EOG Resources - Shale We Play?

EOG Resources, Inc. - (Reviewed 01/08/2014)
EOG Resources, Inc. GME – Sell based on a recent price of $164.02 and a fair value estimate of $70-$83.

The company is one of the largest independent (non-integrated) crude oil and natural gas companies in the United States with proved reserves in the United States, Canada, Trinidad, the United Kingdom and China.

I had an opportunity to buy shares of EOG back in 1999, just as the company was separating itself from mother Enron. But who wanted to own an oil company when we were all getting rich owning high tech?

With estimated net proved reserves of 1811 million barrels of oil equivalent, the company's admitted crap shoot is the mid $80 per barrel mark for WTI crude.

As long as the price remains at or above that level, the company has reasonable 2014 drilling plans in the Eagle Ford Shale Pay, the Bakken Shale pay, the Texas Delaware Basin and the Leonard Shale pay.

Management believes, as do many analysts, that when an oil company increases its proved reserves, as EOG did last year by roughly 35%, the company is well managed. I don't.

All that means to me is that the company has proved reserve increases that it obtained at a higher price.

As I noted, the crap shoot is that oil will stay at or above the mid WTI $80 mark, and the more holes that are poked in the ground, the easier it becomes for prices to fall below that magical number.

While the company did increase y-o-y debt by 25%, it also increased y-o-y cash on hand by 41%, and y-o-y free cash flow by 44%. With borrowing costs currently low, the company's effective interest rate last year was 3.4% compared to 4.12% the year before, I agree, borrow what you can and horde your cash.

What troubles me about this stock is simply the price, which based on the recent close is roughly 89% above the point where I would have removed all of my invested capital.

Look. I realize that I am a long-term value guy, and as such I am looking for a bargain in a stock that currently holds no bargain. I get that. But I am also about risk, and making a reasonable return on a reasonable investment, something that at current pricing levels I simply don't see happening with EOG.

But hey! What do I know? I used to own high tech.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Wax

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