2008 capital efficiency, Bakken Shale are key differentiating factors - Goldman Sachs - August 03, 2007
What's changed
EOG reported adjusted EPS of $1.17 versus our $1.03 and consensus $1.04, due mainly to higher realized prices. Operating cash flow was $740 million versus our $657 million estimate. Production was 285 MBOE/d, in line with our 285 MBOE/d estimate. Management effectively raised its growth guidance for 2008 by 150-200 basis points adjusted for planned asset sales. We have slightly adjusted our 2007-2010 EPS estimates.
Implications
The most important drivers of relative performance going forward are the extent and perception of capital efficiency in 2008 and developments in the emerging Bakken Shale, where the company announced exploration success that is likely not being fully priced in. Like other large cap peers EOG has an attractive resource base with above-average organic growth potential. However, greater free cash deficits have helped to push EOG's multiple down towards that of Chesapeake Energy, which also has a large free cash deficit. An improvement in the growth/free cash dynamic can lead to multiple expansion, as EOG already has above-average returns and growth.
Valuation
EOG (Neutral rated) has underperformed year to date, a function of the company's greater exposure to front month natural gas prices as well as a perceived lack of free cash catalysts from the company's producing base. EOG trades at 5.1x 2008 EV/debt-adjusted cash flow versus Chesapeake at 5.0x, Devon Energy at 4.9x, Anadarko Petroleum at 5.5x, XTO Energy at 6.2x and EnCana adjusted for oil sands at 6.7x. We see 3% downside to our $71 12-month discounted cash flow based target price. We believe EOG deserves a higher relative valuation versus Anadarko and EnCana.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements. |
