I've been figuratively lifting the hoods -- from an investment perspective -- on public companies for longer than I care to recall. And despite my having concentrated at separate times on a trio of very different sectors, I can't recall having analyzed another corporation that's topped EOG Resources (NYSE:EOG) in racking up displays of superiority over its peers.
However, a new issue was raised at the company when, in announcing final 2013 results recently, management said it will split the company's stock 2-for-1 in late March. A key question thereby emerges regarding whether EOG shares become even more attractive than they were before the disclosure of their coming cleavage.
Two key components of EOG's future
For my money, that question depends in turn on a pair of other issues: the potential that EOG will continue to beguile us with spectacular financial and operating results for the next several quarters, and whether the split itself is likely to help or hinder the company's valuations.
In attempting to respond to the first issue, let's briefly review the bidding on EOG's most recent results and then take a gander at its espoused future expectations. If you're a follower of the company, you probably realize that its adjusted per-share earnings came in $0.06 above analysts' expectations.
But I think it's far more important to consider the elements that indicate EOG's relative operating strengths. For instance, the company isn't just the discoverer of the Eagle Ford Shale in South Texas. It also continues to be the prolific play's top performer, having increased its net potential recoverable reserves there from 2.2 billion barrels of oil equivalent to 3.2 billion, or 45% higher, during 2013.
Its results in the Bakken also materially topped expectations. In fact, by upgrading its drilling approach from one to four wells per section, it turned what it termed a "steady development drilling program into a high rate-of-return crude oil growth play."
But don't assume that EOG represents one of many boats raised by a rising tide. Whiting Petroleum (NYSE:WLL), another member in good standing of the Bakken contingent, posted a loss for the quarter. While EOG was lowering costs as it increased operating efficiencies, Whiting's higher expenses were the root of its weak quarter. And Chesapeake Energy (NYSE:CHK), once the belle of the producers' ball, also let expenses pound its quarterly earnings well below expectations.
The company's short-term future
Looking ahead, EOG management expects the company's 2014 production to expand by a robust 27%. Capital spending for the year, which could reach $8.3 billion, will be concentrated in the Eagle Ford and Bakken.
So the past year was a highly successful one for EOG, and the near-term future looks every bit as promising. But what about the potential impact of the stock split?
The likely effects of the stock split
Let's begin by looking at another independent producer that split its shares 2-for-1 nearly a year ago. Noble Energy (NYSE:NBL), a solid operator about half EOG's size from a market capitalization perspective, closed Thursday about 14% (on an adjusted basis) above its level the day before its split. And it was 27% higher than the day before its splits was announced. For perspective, EOG shares have risen by a whopping 65% since the day before Noble's split announcement.
But -- and here I go crawling out on a limb -- theoretically had EOG split its shares on the same day as Noble, would that 65% have been even higher? Maybe. David Ikenberry, the dean of the Leeds School of Business at the University of Colorado, appears to top the academic pack in the number of studies of the effects of stock splits. His conclusion is that splits of 2-for-1, 3-for-1, or 4-for-1 have tended to outperform the market by 8% to 12% during the three years following revaluations.
The Foolish takeaway
My colleague Taylor Muckerman was asked the day after EOG reported its fourth-quarter results and its share-split plans whether the market's reaction -- the shares rose nearly 1.5% that day -- was too hot, too cold, or just right. Based on all of the considerations here (and even though the shares later added more value), I'm inclined to agree with his notion that the Mr. Market's reaction was a bit too frigid. After all, EOG is an independent oil and gas producer nonpareil.