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EOG Resources, Inc. Is in a Class All by Itself

By Matthew DiLallo – Nov 22, 2016 at 10:00AM

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The shale producer’s CEO lays out his outlook for the future.

Image source: Getty Images. 

EOG Resources (EOG -2.66%) refused to increase production during the oil market downturn because it did not want to grow for the sake of growth. Instead, the company held back for much of the past two years while it focused on getting costs down and hydrocarbon recoveries up. That approach has paid off, and now with oil prices on the rise, the company can hit the accelerator in 2017 at a much lower price point than most of its rivals need to achieve similar growth rates.

Getting ahead of the curve

On EOG's third-quarter conference call, CEO Bill Thomas provided the company's view on the oil market. While he started off by saying that "our macro view has not changed," he still spent some time detailing the company's view and what that meant for the industry. He said:

Over the long term, we believe oil in the $40s will not sustain enough production to meet demand worldwide. While EOG can deliver strong oil growth within cash flow with $50 oil, we believe the US industry as a whole needs sustained $60 oil prices and extended lead time to provide a moderate level of growth. Worldwide base decline rates are slowly reducing supply and the consensus view is the current large inventory overhang could return to normal levels by late 2017.

As Thomas notes, current oil prices are not high enough to meet future demand because producers cannot generate enough cash flow to drill the necessary wells to replace declining production elsewhere. The sector as a whole will not reach that pivot point until oil is sustainably over $60 a barrel, while most of the top drillers need at least $55 oil to fuel their growth forecasts.

However, Thomas points out that EOG Resources can start growing production at a much lower price point. In fact, the company recently revised its long-term growth forecast and now expects to increase output through 2020 by 15% compounded annually at $50 oil, with that rate accelerating to 25% at $60 oil. This view is up from its prior outlook of 10% at $50 oil and 20% at $60 oil. Even better, it can achieve this rapid growth and pay its current dividend all within projected cash flows.

Image source: Getty Images.

There's no comparison

EOG Resources' forecast stands out when we compare it with those of its rivals. For example, Permian-focused driller Pioneer Natural Resources (PXD -2.83%) recently noted that it is "on a trajectory to deliver compound annual production and cash flow growth through 2020 of approximately 15% and 25%." However, Pioneer Natural Resources noted that it does not expect to live within cash flow until 2018 and that it needs $55 oil to achieve that target. Furthermore, Pioneer's growth rate is off of a lower starting point, given that it produced 239,000 barrels of oil equivalent per day (BOE/d) last quarter while EOG Resources delivered 275,700 barrels of oil per day.

Canadian shale driller Encana (OVV -3.99%), likewise, requires $55 oil to fuel its five-year plan. Also, Encana's focus is on absolute growth of 60% for production and 300% for cash flow through 2021, instead setting a double-digit annual rate. It is also worth noting that Encana's forecast is for growth across its four core assets, which given last quarter's production of 242,800 BOE/d also represents a lower starting point than EOG.

Meanwhile, leading shale driller Devon Energy (DVN -2.65%) only has a two-year preliminary plan at the moment. For 2017, Devon Energy needs $55 oil to generate enough cash flow to fuel double-digit oil growth, though it measures exit-to-exit growth instead of an increase in the daily average rate. In addition, Devon's 2018 plan assumes $60 oil, which would provide it with enough cash to generate "stronger growth." Devon is apparently not confident enough to attach any numbers to its growth expectations just yet.

Investor takeaway

EOG Resources does not see a vast improvement coming to the oil market until the end of next year, which could keep a lid on oil prices. That outlook, however, is just fine with the company because it does not need oil to be much more than $50 a barrel to drive robust growth for years to come. Because rivals need oil to be much higher, EOG Resources is clearly in a class by itself.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and EOG Resources. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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