EOG Resources: Lower Costs Support Increase in Fair Value Estimate to $108

We’re raising our fair value estimate for narrow-moat EOG EOG to $108 from $97, after incorporating the firm’s first-quarter financial and operating results. The increase was primarily driven by lower-than-expected processing and transport costs, coupled with a sequential (and maintainable) decline in unit general and administrative costs. We have also factored in a small dip (5%) in well cost per foot starting 2024, given that steel prices have moderated, several upstream firms are anticipating service markets will soften in the back half, and EOG remains laser-focused on getting more value through productivity and efficiency gains. Supporting the last point, management discussed its improved completion design in the Permian, with 39 wells in the test averaging a performance upgrade of about 20%. While the new technique is only applicable in certain parts of the play, management expects to roll it out more broadly this year. The impact on production was taken into account with the firm’s volume guidance, which we think the firm can meet or exceed. But the potential for cost savings was not previously accounted for in our model.

As we noted in our first take on EOG’s results, the firm enjoyed a strong operational quarter and surpassed expectations on most metrics in the first quarter of 2023. Firmwide output was 943 thousand barrels of oil equivalent per day, exceeding the high end of guidance. While firmwide crude volumes and Trinidad natural gas volumes were both above the midpoint of guidance, the outperformance was primarily driven by higher-than-expected natural gas liquids and natural gas production in the United States. Accrued capital expenditure was within budget, and as noted above, unit operating costs were generally lower than expected. As a result, the firm’s financial results were ahead of Wall Street estimates (adjusted earnings per share was 8% higher than consensus according to FactSet).