EOG Resources: Continue to Buy on Pullbacks

This past week seemed to be a bit of a snag for oil prices. Oil had been almost invulnerable from rhetoric used to slow increasing prices. We have OPEC saying speculators are the problem. We have our government stating we need more oil because we do not have enough supply. We even have some on Wall Street saying that it is the ETFs and investors buying up supplies to sell at a later date.

From what I am seeing, it seems quite simple. People will pay more to get into oil not because we cannot meet demand today, but what about next year or the year after? It is a simple premise, but one thing can crush the movement upward, and that is an announced move by OPEC to pump more, or anything that will lead investors to believe that they are in early.

I don't know if it will happen next week or the month after, but I do believe that the price will come down. I also believe the Saudis do have more oil to place on-line and they are hesitant to do it because they love all the money they are making.

One thing that looks to be reasonable would be to switch to natural gas E&P from oil E&P. Since my calls on theupdown.com, Chesapeake Energy (CHK) is up 47% in 94 days, XTO Energy (XTO) is up 4% in 66 days and the U.S. Nat. Gas Fund (UNG) is up 39% in 94 days. XTO has been a bit of a disappointment but looks good going forward. Since natural gas has not run as high as quickly as oil, it should continue upward even as oil takes a breather for a while.

EOG Resources (EOG) seems well positioned as their production is 82% natural gas. Their oil production is mostly in the Bakken Shale, which is also exciting as they are guessing that deposit has more BTUs than the Saudi's largest. EOG has stated that they are not interested in being the biggest E&P company, but more  importantly, they are focused on paying down debt and increasing production organically, as they have the reserves and just need to get them on-line. EOG has developed most of their growth from the transition in the United States towards horizontal drilling and they plan to use this technique in their Canadian assets. EOG has very good management. If you are to compare them to their competitors, you would see with respect to return on capital, EOG has averaged 19.3% per year, while their peer group is at 12.9%.

Looking forward, the company estimates that they will grow 15% this year, and between 13% to 15% for the two following years, and 100% of this estimate is organic, so any acquisition made would just improve these numbers. Looking forward, they are going to keep their business simple and not change what has worked. They are maintaining to keep their balance sheet clean. Along with this, they are going to keep their accounting conservative. Their hedges are as follows:

North American Natural Gas

• 2008 31% hedged at $8.51
• 2009 26% hedged at $8.99

Crude Oil

• 2008 26% hedged at $92.05

Looking over estimates for EOG, it seems as though they are low. Analysts' average estimate for growth next year is only 10.8%. They have beaten estimates for three out of four quarters and the quarter that didn't beat was in-line. Their assets are in key areas of growth and they should continue to increase production even if prices falter a little. The stock continues its bullish trend and I would continue to buy on pullbacks.

Disclosure: Long

Comments

[Clavis]

Interesting, more homework, but I personally think that the Saudi's are spinning out their depleted reserves.

[sharksm]

Why should the Saudi's use up their reserves when the U.S. won't? The Democrats want $8.00 gasoline and they will get it! I doubt if Kerry, Kennedy et al and their greenie friends will give up their limo's and SUV's.

[Bobcheesedoodle]

sharksm, I hope you're more perceptive with your investments than you are with your politics. In view of the actions of the republicans over the last seven years, it's odd that you would be forecasting increases in the price of gasoline based on the actions of democrats. No democrat I know wants $8/gallon gasoline. Your post seems more directed at trying to play upon the fears of others to foster your own political objectives than having anything to do with EOG. Doesn't Rush Limbaugh have a site that would be more appropriate for your biased political views?

[maelstrom]

Both political parties are the same..power and money hungry phony asses..And for god sake Michael powder your forehead. I enjoy your analysis

[User 214374]

Hi im new here and really dont understand everthing im learning yet. I would like to know if someone can help me ? I was reading online about this great company that manufactures the equipment to procure the natural gas. Im not sure if it is a ipo or existing company any help would be great. I will check back thanks pizan8766

[ForecastS.Com]

There appears to be some mild resistance to upside movement around $133, at least that's what our latest price forecasts suggest. Whether EOG will break above it short-term, remains to be seen.


FORECASTS ON TICKER SYMBOL: EOG

SYMBOL, DATE, PRICE, FORECAST, PERCENT
EOG, 20080620, 130.5143, 1.3677, 1.0
EOG, 20080619, 130.3000, -0.3259, -0.3
EOG, 20080618, 133.2000, -1.8628, -1.4
EOG, 20080617, 132.3100, -2.2426, -1.7
EOG, 20080616, 129.5100, -0.6955, -0.5
EOG, 20080613, 130.3100, -1.1528, -0.9
EOG, 20080612, 128.5800, 2.8534, 2.2
EOG, 20080611, 128.3900, 0.4492, 0.3
EOG, 20080610, 128.2700, 2.5286, 2.0
EOG, 20080609, 131.8900, -4.9710, -3.8
EOG, 20080606, 128.8100, -2.3114, -1.8
EOG, 20080605, 131.2900, -1.4545, -1.1
EOG, 20080604, 124.0900, 4.5426, 3.7
EOG, 20080603, 124.0700, 6.0884, 4.9
EOG, 20080602, 127.3400, 7.8633, 6.2
EOG, 20080530, 127.8776, 6.1919, 4.8

Source: Http://ForecastS.Com

[pachanguero]

The democrats are wedded to the green lobby which is stuck in the failed policies of the past. They gave us ethanol which is a curse.

The won't let us drill or explore in our OWN country.

I have never voted Republican before but with that racist Obama as the choice I will be voting for McCain. I hate Republicans and Decorates hover Obama scares the hell out of me.

He is a socialist pig with a butch wife.

So sad that's the best the could do.

An affirmative action angry black man who smoke two packs a day. What a fake!

[cook503]

Here's what I think: the government should open up the Strategic Petroleum Reserve and use it for "open market operations" to help regulate petroleum supply, like how the Fed conducts open market operations to control the money supply. It is believed by a rising number of people that the price of oil is starting to peak--for how long, we are not sure--so an open market sale from the SPR would yield a hefty revenue for the government and create a dip in the market price of oil by introducing new supply. When prices go down, the government can then refill the SPR.

Yes, it is government interference which I am no fan of, but it is government interference in a market full of government interference--cartels, state owned companies like Saudi Aramco or CITGO, and Chinese subsidies. We should play ball too.

[User 218585]

how can eog say they dont want to be the bigest ,if you dont grow you become stsgnent ,plus i dont see the ceo buying any of his own stock like chk put your money were your production is .look at mikro soft they cant grow any more so they try to buy other companies .a statment like we dont want to be the begest if i own eog i would sell it yesterday .

[MichaelFilloon(legmaker)]

Very good points by everyone, but I still like the stock in this market. The natural gas bull is just starting, and will continue to move. As for our oil problems, I dont have an answer, OPEC seems to be more interested in money then a recession here in the US. When food prices go sky high, they will feel it. God Bless.

[User 220732]

bill clinton allowed bp to merge with amoco...shell to unite with texaco..and exxon to eat up it's biggest competitor...mobil...t... is no wholesale competition....and the dems and green people don't want you to drill.....if you don't drill....you'll pay the arabs whatever the dems want.....open the us reserves....lets go with atom power, solar, and wind....we need years...it will come together....