Shifting strategies and volatile markets cast shadows over future profitability

What are the underlying business or industry changes driving this perspective?

• EOG Resources, Inc., together with its subsidiaries, explores for, develops, produces, and markets crude oil, natural gas liquids, and natural gas primarily in producing basins in the United States, the Republic of Trinidad and Tobago and internationally.
• The shift towards gas with higher GOR in the Delaware Basin might lead to more associated gas production, potentially pressuring natural gas prices and impacting revenue from gas operations.
• Increased capital allocated to strategic infrastructure projects, like the Janus gas processing plant and Verde natural gas pipeline, might initially elevate operational costs, possibly affecting net margins in the short term.
• The moderated activity in the Dorado play reflects a cautious approach to natural gas market volatilities, potentially limiting immediate revenue growth from this asset.
• Investments in long-term strategic infrastructure, while beneficial for lowering future operational costs, may reduce free cash flow available for shareholder returns in the short to medium term.
• The focus on multi-basin organic growth and continuous improvement in operational execution, including longer lateral lengths and drilling efficiencies, suggests significant capital reinvestment that might temper short-term earnings growth as the company prioritizes long-term value creation over immediate returns.

How have these above catalysts been quantified?

• Analysts are assuming EOG Resources's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.6% today to 24.9% in 3 years time.
• Analysts expect earnings to reach $6.8 billion (and earnings per share of $12.41) by about April 2027, down from $7.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish analysts expecting $9.1 billion in earnings, and the most bearish anlaysts 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 13.3x on those 2027 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 1.78% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• EOG Resources' focus on capital discipline and a returns-focused capital allocation strategy could improve free cash flow priorities and enhance shareholder value, potentially impacting revenue and net margins positively.
• Operational execution, leveraging in-house technical expertise and proprietary technology, supports leading-edge well performance while minimizing costs, which could lead to increased earnings due to operational efficiencies.
• EOG's commitment to sustainability and achievements in environmental performance, such as achieving zero routine flaring and a wellhead gas capture rate of 99.9%, may strengthen its market position and impact revenues positively by aligning with investor and consumer preferences for environmentally responsible companies.
• The strategic investments in infrastructure, such as the Janus natural gas processing plant in the Delaware Basin and the Verde natural gas pipeline in South Texas, are poised to reduce operating costs and expand margins over the long term, potentially enhancing net margins and earnings.
• EOG's financial strategy, including a competitive dividend policy and share buyback program, supported by a strong balance sheet, may deliver significant long-term shareholder value, impacting the company's earnings positively through efficient capital return initiatives.

• The analysts have a consensus price target of $142.16 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 $169.0, and the most bearish reporting a price target of just $117.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $27.1 billion, earnings will come to $6.8 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $132.96, the analyst's price target of $142.16 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.