Business

OPEC Has Venezuela, Shale Has EOG *and* Venezuela

The cartel's supply squeeze is boosting its U.S. rivals, including a Texas unicorn.

A "Christmas tree" well stands near Mentone, Texas

Photographer: Bloomberg/Bloomberg

It is perhaps fortunate for OPEC that not every U.S. exploration and production company is like EOG Resources Inc.

EOG’s results and guidance, released Thursday evening, read like a wish list for today’s E&P investor. Cash flow and earnings per share beat consensus forecasts easily. Production increased by 17.5 percent versus the prior year, with liquids accounting for almost four-fifths of that growth. It stuck to full-year guidance on production and capital spending.

And returns? EOG targets dividend growth above its historical compound annual rate of 19 percent, while also reducing debt by $3 billion. On Friday’s call, it took the time to rule out “expensive corporate M&A.”

In this sector, production growth combined with rising dividends, falling debt and resistance to the M&A bug is about as close to a unicorn as it gets.

One of the things feeding that unicorn, though, is OPEC.

While EOG’s production rose by almost a fifth, its implied revenue — multiplying its barrels by the realized price — jumped by nearly half, from $1.72 billion to $2.51 billion. Backing out the change in production, 49 percent of those extra dollars resulted purely from higher realized oil prices. For that, EOG can largely thank OPEC, whose supply cuts in partnership with Russia and some other countries helped push the quarter’s average Brent crude-oil price up nearly $13 per barrel, or 23 percent, from a year earlier.

And it isn’t just EOG enjoying the boost. Here are growth in U.S. output and implied revenue for the company and several of its peers:

EOG’s scale puts its percentage gains at the bottom of that chart; in absolute dollar terms, it actually accounted for 28 percent of the entire group’s increase in implied revenue.

Macro Effects

The effect of higher prices on EOG's implied U.S. upstream revenue was almost as big or bigger as the entire gain in implied revenue for its peers

Source: The companies, Bloomberg Opinion analysis

Note: Change in implied 1Q2018 U.S. upstream revenue, year over year. "Other" includes production and pricing effects for natural gas and natural gas liquids. Excludes hedging impacts.

Part of its edge is that, while oil prices are up everywhere, they’re up in some places more than others. Logistical constraints in the Permian basin are inflicting discounts on local producers lacking access to sufficient pipeline capacity to get their oil and gas out:

Location, Location, ... Logistics

Regional U.S. oil benchmarks trade at discounts to Brent, with Bakken and, especially, Permian spreads having blown out this year

Source: Bloomberg

EOG’s position in several basins, especially the Eagle Ford in southern Texas, and investment in takeaway capacity mean less than 15 percent of its output are exposed to depressed pricing in west Texas. This, plus a relatively low share of cheaper natural gas in its mix, gave it a real edge on realized prices versus peers in the first quarter. And as the worst of the blowout in spreads occurred after the end of March, that advantage should be even more pronounced in the current quarter:

Better Barrels

EOG's better access to international pricing and high proportion of crude oil give it an important competitive edge -- that gets multiplied by the bigger scale of its output

Source: The companies, Bloomberg Opinion analysis

Note: Realized prices for U.S. production in 1Q2018, excluding hedging impacts.

The result is that EOG’s cash from operations covered both investment and dividends in the quarter, despite a 52 percent increase in the capex budget, year over year. Yet as earnings season has shown — along with steady increases in U.S. oil and gas production data overall — it isn’t the only American E&P firm getting a helping hand from OPEC.

Don’t forget, also, that OPEC’s apparent success owes a great deal to the collapse of one of its founder members, Venezuela. As competitive advantages go, that one’s unlikely to make its way into a business school case study. Its effects on the market, however, provide more room for the likes of EOG to perfect theirs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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