daily’s Real World Investing.
The company’s technical leadership and a high level of operational execution enables it to be one of the few frackers able to generate positive cash flow with some regularity — it was cash-flow-positive in two of the last four years, and should make it three out of five this year.
And during the energy slump, as oil bottomed in the $20s in 2016, EOG was the only large-cap fracker that did not issue dilutive new equity or reduce dividend.
The company owns significant acreage in the Permian and Eagle Ford basins, two key shale basins. The Permian is especially productive and is the lowest-cost tight-oil basin in the U.S.
EOG’s technical excellence and having its own mid-stream infrastructure (gathering and transportation pipelines) enables it to operate cheaply enough that breakeven is believed to be achievable even if oil fell to $30 per barrel.
The company is known for utilizing data-driven methods to increase operational efficiencies and it’s among the leaders in using artificial intelligence (AI) to pinpoint the best drilling locations.
AI techniques such as machine learning are used to synthesize data from a variety of sources (e.g. flow rates, seismic vibrations, equipment durability, and others) to optimize the capital-intensive exploration and production processes.
Such techniques allow companies to utilize real-time data insights to identify patterns, predict critical outcomes, and make smarter business decisions.
With oil no longer in triple digits as it once was, frackers are under pressure to operate more efficiently than ever before. We expect EOG’s superior technological expertise will continue to position the company as industry innovator and leader for years to come.
With oil prices at its current levels, we think EOG should be able to increase oil production between 15 percent and 25 percent per year.
Indeed, the company raised its production for 2017, projecting approximately 20 percent year-over-year oil production and positive cash flow with oil at $50 a barrel. Keep in mind that EOG has a history of issuing conservative guidance, so its actual results could turn out even better.
Scott Chan is editor of Real World Investing.
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