Thirsty Thursday: EOG, the conclusion
When we left our hero on Tuesday, I made the case that EOG’s best strategy was to hoard cash and do nothing because as I saw it, none of their peer companies made attractive acquisition candidates FOR EOG. Today, we revisit that with the help of the RBCRichardsonBarr website of power.
Premise 1. If EOG is going to do a transaction, it needs to be meaningful (So not a small cap, though I know at least one… CDEV) and enhance their footprint with a bolt on in the U.S. I’m specifically excluding international and deep water projects as EOG’s excellence in execution has been onshore in the lower 48. That drops off Encana (I still refuse to say the same, and it has Canadian assets), Murphy (GOM), Noble (Israel), Apache (Egypt), Hess (Guyana), Occidental (GOM and too big), COP (too big). I’m also excluding Continental because their majority shareholder is Harold Hamm so it’s more like a private company. I’m also excluding Cabot because it’s not oily, although I’ll come back to this example at the end.
Premise 2. Cash is king, and EOG should use it’s premium equity rather than cash to acquire a competitor. Therefore relative valuation is all that matters. Below is the table of the remaining companies.
Due to the “relative valuation”, I exclude Pioneer, Concho, Diamondback, Devon as targets. They trade at a premium to even EOG. That leaves Marathon, Parsley, WPX and Cimarex. With thanks to ShaleProfile Analytics, let’s start with the basin that matters the most (Permian, sorry other basins, I mean no disrepect).
Parsley is out as most of their acreage is in the Midland basin or Southern Delaware. Cimarex is out because of the Culberson acreage and Oklahoma position (not that they are doing anything there). WPX is out because they haven’t closed Felix yet (eastern edge of Delware and south of existing EOG position) and the Delaware footprint isn’t a great overlap. That leaves only Marathon.
G&A saving potential is $356 million per year.
Well, that was a surprise. EOG, if you would like to take over Marathon, I think that would be a good idea. But I would still hoard your cash.
Great post – thanks for the data! And now, lurking in the corner – it’s borrowing base time! As if coronavirus and Q4 earnings weren’t enough, looks like we’re in for another round of fun. Guesstimates are a 10-20% cut in borrowing bases after factoring in the lower price situation.
“I’m also excluding Cabot because it’s not oily, although I’ll come back to this example at the end.” –> Did I miss your come back on this?
I was so surprised at finding Marathon – I forgot to come back to Cabot! Short answer, it’s gassy and right now, I can’t see a reason to be bullish gas and therefore the producers have to declare Chapter 11, renegotiate their contracts and then emerge before it probably makes sense to look at them. Good catch
Ken Boetticher is likely way ahead of you.
Here is an update as of a few minutes ago on your evaluations:
Company Share Price Outstanding shares Debt SMOG NAV/Share Premium
EOG $38.70 581.8 $5,140 $25,114 $34.33 113%
Pioneer $71.65 165.6 $4,452 $9,734 $31.90 225%
Concho $45.88 197.7 $3,955 $9,583 $28.47 161%
FANG $25.16 158.3 $5,371 $10,184 $30.40 83%
Marathon $4.17 796.2 $5,501 $10,755 $6.60 63%
Devon $8.36 382 $4,294 $5,398 $2.89 289%
Parsely $6.48 280.1 $2,182 $4,963 $9.93 65%
WPX $3.75 417 $2,202 $4,131 $4.63 81%
Cimarex $16.33 102.1 $1,985 $3,629 $16.10 101%
The major corrections are getting evals much closer to SMOG
Totally agree…. but the key assumption is “in a 55 and 2.50 world”! The market is in free fall and broken until we fix it. We can fix it. There is only one way. We must shut in 4 mmbo/d of production.