We continue to see EOG Resources, Inc. (EOG) shares as a core holding in the large-cap exploration and production (E&P) space for the company's demonstrated ability to achieve consistent production growth, primarily through organic means.
EOG's strong positions in Texas Barnett Shale and North Dakota's Bakken plays provide it with a multi-year inventory of development drilling opportunities. EOG has a very strong organic production-growth profile, with volumes expected to increase by approximately 15% in 2008. We are keeping our recommendation, price objective and estimates unchanged at this stage.
Long-term production-growth visibility has significantly improved following recent discoveries, and the management is guiding towards annual growth of approximately 14% in the 2009-2010 period. Outside North America, EOG has taken modest but concrete steps toward international diversification, focusing on operations offshore Trinidad and in the U.K. North Sea.
The company has continually pushed field efficiencies higher, adding and refining new techniques to its drilling toolkit and anticipating cost pressures by boosting staff early and locking in materials costs. Finally, the company is in strong financial health, with current net debt-to-capitalization of approximately 12%.
EOG shares command a well deserved valuation premium to its peer group average. At its recent analyst meeting, the management announced four major new plays that provide for significant long-term production growth and reserve additions. Its cost and return metrics are one of the best in our coverage universe. Our unchanged $145 price objective is based on 2008 P/CF and EV/EBITDA multiples of 6.6x and 6.5x.
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