Why the Street Is Wrong About EOG Resources Looking Cheap

The consensus framing on EOG draws heavily on the FY2022-FY2023 cycle, when EOG produced peak earnings of $7.8 billion (FY2022) and $7.6 billion (FY2023). Those years featured WTI averaging $94 and $77 respectively, with natural gas prices averaging $6.50 and $2.55. The combination of high oil prices and the operational discipline that EOG is genuinely best-in-class at translated to record-setting earnings power.

That earnings power has been compressing for two consecutive years. FY2024 net income came in at $6.4 billion. FY2025 net income at $5.0 billion. The trajectory is downward despite oil prices remaining in the $75-85 range across most of FY2025 and natural gas prices recovering to a $3-4 range. The compression is not driven by price; it is driven by per-barrel economics. Specifically, the cost-of-supply curve for the EOG portfolio has been inflecting upward as the highest-quality acreage has been depleted and the marginal incremental barrel is being produced from progressively less productive locations.

The Permian basin, EOG's largest production area, has seen Tier 1 inventory life reduce from approximately 12 years (industry average end of 2020) to 7 years today. EOG's specific Tier 1 inventory life is better than the average, but is still tracking down at the same rate. That structural dynamic is the most important fundamental factor in the multiple compression that has been visible across the US E&P space, and it does not reverse.

The consensus has been slow to incorporate the inventory-quality decline because the per-barrel-equivalent cost-of-supply data is reported with significant lags and is sensitive to specific completion assumptions. The Risk Desk view is that the FY2026-FY2028 cost curve will compress operating margins by 200-400 basis points relative to the FY2023 peak even if oil prices hold at today's levels.

Bull point one: EOG has the lowest F&D costs in the US E&P space. Response: this is true in absolute terms but is being eroded as the high-quality acreage depletes. F&D costs at EOG have crept upward by approximately 8% annually over the last three years, despite the operational discipline. The competitive advantage is narrowing, not widening.

Bull point two: the natural gas tailwind from data-centre power demand will lift FY2026 earnings. Response: the timing of that demand is real, but the basis differentials in the major US gas-producing basins compress the realised price relative to the headline Henry Hub level. EOG's natural gas production is concentrated in basins where the takeaway capacity already absorbs the demand growth at relatively flat differentials. The benefit to EOG specifically is more contained than the bull case suggests.

Bull point three: capital-return discipline supports the share price even at compressed earnings. Response: this is the strongest leg of the bull case, but it has limits. The base dividend at $3.84 annualised costs $2.2 billion against FY2025 FCF of $3.9 billion, leaving roughly $1.7 billion for buyback and special dividends. The variable-dividend framework that EOG has used historically has flexed lower as the FCF has compressed. The buyback runway is constrained.

Bull point four: the energy transition will be slower than the consensus expects, and oil prices will hold at $80+ for years. Response: this is plausible but is being priced into every other E&P stock. EOG specifically is not advantaged in that scenario; it is at par with peers. The relative-value case requires a price reset that is asymmetric in EOG's favour, which the operational data does not support.

The cumulative dismantling: each bull leg holds water in isolation but is weaker than the consensus narrative implies. Layered together, the cumulative case for EOG re-rating higher requires a combination of operational outperformance, commodity-price tailwinds, and capital-allocation execution that is more demanding than the multiple appears to suggest.

Operating margin has compressed from 33% in FY2022 to 16.9% in FY2025. The compression has continued for three consecutive years and the FY2026 trajectory is on track for further compression to 14-15%. Each percentage point of operating margin compression on EOG's $22 billion revenue base is roughly $220 million of operating income. The cumulative compression of 16+ percentage points over four years has cost approximately $3.5 billion of annual operating income.

Return on invested capital sat at 28% in FY2022 and has compressed to roughly 14% in FY2025. The Risk Desk uses 11-12% as the cost of capital for US E&P. EOG continues to earn above its cost of capital, but the cushion is materially narrower than the bull case narrative implies. The next leg of compression brings the franchise closer to the cost-of-capital threshold than to the historical premium it commanded.

Debt-to-EBITDA leverage sits at 0.4x, which is best-in-class for the sector. That balance-sheet strength is real and is the cleanest single argument the bulls have. The franchise is not at risk of capital-structure stress in any reasonable scenario. The argument here is about earnings power, not solvency.

The variable-dividend framework, often cited as a strength, is also a weakness in a compressing-earnings environment. Variable-dividend amounts have stepped down from $5.40 per share in FY2022 to roughly $1.50 per share in FY2025 reflecting the lower FCF base. The total cash return to shareholders has compressed by roughly 50% across the same window. That is the dynamic the consensus model has not yet fully discounted into the multiple.

Pioneer Natural Resources (acquired by ExxonMobil in 2024) demonstrated the structural endgame for the highest-quality independent E&P assets: get acquired by an integrated major at a multiple premium that the public market would not otherwise sustain. EOG's standalone profile, while best-in-class operationally, is not the kind of franchise that attracts a similar takeout premium because of the asset-base scale; it is too large to be acquired without significant antitrust and regulatory friction.

Devon Energy at 8x forward earnings, ConocoPhillips at 13x, Diamondback Energy at 9x, and Marathon Petroleum (refiner mix) at 14x make up the comparable cluster. EOG's 8.9x is not the lowest in the cluster (Devon and Diamondback are similar). The franchise quality argument supports a modest premium, but not a meaningful one given the inventory-depletion dynamic that affects the whole peer set.

The more interesting peer-set comparison is to the integrated majors. ExxonMobil and Chevron both produce integrated operating margins (refining and marketing offsets compress the upstream-only volatility) and are valued at 14-15x forward earnings. The integrated majors have re-rated higher relative to pure-play E&P names over the past three years, reflecting the market's preference for diversified energy exposure as the energy-transition narrative has intensified. Pure-play E&P names like EOG carry the full structural derating without offsetting refining or chemical exposure.

The relative-value implication is to prefer integrated majors over pure-play E&Ps in the current cycle phase. EOG's quality is real but is being neutralised by sector-level structural pressures. Within the pure-play cohort, the multiple ordering does not give EOG a meaningful relative-value edge.

We acknowledge the strongest counter-arguments. EOG's exploration program in international locations (Trinidad, Bahrain, the broader international portfolio) provides growth-vector optionality that the pure-domestic peers do not have. The international exploration acreage has been a quietly-accumulating asset base, with potential FY2027-FY2028 development upside that is not fully captured in current consensus models.

We also acknowledge that the Tier 1 inventory depletion narrative we lean on can be wrong on timing. Operational technology (refrac, longer laterals, secondary completion designs) has historically extended the productive life of Tier 1 acreage by 2-4 years beyond initial expectations. EOG specifically has been a leader in completion-design innovation, and the FY2026 productivity per well may surprise to the upside.

The response: even granting both, the multi-year structural compression in operating margin is the dominant factor. International growth optionality and completion-design innovation can dampen the trajectory but cannot reverse it. The bull case for EOG re-rating higher requires a price reset that is not in the current strip and is not in the consensus forecast.

If the Risk Desk model is wrong and oil prices break above $95 on a sustained basis, EOG works at $145 within 12 months. We assign that scenario approximately 15% probability based on the current supply-demand and geopolitical setup. The probability-weighted return at $126 remains negative even at that 15% bull-case probability.