Identifying the key driver
In the final part of this series, we will study EOG Resources’ (EOG) stock price movement with respect to energy prices, the dollar index, and the broader market.
As seen in the above chart, EOG’s stock price was in an uptrend from June 2012–June 2014 when NYMEX WTI crude oil prices were also in an uptrend. NYMEX WTI crude oil started its decline in June 2014, and that’s when even EOG stock topped out. Since then, both NYMEX WTI crude oil and EOG have been in a downtrend.
Clearly, crude oil is a key driver behind the movement in EOG’s stock price. Since then, both NYMEX WTI crude oil and EOG have been in a downtrend, and they have lost ~69%, and ~47%, respectively, of their values.
Effect of a stronger dollar
As seen in the above chart, there is an inverse relationship between EOG’s stock price and dollar index movements. A stronger dollar weakens energy prices, which affects EOG’s earnings.
Comparison to broader market
In 2015, EOG underperformed the S&P 500 ETF (SPY) because EOG had lost ~23%, whereas the S&P 500 was almost flat during the same period.
EOG has excellent quality oil and gas reserves with very low-cost production capacity. But EOG has a relatively more leveraged balance sheet. Another factor that is not in favor of EOG is its smaller hedge positions when compared with total production volumes.
Given all these factors and the fact that energy prices are in a downtrend, if energy prices move further down, EOG could be at further risk to reductions in its earnings.