Enron Oil & Gas Company
Overview:
EOG Resources is generally regarded as one of the most technically innovative and efficient oil producers in the United States while also producing one of the highest amounts of oil per day compared to other competitors. What sets them apart is the fact they were created just 24 years ago and have been able to dominate their other competitors who have been in this business for over a hundred years. They also have one of the most diverse areas of operation as shown in the picture below. The company also places a strong emphasis on culture, as they believe that a positive and supportive culture is essential for driving success. Overall, EOG is dedicated to creating sustainable value for their shareholders and stakeholders through all stages of the industry cycle.
Understanding the company (same as Marathon):
Petroleum is a dark-colored, thick crude oil found deep below the ground in certain areas. The name petroleum means rock oil. It’s called petroleum because it is found under the crust of the earth trapped in rocks. Petroleum is a complex mixture of compounds that is made up of only two elements, carbon, and hydrogen.
Formation of petroleum: It is formed by the decomposition of the remains of tiny plants and animals buried under the sea millions of years ago. Their dead bodies sank to the bottom of the sea and were soon covered with mud and sand. Due to high pressure, heat, bacteria, and the absence of air, these dead remains are slowly converted into petroleum. The petroleum formed then gets trapped between two layers of rocks, forming oil deposits.
Extraction of petroleum: It is extracted by drilling holes in the earth’s crust, where the presence of oil has been predicted by special machines. The oil wells are drilled by using drilling rigs. When an oil well is drilled through the rocks, natural gas comes out first with great pressure for a time and the crude petroleum oil comes out by itself due to the gas pressure. After the gas pressure goes away, petroleum is pumped out of the oil well.
Natural gas: It is found deep under the crust of the Earth either alone or along with oil above the petroleum deposit. Some wells produce only natural gas whereas others produce natural gas as well as petroleum oil. It is formed under the earth by the decomposition of the vegetable matter lying underwater. This decomposition is carried out by anaerobic bacteria in the absence of air.
Advantages:
It is a good fuel because it burns easily and produces a lot of heat.
It burns with a smokeless flame and causes no air pollution.
It does not produce any poisonous gases on burning.
It does not leave any residue on burning.
It can be used directly for heating purposes in homes and industry.
It can be supplied to homes and factories through a network of underground pipes and this eliminates the need for additional storage and transport.
Uses:
It is used as domestic fuel and industrial fuel.
It is used as a fuel in thermal power stations.
It is used as a fuel in transport vehicles. It’s a good alternative to petrol and diesel in vehicles because it is a cleaner fuel and does not cause much air pollution.
It’s a source of hydrogen gas needed to manufacture fertilizers. When natural gas is heated strongly, the methane present in it decomposes to form carbon and hydrogen. This hydrogen is then used to manufacture fertilizers.
Thoughts:
This will be my third report on an oil company within the last two weeks. When I first started, I was clueless as to what I was typing about however, at the time of typing this, I have an accurate understanding of this industry through my two weeks of research. I have done analysis on both the small and the giant companies in this business and can fully reflect on their state.
Looking at present, the main problem that most petroleum companies were facing this quarter was severe weather conditions. As a result of this, they weren’t able to produce as many barrels of oil as they normally would have and therefore had a decreased revenue. Many of the equipment was also damaged which further set them back on track considering the amount of time and money that is needed to fix them.
The next big problem oil businesses are facing is a very weak outlook. Usually, if a complete sector, in general, faces a bad forecast, investors tend to not mind as much since every stock is facing it and it’s something that can’t be avoided however, I believe this to be the opposite for oil stocks.
Petroleum recently reached an all-time high and is now in a sharp downfall. What this huge price increase caused was a big amount of cash flow that companies weren’t ready for. Usually, companies that are used to these types of cash flows such as Google, invest it back into themselves by strengthening their services or decreasing operational costs by buying up-to-date equipment. However, I haven’t been seeing many oil companies invest the money back into themselves other than doing buybacks, which I believe still wouldn’t be considered as spending since you are just turning your money from cash to stocks. This as a result has resulted in a large number of cash equivalents that aren’t being spent. Now that their revenue is beginning to fall, so is their cash flow which isn’t a good look for them. So now not only are they losing cash, but also potential investments that could have greatly improved their operating margins.
Another reason why I believe this sector is going to have a much harder time than other sectors due to weak forecasts also relates back to the sudden jump in oil prices. This as a result made some petroleum stocks go up as much as 150% within just one year. Comparing them to other sectors that had a slow steady growth over the years, they will also be crashing much harder and faster than other stocks due to their quick price increase.
The second reason why this sets them apart from other sectors is that oil is never going to be as high as its peak again. Once a recession or a bad outlook is over, most companies will be able to get back on their feet and even make more revenue than before. However, this won’t be the case for oil companies as oil prices aren’t expected to reach a new high again so this also causes the stocks to lose value. Knowing that these companies have reached their peak, most investors are selling their shares and taking the huge profits they made instead of risking losing their money which is bound to happen.
The third reason why this quarter has been horrible is the quick rise of operational costs. Currently speaking, the cost of producing each barrel of oil is the highest it has been while the company’s revenues are also rapidly decreasing. This in return is causing a huge dent in their profit margins which is never a good sign, especially in a recession. As oil companies begin to lose value, most investors are selling their shares and putting them into much safer stocks that aren’t going to be affected by a recession.
All of these problems combined have caused both professional and average traders to sell their shares in the oil industry. Although some people might believe that these companies will reach a new peak again, I believe it’s too soon to say that as their downfall is just beginning and hasn’t reached a bottom yet. What I see investors who still want to invest in oil do would be to sell their shares and take the profit they already made, then wait for the market to hit its bottom and buy back the shares at a much lower price.
Research and disadvantages:
EOG confirmed their earnings date much earlier than usual.
After looking into it, there's evidence that shows when firms confirm an earnings date earlier than they usually would have, it usually means that they have a great report along with an expected positive movement. Although this is not true 100% of the time, it is still important to take into consideration as we were planning to short it.
EOG is in a great position to reward shareholders with excellent dividend income because at the end of Q3 it had net-debt of a positive $188 million and unlike their biggest competitor ConocoPhillips, which has decided to greatly over-emphasize share buybacks over the dividend, EOG has been richly rewarding shareholders with excellent dividends
I find this to be important as not only do they not have any debt, but they have also a great dividend which to many investors would be enough for them to keep their positions open. What’s even a bigger positive factor is their debt. This is suggesting that this stock hasn’t reached its full potential yet and still has room for growth over the upcoming quarters.
As shown in the picture above, most investors get $3 per share of the stock that they buy which is much higher than their competitors. After the dividends are paid out, they are still left with 33% of their high cash flow which could be used to invest in other areas of the company.
The stock has a low 1% short interest. Key for EOG is growth in the Permian region, and the CEO recently said supply pressures are easing which should allow for more production in that shale spot.
This again points to the fact that this company could still have many successful quarters coming up unlike their competitors and that it is too soon for investors to sell their shares. It is also a great stock for people who want to invest in oil stocks but are late to the party as there is still potential for growth.
Analysts at BofA see earnings having risen by 56% last year. That followed a major EPS jump in 2021. Per-share profits are seen as climbing another 20% in 2023 before they finally moderate to the $12 to $13 range next year. Dividends are also expected to continue to rise big nearing $12 this year with an 8% increase but then dropping back in 2024.
This further backs up the fact that EOG is still raising its revenue and EPS for at least another year, unlike other petroleum companies. This in return will also cause many shareholders of other oil stocks to sell their positions and open a new one in EOG instead.
EOG's success is due to their focus on being a low-cost and high-return producer in the industry, as well as their commitment to sustainability through minimizing their emissions. This focus on sustainability and financial performance allows EOG to create value for their shareholders over the long term. In order to achieve their goals, EOG has a consistent strategy that is designed to maximize shareholder value. This includes a focus on disciplined growth and the generation of significant free cash flow.
During their 3Q22 earnings call, the company provided guidance for low double-digit year-over-year volume growth in 2023, including low single-digit oil growth. This growth is expected to be driven by higher activity at Dorado and the Powder River Basin, as well as a higher mix of deeper targets in the Delaware Basin Wolfcamp play, which has a higher percentage of natural gas. This increase in natural gas volumes is expected to have a positive impact on EOG's per-unit cost structure. Despite the significant increase in gas volumes in 2023, EOG has noted that they have the adequate takeaway capacity to flow their volumes at attractive margins. I also assume that this in return will cause them to raise their forecast for the next quarter which almost always results in a positive stock movement. I’m expecting EOG to move even higher than usual considering the fact that all of their other competitors are struggling.
EOG has expanded its operations to include seven significant resource basins with the addition of the Utica Combo in Ohio. This diverse portfolio of high-return plays positions the company for long-term, sustainable value creation. Operating in multiple basins provides EOG with a number of competitive advantages.
Taxes on what is referred to as windfall profits could hurt the positive outlook. Lowering the outlook on a report results in a drop most of the time.
At a share price of $140, many people consider this stock to be over valued. This can create a sell-off as investors begin to think that it has reached its peak and will only go down from here.
EOG highlighted in its Q2 earnings release that it would be hedging less than it normally would. Therefore, it appears that management is confident of oil prices dropping as CEO Ezra Yacob said: "Going forward, we expect to hedge significantly less than the 20% to 30% of volumes we typically hedge in prior years."
Crude prices have fallen well below the benchmark price that EOG registered in Q1'22 and Q2'22. Therefore, investors believe that EOG would be unable to sustain the growth momentum for its average price, and its growth could start to trend down from Q3. As a result, investors expect the headwinds in the market to pressure further buying stock in EOG.
Even the consensus estimates are not confident that EOG could sustain its revenue and adjusted EPS growth rates through FY23, seeing further moderation ahead.
EOG has failed to sustain its buying upside above its June highs, as its upward momentum stalled in August. Therefore, it formed a lower-high price structure, which could be an early warning signal that EOG might have significant trouble breaking into a higher high than June's levels.
Why it won’t drop like Pioneer:
Through our investment in Pioneer, I realized that investors in the oil sector are no longer waiting for a company to release their report to see if there is going to be a bad forecast or not so they have already sold their shares. This in return also creates a smaller movement even if they do report bad results since there aren’t any investors left to sell their positions. I find this as an advantage since we are longing this company. At the same time, due to a strong forecast and a high dividend, there could still be new short-term investors who might want to invest after seeing the results. However, I will now be decreasing my estimate from +7% to +4% as the trading volume will be lower which would cause a smaller movement.
Final thoughts:
I had originally wanted to short this company however, after further research, I believe longing it would be a better option. As Nassim Taleb says, no single observation can impact your total. I find it to be the case here as my research on other companies proved to be wrong for Enron and ended up being the opposite. As I explained earlier, most oil companies who were suddenly receiving large amounts of cash flow didn’t know what to do with it however it seems to be the opposite for EOG. After all, they were able to make their way up to one of the top oil companies within just 25 years so their business strategy is unparalleled. Additionally, this company seems to be focusing on long-term growth instead of short-term, so I feel confident that the upcoming quarters are going to be equally as great which also gives investors the peace of mind they need in order to keep investing.
Something else they are focusing on is lowering production costs by as much as possible. I had also explained earlier how many oil companies were facing this problem which again seems to not be the case for EOG. This in return causes higher profit margins which will compensate for the price drop in oil and also explains how they are still able to increase the revenue and EPS while other competitors aren’t.
SWOT Analysis:
Strengths:
Very minimal debt
Focus on long term returns
Strong management team
High dividends
Only 1% of their stock is shorted
Expected to have a good future forecast
Weaknesses:
Most of their operation is only in America
Don’t have a good reputation due to previous scandals
The main reason investors invest into this stock is due to their dividends so a decrease in it could cause the stock to fall
Their good forecast is only expected to be until the end of this year
Opportunities:
Spend more money on advertising and marketing
Other than high dividends, come up with a new strategy that would attract investors
Buy basins in other countries like their competitors
Spend their large cash flow on investing back into themselves
Threats:
A bad forecast for oil prices
Lower demand
Quick price increases in oil production
China’s economy opening up
Harder to keep a high dividend due to less cash flow
Estimate:
I’m estimating a 7% increase after the report. The reason behind this is that EOG shares have always had at least a 5% movement after each report so this type of jump is normal. At the same time, considering that they are one of the few companies in this sector doing well, I’m expecting a little higher movement than usual. As they have also lost around 5% of their stock price over the last week due to their competitors coming out with bad reports, this 7% jump makes sense.
Estimate: +4%
Time: Friday before the market opens
P/E Ratio: $69.315B
Market Cap: $9.26