Roth Capital Partners downgraded EOG Resources’ stock to “neutral,” reporting the $67-billion market cap E&P’s Permian Basin and Eagle Ford Shale economics are “deteriorating.”
EOG has a shorter inventory life versus its E&P peers—ConocoPhillips, Diamondback Energy and Occidental Petroleum—Roth analyst Leo Mariani wrote to clients.
Mariani told Hart Energy, “EOG is basically out of Tier 1 Karnes [County, Texas] inventory” for oily Eagle Ford wells.
In the Permian Basin, “EOG may only have a few years left of Tier 1 Permian inventory.”
EOG did not respond to a request for comment.
In the Permian, EOG operates in the Delaware Basin, except for a relatively small position in the northern Midland Basin where it has been prospecting for Dean and Spraberry pay.
Brandon Myers, head of research at Novi Labs, agreed that EOG is nearly out of oily Tier 1 future well locations in the Eagle Ford at its current drilling pace.
“We're down to maybe between 100 and 200 locations of that with another couple hundred of Tier 2,” Myers told Hart Energy.
Formerly a securities analyst, he cited from an Eagle Ford study Novi Labs plans to release in September.
A recent EOG $275 million bolt-on acquisition from Arrow S Energy of mostly undeveloped property in the oil window gave it 110 more Tier 1 locations, but that’s about a year’s worth at EOG’s drilling and completions pace, he added.
The deal “brings them up to a little over six years of remaining inventory implied at the recent drilling cadence,” he said.
Overall, “Eagle Ford Tier 1 is definitely starting to see signs of exhaustion. You're getting into these little bolt-ons now.”
‘Had to come down’
EOG still has running room in the Delaware, though, Myers said. Data show the E&P’s remaining Tier 1 inventory there has simply become normal in comparison with other Delaware operators, he said.
On a rock-quality score, EOG started drilling in the basin in the early 2010s with some of the best.
“EOG’s starting point was ridiculous,” Myers said. “Their rock quality was so high that they were pretty much in front of everybody, maybe with the exception of Oxy.”
In time, what EOG has left puts them only in the “best in class” category.
“Yes, their rock quality in the Permian's deteriorating. Everyone's is. But EOG has deteriorated from considerably better than everyone to just best in class. And that's super important.”
“Deteriorating” could suggest “they're middle of the pack now.”
Rather, “they're still amazing.”
“They had such a head start and they were so much better than everyone at the beginning that they obviously had to come down at some point.”
Offset Delaware
Still, the overall effect on EOG’s future production from the two plays is concerning, Myers said.
The Eagle Ford has been the steady oil-producing workhorse at EOG, while production growth has come from the Delaware—from 14,000 bbl/d in 2014 to 300,000 bbl/d currently.
“CAGR was 37% year-over-year for that entire decade,” Myers said.
The impending decline in liquids output from the Eagle Ford would erode that foundation. An eventual decline in its Delaware liquids output would pile on.
Mariani reported that the near exhaustion of Eagle Ford inventory and declining Delaware inventory has pushed the E&P’s focus to other prospects.
These include the higher-cost, oily emerging Utica Shale, the Powder River Basin and deals to prospect “in unproven international plays in Australia, Bahrain and the UAE.”
Myers said, “These things aren't trying to offset Eagle Ford; they're trying to offset what will happen in the Delaware in the 2030s.”
Mariani concurred, writing, “The foundation of EOG's production and cash flow growth over the past decade-plus has been built on the back of its positions in the Eagle Ford Shale and Delaware Basin.”
This “has put it into a position where the vast majority of its Tier 1 acreage has been exhausted, forcing EOG to rely more heavily on lower-returning acreage going forward.”
Until announcing in May a $5.6-billion deal—its largest ever—to buy Utica oil producer Encino Energy, adding nearly 700,000 net acres, EOG hadn’t made deals other than bolt-ons for future well locations since the 2016 acquisition of Delaware-focused Yates Petroleum.
Mariani wrote that the Utica deal is helpful in adding inventory, “but this asset probably can't replicate the Permian and Eagle Ford.
“This acquisition turns the Utica into a foundational play for the company based on scale, but the basin is still in the early days of proving out its competitiveness relative to other premier shale plays.”
As good as it gets
Mariani pared $6 from his outlook on EOG shares to $134. The stock closed July 9 at $121.89.
Roth’s Neutral rating is based on an expectation that a stock’s total return will be plus or minus 10% in the next 12 months.
Mariani added that part of his downgrade factors in expectations that current WTI prices might be as good as it gets for a while. He sees a risk of lower prices later this half.
Lower oil prices can push Tier 1 inventory into Tier 2 or lower if they’re no longer economic, although EOG has sub-$50 break evens.
OPEC+ reaffirmed this past weekend its plan to add a cumulative 2.5 MMbbl to daily output before year-end. And ongoing U.S. tariff negotiations have made the view on coming global oil demand opaque.
Other ratings
Among other analysts, 6.5 out of 10 have also rated EOG shares as “neutral” among seven reviewed by LSEG StarMine. A Trefis analysis estimates the stock is worth $129.81 based on its assets and discounted cash flow.
Since it became public in 1989, EOG shares’ all-time high was about $142 in fourth-quarter 2022.
According to Benzinga, the average target on EOG shares is $138.86 among 24 analysts ranging from $158 and $124.
J.P. Morgan Securities analyst Arun Jayaram also has a Neutral rating on EOG shares. His target is $142, which he increased from $125 after WTI improved to the $70s last month; it has since settled into the mid-$60s.
John Freeman, E&P analyst for Raymond James, put a Strong Buy on EOG in early June with a target of $158 when WTI was about $60. The stock at the time was $108.
Freeman reported that the Encino property comes with roughly 850 future well locations based on $50 oil and $2.50 gas. Encino has brought online roughly 80 new wells each year and has a total of more than 1,000 producing, operated wells.
Piper Sandler analyst Mark Lear rated EOG as Neutral with a target of $138.
Gabriele Sorbara, analyst for Siebert Williams Shank, has a Buy on EOG with a target of $152.
Bob Brackett, analyst at Societe Generale Group’s Bernstein research unit, had a Market-Perform on EOG and a $144 target.
Brackett wrote, “It appears clear to us that, if things go as expected, the Utica could join Eagle Ford and Delaware as foundation assets within the EOG portfolio with other basins, including international basins, providing future opportunities.”