Enron Oil and Gas EOG Message Board

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Gold/Mining/Energy : Enron Oil and Gas EOG

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From: Dennis Roth	10/30/2007 2:01:34 PM
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2008 guidance impressive; narrower free cash deficit targeted - Goldman Sachs - October 30, 2007 What's changed EOG reported 3Q 2007 adjusted EPS of $0.79 in-line with $0.79 consensus and our estimate of $0.78. Total production was 1,759 MMcfe/d versus our 1,781 MMcfe/d. Operating cash flow was $730 million versus our $660 million due mostly to greater deferred taxes. EOG announced 2008 production guidance of 13%-17%, with variability based on ultimate natural gas prices. Management indicated it expects to have flat net debt at yearend 2008 versus yearend 2007, taking into account the expected Appalachia asset sale proceeds, dividends and operating free cash flow. Implications EOG’s expected growth is impressive, reflecting: (a) its capacity to grow Barnett production; and (b) ample drilling opportunities outside the Barnett led increasingly by the rising Bakken Shale oil play where resource is expanding. We are updating our estimates and now assume growth of 16% versus 11% previously. We translate flat net debt expectations to mean a targeted operating free cash deficit of $300 million (versus a $720 million deficit in 2007) if Appalachia asset sale proceeds are $400 million. We are assuming $4.3 billion in 2008 spending ($3.7 billion in 2007). Valuation EOG trades at 5.3x 2008 EV/debt-adjusted cash flow versus 5.9x for peers. We see 22% upside to a $100 12-month discounted cash flow based target price versus 17% for E&Ps. Because EOG has been largely unhedged, many have used the stock as a natural gas proxy, which combined with a free cash deficit has led to multiple contraction. Our bullish gas outlook is expected to be a positive. The other key catalyst is the Street’s comfort with EOG’s free cash profile, which is aided by the new guidance. Key risks Commodity price volatility, drilling results cost pressures and government pronouncements are key risks.

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