EOG Resources Inc. (EOG): Buy the dip due to gas price, resource momentum - Goldman Sachs - February 29, 2008
What's changed
EOG shares rose 18% following its February 28 analyst meeting. We attribute this to four factors:
(1) natural gas and oil price increases, which likely added $3/share;
(2) the British Columbia shale play, which, based on peer performance added $3/share;
(3) Barnett Shale gas and Rockies oil/gas success, which likely contributed $3/share; and
(4) Barnett Shale oil exploration success, which, if accounting for the remainder of the move, would represent about $10 per share.
Implications
We value the Barnett oil play at $8 per share, so we do not dispute that EOG shares may have temporarily overreached to the upside relative to other E&Ps, and could pull back from here. However, given our bullish view on natural gas—in which improvements in fundamentals appear to be generally matching improvements in sentiment, we continue to rate the stock a Buy, and we are adopting a buy the dip approach for now. We believe EOG’s exploratory expertise is likely going to be valued more highly going forward until there is evidence of missteps. We believe that many of management’s assumptions are conservative and that there are other exploratory plays that could turn into successes in the coming years.
Valuation
We are raising our 12-month discounted cash flow-based target price to $135 per share from $117, based on additional resource potential. An even clearer case can be made that EOG should have superior growth and returns over multiple years, potentially with free cash flow. EOG trades at 7.1X/5.4X 2008/2009 EV/DACF versus 7.8X/5.9X for XTO Energy. We see the potential for further narrowing of this gap. We are also raising our EPS estimates to reflect higher production growth in 2009-2012.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
