EOG’s Leadership Change Fuels Deal Talk: Real M&ATara Lachapelle and Edward Klump
EOG Resources Inc., the U.S. crude oil producer that’s rallied more than any peer in the past six months, offers the biggest energy companies the chance to expand in one of the world’s fastest-growing markets.
Even after surging 32 percent since July, EOG trades at a below-average multiple of enterprise value to both production and profit, according to data compiled by Bloomberg. With Chief Executive Officer Mark Papa retiring in June, a takeover of the $34 billion company is more possible, Royal Bank of Canada said.
EOG has exceeded analysts’ earnings projections for eight straight quarters, and in November forecast 2012 production growth of 10.6 percent, almost double the rate it estimated in February. The company has some of the best acreage in North America’s two top shale formations, the Bakken and Eagle Ford, according to Miller Tabak & Co., which said Chevron Corp. is the most likely suitor given that its cash equals 63 percent of Houston-based EOG’s market capitalization. Stewart Capital Advisors LLC said Statoil ASA also has the leeway to do a deal.
“It’s certainly an attractive target from the perspective of a super-high-quality asset base in all the right plays in the U.S.,” Leo Mariani, an Austin, Texas-based analyst at RBC, said in a telephone interview. With EOG’s CEO leaving this year, “it does increase the possibility” of a deal.
K Leonard, an EOG spokeswoman, declined to comment, citing company policy not to respond to takeover speculation. Gareth Johnstone, a spokesman for San Ramon, California-based Chevron, also declined to comment. An e-mail sent to Stavanger, Norway-based Statoil’s Jannik Lindbaek Jr. wasn’t returned.
EOG is among U.S. producers that transformed the American energy market during the past decade with hydraulic fracturing, which uses injections of water, chemicals and sand to extract oil and gas. The company shifted its focus away from gas and toward the more profitable business of onshore shale-oil production, tapping acreage in Texas’s Eagle Ford and North Dakota’s Bakken formations.
EOG has risen more in the past six months than any other in the 17-company Standard & Poor’s 500 Oil & Gas Exploration & Production Index. The shares, which closed at $126.03 today after rallying 0.5 percent, climbed to a 4 1/2-year high of $126.10 on Jan. 10.
Even following its rally, EOG’s valuation is relatively low. Its enterprise value of $39 billion, the fourth-highest in the index, is 82 times daily production, expressed in millions of barrels of oil equivalent, data compiled by Bloomberg show. That compares with the median of about 92 among energy explorers and producers worldwide trading for more than $10 billion. EOG fetches 6.7 times earnings before interest, taxes, depreciation and amortization, below the median of about 7.6.
“EOG’s not necessarily expensive at this point, even after the outperformance,” Cameron Horwitz, a Houston-based analyst for U.S. Capital Advisors LLC, said in a phone interview. “It’s hard to find another company out there that has that concentrated of a position in the core of these top-tier resource plays. From that perspective, EOG is attractive from an investment opportunity standpoint, whether that means to invest in the equity or whether that means for a potential M&A suitor.”
EOG’s focus on U.S. oil production comes as that market booms. The nation’s crude output has climbed to 7.04 million barrels a day, the highest rate since 1993, according to data compiled by the U.S. Energy Information Administration.
The company’s performance improved as 2012 progressed, with EOG boosting its forecast for annual production three times.
EOG is seeking to increase the amount of oil it recovers from its discoveries. In the Eagle Ford, EOG said its estimated potential reserves are the equivalent of 1.6 billion barrels of oil. That means the company expects to recover only an estimated 6 percent of the possible oil in place -- leaving upside as new techniques are developed to extract resources.
“There’s a lot of drilling still to be done,” Charles Meade, a New Orleans-based analyst for Johnson Rice & Co., said in a phone interview. “EOG’s proven that not only do they have good acreage, but they have institutional knowledge and execution ability. If a major really wanted to get into an oil shale play in a big way, they’d need both of those.”
EOG isn’t going to sell itself cheaply, Miller Tabak’s Adam Michael said. The Houston-based analyst projects EOG won’t turn over ownership for less than $160 a share, or 27 percent more than today’s close.
Past targets in the oil industry have been taken out for 25 percent to 40 percent premiums, said Johnson Rice’s Meade. That implies paying as much as $176 a share for EOG, which he said still leaves the buyer room for further upside if it can speed up the development of more drilling sites. That would value a deal at $53 billion, including net debt.
EOG’s size is an obstacle to a takeover, said Timothy Parker, Baltimore-based manager of T. Rowe Price Group Inc.’s $4.4 billion New Era Fund, which invests in natural-resource stocks including EOG. The “mixed success” of Exxon Mobil Corp.’s $35 billion purchase of XTO Energy Inc. three years ago may dissuade others from striking such large deals, Parker said.
“Only a few companies can afford EOG,” he said in a phone interview. “Other majors look at the XTO deal and say, ‘not in a million years. I can’t make that work.’ Plus, EOG’s not terribly cheap, so to pay a premium on top of that, it starts to get pretty fancy.”
Chevron and Statoil are two of the oil industry’s so-called supermajors that have the financial wherewithal for an EOG acquisition, according to Stewart Capital’s Helena Derr.
“You are limited to the majors,” Derr, who helps oversee $1.1 billion as a fund manager and energy analyst, said in a phone interview from Indiana, Pennsylvania. “Statoil and Chevron are probably the most likely just due to the size.”
Chevron’s $21.6 billion of cash and equivalents -- an all-time high -- is almost two-thirds of EOG’s market value, data compiled by Bloomberg show. It also exceeds the cash stockpiles at larger rivals Exxon and Royal Dutch Shell Plc.
“There aren’t a lot of companies that can swallow EOG,” said Miller Tabak’s Michael. “Chevron jumps out because their balance sheet gives them the ability to take on something as large as EOG.”
Chevron, the second-largest U.S. oil company, already produces in the Gulf of Mexico and Canada’s Athabasca oil sands. Its growth has stalled, with analysts projecting revenue rose 2.2 percent in 2012, down from the 25 percent increase in 2011, estimates compiled by Bloomberg show. Chevron hasn’t made a sizable purchase since 2011, when it bought Atlas Energy Inc. for more than $4 billion.
Statoil, Norway’s biggest energy producer, had 84.5 billion kroner ($15.2 billion) of cash and equivalents at the end of September, data compiled by Bloomberg show. The company bought Brigham Exploration Co. in 2011 for $4.5 billion, its largest purchase since 2006, to expand in unconventional U.S. assets because of declining North Sea production.
The deal gave Statoil about 375,000 net acres in the Williston Basin, where the Bakken formation is located. Despite the added production, Statoil’s sales may decline 8.6 percent this year before increasing 2.5 percent in 2014, analysts’ estimates show.
For such large companies, acquisitions can be the fastest way to recharge growth, said Johnson Rice’s Meade. While it may be “surprising,” it’s possible that one could seek as large of a target as EOG, he said.
“Majors are looking for growth, and they’ve got to be looking at companies like EOG,” Meade said. “We’re not used to looking at these large-cap E&Ps as growth companies, but that’s what they are right now.”