EOG Resources Looking Strong

We continue to see EOG Resources, Inc. (EOG - Analyst Report) shares as a core holding in the large-cap exploration and production (E&P) space for the company’s demonstrated ability to achieve consistent production growth, primarily through organic means.

EOG’s strong positions in Texas Barnett Shale and North Dakota’s Bakken plays provide it with a multi-year inventory of development drilling opportunities. Production is expected to grow around 15% this year and approximately 14% over the following two years. We have raised our earnings estimates (08: $8.49 vs. $7.80; 09: $9.35 vs. $8.47) to account for the continued commodity-price strength.

Outside North America, EOG has taken modest but concrete steps toward international diversification. EOG has continually pushed field efficiencies higher, adding and refining new techniques to its drilling toolkit and anticipating cost pressures by boosting staff early and locking in materials costs. The company is in strong financial health, with current net debt-to-capitalization of approximately 12%.

EOG shares command a well-deserved valuation premium to its peer group average. It has a consistent track record of organic growth and that is by all means sustainable over the next few years. At its recent analyst meeting, the management announced four major new plays that provide for significant long-term production growth and reserve additions. Its cost and return metrics are one of the best in our coverage universe.

We continue to believe that the company’s long-term growth prospects, particularly its expanding prospects in shale gas plays, warrant a valuation at higher trading multiples. Our unchanged $145 price objective is based on 2008 P/CF and EV/EBITDA multiples of 5.5x and 5.3x.

Read the full analyst report on EOG