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EOG Stock Study (8-19-24)

Posted by on October 9, 2024 at 07:00 | Last modified: August 19, 2024 11:33

I recently did a stock study on EOG Resources, Inc. (EOG) with a closing price of $128.06.

M* writes:

     > EOG Resources is an oil and gas producer with acreage in several
     > US shale plays, primarily in the Permian Basin and the Eagle
     > Ford. At the end of 2023, it reported net proven reserves of
     > 4.5 billion barrels of oil equivalent. Net production averaged
     > roughly 985,000 barrels of oil equivalent per day in 2023 at a
     > ratio of 71% oil and natural gas liquids and 29% natural gas.

Energy is notorious for being cyclical. As a result, I usually avoid these companies because visual inspection fails. I wonder, though, are we really to blacklist an entire sector for this reason? Is it not possible to realize phenomenal investment returns here? The recent inclusion of SLB in a Manifest Investing portfolio (along with its 99 Quality score) suggests otherwise.

Visual inspection for EOG cleans up relatively well with the exclusion of 2015, ’16, and ’20 from the full analysis. ’20 probably makes sense due to COVID-19. Rather than dig to figure out plausible excuses for ’15-’16, I will defer to the overriding question asked in the first paragraph.

Pressing onward with stated exclusions, over the past 10 years this large-size company has grown sales and earnings at annualized rates of 7.1% and 12.8%, respectively. Lines are somewhat up and parallel with YOY sales+EPS declines in ’19 and ’23. Ten-year EPS R^2 is 0.67, but Value Line gives a weak Earnings Predictability score of 30.

Over the past decade, PTPM leads peer and industry averages while ranging from 5.9% in ’17 to 41.8% in ’23 with a last-5-year mean of 31.6%. ROE also leads peer and industry averages while increasing from 14.5% (’14) to 27.2% (’23) with a last-5-year mean of 23.6%. Debt-to-Capital completes the trifecta being much lower than peer and industry averages while falling from 25.0% (’14) to 14.6% (’23) with a last-5-year mean of 18.9%.

Quick Ratio is 1.7 and Interest Coverage is 69.3 per M* who also rates the company “Exemplary” for Capital Allocation and assigns a “Narrow” Economic moat. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

My 2.0% per year forecast is near bottom of the range.

With regard to EPS growth:

My 3.0% per year forecast is toward bottom of the long-term-estimate range (mean of six: 7.2%). Initial value is 2024 Q2 EPS of $12.95/share (annualized) rather than ’23 EPS of $13.00.

My Forecast High P/E is 11.0. Over the past decade, high P/E falls from 22.3 (’14) to 10.6 (’23) with a last-5-year mean of 14.3 and a last-5-year-mean average P/E of 11.4. I am near bottom of the range (only ’23 is less).

My Forecast Low P/E is 7.0. Over the past decade, low P/E falls from 15.2 (’14) to 7.6 (’23) with a last-5-year mean of 8.5. I am forecasting toward bottom of the range [only ’21 (6.1) and ’22 (6.7) are less].

My Low Stock Price Forecast (LSPF) of $90.60 is default based on initial value from above. This is 29.3% less than the previous closing price and 16.8% less than the 52-week low.

Over the past decade, Payout Ratio (PR) increases from 9.6% in ’14 to 25.4% in ’23 with a last-5-year mean of 22.5%. I am forecasting below the range at 9.0%.

These inputs land EOG in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 6.0%.

PAR (using Forecast Average—not High—P/E) of 2.1% is less than I seek for any size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 19 studies (my study and eight other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 5.7%, 4.1%, 13.4, 8.2, and 21.9%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 14.0 is higher than MS (10.8) and higher than mine (9.0).

MS high / low EPS are $15.55/ $12.66 versus my $15.01 / $12.95 (per share). My high EPS is less due to a lower growth rate. Value Line soars above both with its $17.50 projection.

MS LSPF of $102.30 implies Forecast Low P/E of 8.1: very close to the 8.2 mentioned above. MS LSPF is 12.9% greater than mine thereby resulting in more aggressive zoning.

With regard to valuation, PEG is 2.2 and 3.2 per Zacks and my projected P/E, respectively: somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is a bit low at 0.87.

MOS is robust because my inputs (and most-recent-quarter initial value) are near or below respective analyst/historical ranges. MS sample size is too small for valid comparison, but its 12.3% TAR is anecdotally 6.3%/year greater than mine.

EPS estimates for the company don’t level up to management metrics. The latter [three described near top] would have me believe it to be an industry leader. The former is particularly dogged by M*’s 0.2%.

Per U/D, EOG is a BUY under $109. BI TAR criterion is met ~ $82/share given a forecast high price ~ $165.

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