EOG Bucks the Trend for Maintenance-Level Investing

EOG EOG posted somewhat disappointing operating results, with oil volumes coming in slightly above the midpoint of guidance at 465.6 thousand barrels per day, while both NGLs and natural gas were in the lower half of the respective ranges. Total volumes were also below the midpoint as a result. Likewise, operating costs were within the guidance range but above the midpoint, with higher well maintenance and water-handling costs offsetting the benefit of decreased fuel prices.

For 2023, management anticipates a 30% increase in capital spending ($6 billion vs 4.6 billion). Some of that is catch-up inflation. Peers have been projecting 10%-30% increases in service costs, as legacy contracts roll off and new agreements are entered into at market rates. EOG’s scale and vertical insulation have historically insulated it to a degree from cost increases but it isn’t immune. However, the uptick in spending also incorporates increases in activity across several assets. The new Utica play will go to the back burner now that U.S. natural gas prices have collapsed, but oil-weighted activity increases, especially in the Eagle Ford play. Management is aiming for 155 completions in 2023, compared with 103 wells in 2022, and is adding two additional rigs. The Delaware, Powder River Basin, and Dorado plays will also see moderate increases driven by expanded rig counts. Firmwide, year-on-year production growth is expected to be 8.5% at the midpoint of new guidance.

We intend to incorporate these results shortly but after this first look our fair value remains unchanged.