It has been a brutal couple of months for investors in EOG Resources' (EOG +0.22%) stock, which has tanked along with oil prices.
While there are a number of reasons to believe the stock could ascend back to its previous highs even if oil prices don't budge, there are also risks that could send the stock even lower. Here are the top three dangers to watch.
Oil prices don't stop falling
As indicated above, EOG Resources' stock is highly correlated to the price of oil. Just look at this long-term chart.
So, if oil prices keep going down, EOG Resources' stock price will more than likely head lower, too -- even though the company hedges some of its oil production. However, investors could pick up one of the top oil-drilling stocks at an even better price if the stock is knocked down by another downdraft in oil prices.
A shift in strategy
The other big driver of EOG Resources' stock in recent years has been the company's peer-leading organic crude oil production growth, which has clocked in at 36% annually over the past three years. The company's strategy is to continue delivering best-in-class, double-digit oil production growth through 2017. However, that strategy was set before oil prices fell off a cliff.
At some point the company will have to abandon its plans to continue growing oil production at such a rapid rate. One reason for this is that if oil prices drop below $50 some EOG plays will not be profitable for drilling, as shown in the following slide.
Sources: EOG Resources Investor Presentation.
It remains to be seen if the company proactively cuts back on growth before oil prices drop that low, or if it decides to remain the growth leader. Both options come with risks, but a reduction in growth spending would likely send the stock lower, as growth investors could then decide the time has come to abandon the stock.
Over-aggressiveness
One thing that has set EOG Resources apart from its competitors is that all of its oil production growth has been organic: The company has not made a meaningful acquisition in more than a decade. Instead, it has developed a world-class exploration program that continues to uncover new oil plays. It simply has not needed to acquire a rival driller or large acreage package because it has always been among the first to uncover new plays.
That being said, given the collapse in oil prices, EOG Resources could be tempted by the bargain valuations of smaller peers to go on the offensive and acquire a rival. That would represent a big shift in strategy, especially after CEO Bill Thomas said on the company's third-quarter conference call that, "historically, there is a lot of competition in M&As and usually they turn out to be very, very low return. So we are going continue to maintain our focus on growing the company organically." However, the price of oil has fallen further since he made those comments, making it possible Thomas could change his mind, especially as EOG Resources is one of the few oil companies with the balance sheet strength to handle a big deal. If EOG does announce an acquisition, investors might sell off the stock because of the added risks from integration.
Investor takeaway
Oil prices remain one of the biggest risks facing investors in EOG Resources. However, another major risk could come from a strategy shift. The company could get conservative and cut out nearly all of its growth capital, or it could get aggressive and buy a rival. Either move could cause the stock to sell off, even though under the right circumstances, either move has merit for long-term investors.
