No company has both led the charge or benefited more from the oil shale revolution than EOG. Spun out from Enron in 1999, the love affair with EOG through the boom years of 2006-2014 was pretty intense. And why wouldn’t it be, when you look at their history, they did pretty much everything right!

In 2007, as Aubrey McClendon was funding the Clean Sky Coalition to prevent the expansion of dirty coal plants (yes, and reduce emissions, but the primary goal was to displace coal in favor of natural gas), Mark Papa was getting EOG focused on oil revolution after drilling their first horizontal well for oil in the Bakken in the Parshall field in 2006. It was a great insight that with horizontal development, natural gas was going to pivot from scarce to abundant in the United States. So in a time when the entire industry was chasing $10/mcf gas, EOG was pivoting to oil.

On their investor day, April 7 2010, EOG came out with what I consider to be the greatest one day technical spectacle that the industry had ever seen, or will see again. EOG announced a new focus area, the Eagle Ford shale, where it had drilled 16 delineation wells over a 120 mile trend.

But it wasn’t the Eagle Ford announcement that is what made me fall in love with the brilliance of EOG. No, it was another part of the announcement they made April 7 of that year. The title in the Denver Business Journal was “EOG Resources at last acknowledges promising Colorado oil well ‘Jake'”. More on that later.

By August of 2010, EOG had sold 25% of its Marcellus acreage and when you think about that, they may have been early, but there is no doubt did really smart things when the rest of the industry was chasing. They acted quickly in 2014 to make divestments, kept the balance sheet strong and the last really key move they made was their distressed acquisition of Yates Petroleum in September 2016 to bolster their Powder River Basin and New Mexico to their portfolio.

I said we would come back to the Jake well. As I wrote this, I tried to find the 240 slide presentation from their investor day that had a big impact on my career. They had, as I recall, a lot of technical slides and one in particular that compared the pore size of shale plays to the size of human hair and were convincing the market that shale would work, and featured the Jake well. At the same time, as my recollection goes, they were quietly divesting acreage around the Jake, having driven private equity into a tizzy because everyone JUST HAD TO HAVE DJ acreage. I don’t know when they made the decision, but their execution to get out of the DJ deserves as much, if not more credit than any other thing they did.

This isn’t a history lesson but in 2020, as our industry sits at a crossroads, it’s worth taking the time to think about the EOG story. They moved to oil before anyone else did. They divested of assets that didn’t support their move to oil. They pioneered a deeper level of supply chain integration, including chemicals and sand but knew enough not to buy rigs or frac equipment. They didn’t build an office tower to honor themselves. They ran a business. If any company deserves a premium valuation, it has to be EOG.

So what is there to talk about? They are great. They are smart. They are well managed. They have a great balance sheet. So what?

Last week, they released their Q4 2019 and 2020 projections and for the first time, I think they really missed the mark.

The highlight, if you can call it that, was their call for 10-14% crude oil growth and a capital budget of $6.3-$6.7 billion next year. While I think the coronavirus is overblown, I have said for a long time that growth in oil production is not a strategy and for the first time, I think EOG has made a strategic mistake.

Strategy is everything. If the strategy is wrong, execution doesn’t matter.

The poster child of EOG’s asset is the Eagle Ford, so let’s look at their vintage well performance, normalized for lateral length.

With decline rates, it’s not too far a stretch to say that the best well performance was 2009 (not surprising, best inventory). It’s also not too far a stretch to look at the 2013 brown line and say that’s the best. But since 2016, well performance has fallen. Inventory is depleting. EOG is running out of ways to excel in execution.

Which brings me to the two most important parts of an oil and gas company. The rock and the balance sheet. If you have learned only two things in the last 16 months from the #htotd, I hope it’s that. On the balance sheet, EOG is as strong as any company- here are their contractual obligations, broken down with great clarity in their 10-K.

EOG’s net cash flow from operations in 2019 was $8.163 billion, which makes their debt to cash flow 0.64. They are positioned for a rainy day…. and it’s absolutely pouring right now.

We talked about a premium valuation, EOG has that. Look at the SMOG.

$25.114 billion PV-10 less $5.14 billion in debt, divided by 580.4 million outstanding shares is $34.41/share (which is why, to me, you shouldn’t buy back your stock).

To me, when you have a premium valuation (179% of SMOG), and when you have the best execution of a capital program in the business, you have first world problems. And to show that everything isn’t a nail (and I’m the hammer), you are the one company I advocate the “doing nothing Strategy”. I looked really hard for a way to use your equity premium to buy someone in an NAV-accretive way and consolidate G&A but no one large enough looks cheap enough (if you’d like me to post this analysis on #thirstythursday, add a comment below). But that means slowing down, too.

So instead of depleting your inventory to grow production, do what Warren does and stockpile the cash on the balance sheet. Why do you feel you need to grow in this environment (gas isn’t $2.50 FYI)? I don’t get it. Berkshire doesn’t pay a dividend because they can do better things with the cash. So can you.

The great equity valuation day of reckoning is coming, and natural gas is the way of the future. So stop growing, hoard cash, and wait until you can pull the trigger on a juicy Appalachia player that just came through Chapter 11.