EOG Resources Is the Second Least Volatile E&P Stock


Aug. 31 2018, Updated 5:30 p.m. ET

EOG ranks second

EOG Resources (EOG) ranks second among E&P stocks in terms of volatility. The 200-day volatility of EOG was 25.1%, which was lower than the 200-day volatility of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) at 27.6%.

EOG’s lower volatility could be attributed to the company’s improvement in margins and higher average realized sales prices compared to its peers. EOG Resources is expected to see a 28% reduction in cash operating cost during the 2014–2018 period. On the other hand, the company has an average $2.65 per barrel advantage in terms of average realized price compared to its peers. EOG’s higher volatility compared to Occidental Petroleum (OXY) could be attributed to the company’s low business diversification.

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Stable cash flow growth

EOG Resources has continued to see YoY cash flow from operation (or CFFO) growth in the past five quarters. The average YoY CFFO growth was 71.7% in the last five quarters. Analysts expect EOG to post 78.5%, 24.5%, and 17.2% YoY CFFO growth in the coming three fiscal years.

The strong cash flow growth is expected to translate into strong dividend growth and ROCE (return on capital employed). The company is expected to post 31% dividend growth in 2018. EOG has posted a 19% dividend CAGR between 1999 and 2017. The company is targeting ~10% ROCE in 2018, which is significantly higher than the -4% and 4% in 2016 and 2017, respectively. The average ROCE was 13% during 1998–2017.

Analysts’ recommendations

Barclays recently initiated coverage on EOG Resources with an “overweight” rating, which is equivalent to a “buy.” Before this, Mizuho initiated coverage on EOG with a “buy.” EOG has seen six rating updates over the past three months including four new coverage initiations, one downgrade, and one upgrade. Now 66.7% of analysts rate EOG as a “buy,” and the remaining 33.3% rate it as a “hold.” EOG is currently trading below the low range of analysts’ target price. Its average target price of $140.9 implies ~19% upside potential from the current price levels.

In the next article, we’ll look into the third least volatile E&P stock, ConocoPhillips (COP).


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