Part I – Introduction
Houston-based EOG Resources (NYSE:EOG) released its first quarter 2022 results on May 5, 2022.
Important note: This article is an update of my article published on February 27, 2022. I have followed EOG on Seeking Alpha since 2016, with 24 articles published and counting.
1 – 1Q22 Results Snapshot And Commentary
EOG Resources reported a first-quarter 2021 adjusted earnings per share of $4.00, beating analysts’ expectations. Results significantly rebounded from the year-ago quarter’s earnings of $1.16 per share.
The total quarterly revenues rose to $3,983 million from the year-ago number of $3,694 million.
The solid adjusted earnings were due to higher oil equivalent production and commodity prices. However, higher lease, well expenses, and exploration costs partially offset the benefits.
EOG Resources’ total volumes increased 13.4% year over year to 79.5 million barrels of oil equivalent (MMBoe) on higher US output.
The quarter’s crude oil and condensate production totaled 450.1K Boep/d, up 1% from the year-ago level. Natural gas liquids volumes increased 53.1% yearly to 190.3K Bbls/d. Natural gas volume rose to 1,458 MMcf/d from the year-earlier quarter’s 1,445 MMcf/d.
EOG’s cash return strategy demonstrates our commitment to deliver long-term shareholder value. Yesterday, we declared a second special dividend for the year of $1.80 per share following last quarter’s $1 per share. Combined with our peer-leading annualized regular dividend of $3 per share year-to-date, we have announced $3.4 billion in cash return to shareholders in 2022.
2 – Investment Thesis
I view EOG Resources as one of the most trustworthy “shale” producers with a friendly attitude towards its shareholders. Thus, I recommend a long-term investment, especially considering the high dividend yield of 10.3% (which includes the special dividend).
The only imponderable when it comes to an investment in EOG Resources is the oil and gas prices, which are highly volatile and are starting to retrace from their high of $140s per barrel achieved after Russia invaded Ukraine.
Contradicting supply and demand factors have raised uncertainty about the oil price prognosis. Fears of a painful recession have intensified, with inflation now above 9% (a 41-year high), which could seriously damage oil demand.
The FED is expected to raise interest rate by 75-point at the end of July.
In addition, extended sanctions against Russian oil exports have boosted uncertainty about supply. With so many facets pulling oil prices in various directions, oil prices are retracing now and trade below $100 per barrel.
In this uncertain environment, trading LIFO using technical analysis is the only viable strategy that can provide a decent long-term reward while reducing the risks of a black swan or grey swan down the road. It allows you to profit from the short-term swings and increase your leverage during unfavorable or unexpected turnarounds that can last longer than expected.
3 – Stock Performance
All five companies have sharply increased year to date, with DVN up 93% yearly, while EOG shows an increase more modest of 19%.
EOG Resources produces oil and gas from its US shale assets, representing 95.3% of the total output in 1Q22. The production from the US comes from five basins: Bakken, Powder River, Wyoming DJ, Delaware, and Eagle Ford (including the dry gas play Dorado).
|Production per Region in K Boep/d||1Q21||2Q21||3Q21||4Q21||1Q22|
|United States of America||736.3||785.2||807.9||827.8||841.5|
Part II – EOG Resources – 1Q22 Balance Sheet: The Raw Numbers
|Total Revenues in $ million||3,694||4,139||4,765||5,908||6,755|
|Oil Revenues in $ Million||4,038||4,492||5,231||6,044||3,983|
|Net income in $ Million||677.0||907.0||1,095||1,985||390|
|EBITDA $ Million||1,828.0||2,083.0||2,404||3,447||1,392|
|EPS diluted in $/share||1.16||1.55||1.88||3.39||0,67|
|cash from operating activities in $ Million||1,870||1,559||2,196||3,166||828|
|Capital Expenditure in $ Million||917||1,023||896||1,014||1,009|
|Free Cash Flow in $ Million||953||536||1,300||2,152||-181|
|Total cash $ Billion||3.39||3.88||4.29||5.21||4.01|
|Long-term debt in $ Billion||5.13||5.13||5.12||5.11||5.10|
|Dividend per share in $ (+ special dividend)||1.4125||0.4125+2||0.75||0.75+1||0.75+1.80|
|Shares outstanding (diluted) in Million||583.0||584.0||584||585||586|
Source: EOG Resources 10Q
* More data available to subscribers.
Part III – Analysis: Revenues, Earnings Details, Net Debt, Free Cash Flow, And Oil Equivalent Production
1 – Total Revenues And Others Were $3,983 Million in 1Q22
Note: Oil revenues were $6,755 million in 1Q22.
The company’s net income was $390 million, or earnings per share of $0.67. The solid performance was the result of increased commodity prices and production volumes.
Lease and well expenses increased to $318 million from $270 million a year ago. Transportation costs rose to $228 million from $202 million a year ago.
The company reported gathering and processing costs of $144 million, higher than the year-ago quarter’s $139 million.
Exploration costs rose to $45 million from $33 million a year ago.
All in one, total operating expenses for 1Q22 were $3,437 million, higher than the $2,762 million a year ago.
2 – Free Cash Flow Was A Loss Of $181 Million In 1Q22
Note: The organic free cash flow is the cash from operating activities minus CapEx. It may differ a little from the company calculation.
The free cash flow for the first quarter of 2022 was a loss of $181 million, and the trailing 12-month free cash flow was $3,807 million.
The company is committed to returning a minimum of 60% of annual free cash flow, which is exceptionally generous.
CFO Tim Driggers said in the conference call:
The size of our regular dividend is now the largest of our E&P peers and the strength of our balance sheet supports our ability to return a large portion of free cash flow back to shareholders going forward under a range of scenarios. The $1.80 special dividend declared yesterday, along with $0.75 regular quarterly dividend, demonstrates significant progress toward our commitment to returning at least 60% of our 2022 free cash flow to our shareholders.
3 – Oil-Equivalent Production And Other
3.1 – Oil Equivalent Production
EOG Resources’ oil production increased sequentially in the first quarter. Total production was 883.3K Boep/d, up 13.4% from last year and up 2.3% sequentially. From the chart below, we can see that the total production has reached a record this quarter.
3.2 – Oil Production Detail: Oil, NGL, And NG
EOG relies significantly on crude oil, representing 51% of the total output in 1Q22.
The company’s oil price (composite) realized this quarter was $96.00 a barrel, up from $58.02 a year ago.
In addition, natural gas fetched at $5.46 per Mcf. Finally, NGL prices were $39.77 per barrel.
Below is the chart history of the Oil and NG price composite.
3.3 – Dorado, A Dry Gas Play
On November 6, 2020, EOG Resources announced its newly discovered Dorado gas play. A 21-trillion-cubic-feet TCF Dorado discovery in the Austin Chalk of Webb County in South Texas.
It looks like an inspiring dry-gas play, and the company is doing well at reducing well costs and exceeding productivity. Production is now approximately 140 MMcf/d in 1Q22.
On July 5, 2022, EOG Resources received a pipeline permit for a 41 Kms pipeline.
This week Pecan Pipeline Company, a wholly owned subsidiary of EOG Resources, had a pipeline permit approved for a 41 mile in Webb and Duval Counties located in Texas.
Since EOG drilled the first well in 2018, the company has decreased well costs by over 35% and greatly exceeded the initial forecast. Refined completion techniques and a focus on targeting have increased the performance projections per foot basis.
4 – Low Net Debt And Plenty Of Cash. Excellent Profile
As of March 31, 2022, EOG Resources had cash and cash equivalents of $4,009 million. Long-term debt was reported at $5,099 million. The current portion of the long-term debt was recorded at $1,283 million – the debt to a total capitalization of 19.1%, which is excellent.
5 – 2022 Guidance
EOG Resources expects 2022 production between 858.3K to 933.7K Boep/d, with the second-quarter production at 864.3-927.0K Boep/d. An increase of about 1.4% (mid-point) sequentially.
EOG Resources expects a CapEx of $4,300-$4,700 million in 2022. CapEx expected to be used in 2Q22 is about $1,100-$1,300 million.
Part IV – Technical Analysis And Commentary
Note: The chart has been adjusted for dividends.
EOG forms an ascending broadening (symmetrical) wedge pattern with resistance at $146 and support at $97.5. Generally, an ascending Broadening Wedge is a bearish trend reversal chart pattern.
The short-term trading strategy is to trade LIFO about 35%-45% of your position. I have increased the short-term portion because of the increasing volatility attached to the oil sector.
I suggest selling at above $146 and waiting for a retracement below $97.5. In this particular case, I recommend selling 25% at mid-support or around $120. However, EOG could break down if oil prices lose momentum and retest the lower support at $92.3.
Watch oil prices like a hawk.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
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