Expansion Into Trinidad And Bahrain Will Open New Markets But May Bring Risks

Key Takeaways

• Strategic international investments and domestic expansion in natural gas aim to enhance cash flows and boost revenue amid rising demand.
  
• Increased operational efficiency efforts and infrastructure development are set to improve margins, with strong focus on shareholder returns through dividends and buybacks.
  
• Increased operational costs, tax changes, and strategic shifts might reduce short-term profitability and free cash flow, while international risks could complicate revenue forecasts.

Catalysts

Explores for, develops, produces, and markets crude oil, natural gas liquids, and natural gas in producing basins in the United States, the Republic of Trinidad and Tobago, and internationally.

• EOG Resources is planning to invest strategically in international opportunities such as Trinidad and Bahrain, expecting to leverage strong partnerships and existing infrastructure to enhance future cash flows and returns, potentially boosting net margins if successful.
  
• The company is increasing activity in its emerging domestic plays, notably the Utica and Dorado, by 20%. This is expected to drive production growth, particularly in natural gas, potentially increasing overall revenue as demand for natural gas rises with more LNG export opportunities.
  
• EOG is focused on operational efficiencies, such as longer lateral drilling and use of in-house drilling technologies, to reduce well costs and improve capital efficiency. These efforts are expected to lower operating expenses and enhance net margins over time.
  
• Strategic infrastructure projects, such as the Verde pipeline and Janus natural gas processing plant, are designed to provide access to premium markets and improve price realizations, which could directly bolster revenue.
  
• The company maintains a strong focus on shareholder returns through dividends and share buybacks, with a large authorization for future repurchases. This combination could significantly boost earnings per share (EPS) and support stock value appreciation.

EOG Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EOG Resources's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.3% today to 23.4% in 3 years time.
• Analysts expect earnings to reach $5.7 billion (and earnings per share of $10.97) by about March 2028, down from $6.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.7 billion in earnings, and the most bearish expecting $4.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 3.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

EOG Resources Future Earnings Per Share Growth

Risks

• The increased cash taxes expected in 2025 due to the expiration of alternative minimum tax credits could reduce EOG's net earnings and available free cash flow to return to shareholders.
  
• The projected increase in operating expenses, partly due to higher fuel and power costs in the field, can potentially decrease net margins and affect the company's profitability.
  
• The anticipated wider natural gas differential guidance, driven by weaker Gulf Coast basis and the timing of new strategic agreements, might lower net realizations for natural gas sales, impacting revenue.
  
• Potential risks associated with international investments in Trinidad and Bahrain, such as geopolitical instability or project delays, could impact expected returns on capital employed and future revenue generation.
  
• The strategic focus on increasing investments and activity in emerging plays like the Utica and Dorado might lead to higher initial capital expenditures, affecting short-term free cash flow and earnings until these projects are fully realized.

Valuation

• The analysts have a consensus price target of $142.969 for EOG Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.4 billion, earnings will come to $5.7 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $127.38, the analyst price target of $142.97 is 10.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.