EOG Resources (NYSE: EOG) is an American energy company focused on hydrocarbon exploration with a market capitalization of almost $60 billion. The company recently made the news for discussing an intention to increase production in a high price environment. As we’ll see throughout this article, the company has a unique ability to generate substantial long-term shareholder rewards.
EOG Resources 3Q 2021 Results
EOG Resources has continued to outperform on the basis of 3Q 2021 results.
EOG Resources has taken advantage of its strong asset portfolio with a focus on driving shareholder returns. The company has increased its regular dividend to $3 / share (a respectable 3% dividend yield) and announced a $2 / share special dividend yield (taking the yield to a mid-single-digits 5% yield for shareholders).
The company also bought back almost $3 billion worth of shares (~5%) in 2021 and has expanded its share repurchase authorization to $5 billion. The company has significant room to expand its share repurchase authorization from current levels. The company’s $1.4 billion in 3Q FCF is annualized at $5.6 billion or an almost 10% yield.
This shows the company’s continued strong portfolio and ability to drive shareholder rewards.
EOG Resources Cash Flow Potential
EOG Resources has a significant ability to generate substantial shareholder returns.
EOG Resources Shareholder Returns – EOG Resources Investor Presentation
EOG Resources has the ability to generate roughly $4.7 billion in FCF at $65 / barrel WTI. With current WTI prices at more than $85 / barrel WTI, the company’s FCF is $7.3 billion in FCF. At current prices, that’s a 12.3% FCF yield, showing the combined company’s financial strength and cash flow potential for shareholders.
A substantial part of that is expected to go towards regular and special dividends with some being earmarked for debt reduction. As we’ll see, the company should be able to generate double-digit shareholder rewards through 2022 and onwards with an ability to increase its production should it decide to with its double-premium wells.
EOG Resources Long-Term Debt
EOG Resources’ manageable debt portfolio is also visible below.
EOG Resources Net Debt – EOG Resources Investor Presentation
EOG Resources has recently converted its strategy to a focus on premium wells and double-premium wells. Since that transition, at the start of 2016, through a difficult environment, the company has generated a cumulative almost $11 billion in cumulative FCF. The company has had a manageable 70% reinvestment rate.
The company has returned $5.3 billion to shareholders as cumulative rewards while reducing its net debt and financials significantly. The company has $0.8 billion in net debt, a $5.1 billion reduction, and its pristine balance sheet means it can easily handle a downturn in the markets. At $25 / barrel WTI, the company can cover expenses and maintain production.
EOG Resources Asset Base
Going forward, supporting long-term cash flow, EOG Resources has an impressive asset base.
EOG Resources Double-Premium Assets – EOG Resources Investor Presentation
EOG Resources is focused on double-premium exploration plays across multiple locations. The company has 5700+ double-premium locations across multiple basins with a 60% return hurdle at $40 oil and $2.5 natural gas. This helps to highlight how valuable the assets are with a 9-month payback at $50 WTI for the company.
The company is focused on exploration here as well with capital spending, it’s confident the locations will be replaced faster than they’re drilled. That means the company will be able to continue generating its reliable cash flow for many years to come.
EOG Resources Shareholder Return Potential
EOG Resources has the ability to drive substantial shareholder returns for investors going forward.
The company is generating $4.7 billion in annual DCF at $65 WTI, and at $85 WTI, that becomes $7.3 billion in annual DCF. That DCF is enough to pay a respectable core dividend and allow the company to provide special dividends and share buybacks. That combination highlights how EOG Resources is a valuable investment for shareholders.
EOG Resources Thesis Risk
One of EOG Resources’ primary risks is that the company trades at a higher valuation than many of its peer companies. That’s because of its low debt and incredibly strong asset portfolio. However, it means, even at $85 WTI, your shareholder rewards are capped at roughly 12%, and at $65 WTI, they’re more like 8%. While those are strong returns, there are other investments with higher potential.
Conclusion
EOG Resources has an impressive portfolio of assets with a shift towards double-premium wells that’s been building since 2016. The company’s impressive asset base means a unique ability to continue shareholder rewards with a double-digit FCF yield at current WTI crude oil prices. That’s a substantial yield for shareholders.
The company is committed to reliable shareholder rewards through dividends. It’s also adding special dividends and share buybacks. That combination, along with the company’s incredibly low debt, means reliable long-term shareholder rewards. As a result of this combination of factors, along with the company potentially being the first to raise production, we recommend investing.