When assessing the optimistic case of hydrocarbon exploration specialist EOG Resource (NYSE:EOG), the narrative comes down to simple math: more people with more money consume more resources. As a result, the company could be due to deliver a strong earnings performance for its upcoming Fiscal Q4 earnings report, anticipated on February 22. I am bullish on EOG stock and will lay out some intriguing ideas.
EOG Stock Should Benefit from Core Realities
As mentioned earlier, EOG stock presents a simple but possibly effective narrative that shouldn’t be overlooked. With economic activity broadly on the rise, the dynamic should lead to increased consumption of critical resources. While the political and ideological winds may prefer renewable energy sources, the core reality is that the world continues to run on fossil fuels.
For its upcoming Q4 report, analysts project that EOG should deliver earnings per share of $3.08. That should be a realistic target to hit, considering that in Q4 of the prior year, the company posted EPS of $3.30. Of course, this tally missed the consensus view at the time of $3.37. However, more favorable economic circumstances should provide a tailwind for EOG stock.
Specifically, the latest jobs report again astounded onlookers, generating more employment positions than expected. Further, much of the concentrated job growth occurred in healthcare, education, and government. Sure, that presents a diversification issue, but here’s the thing: these occupation categories generally require workers to commute. Therefore, this underlying increased consumption should benefit EOG stock.
A Few Call Options to Consider
Looking at recent unusual options activity – essentially “smart money” transactions – for EOG stock, a few trades stand out. For starters, in the near-term expiry frame, the EOG May 17 ’24 115.00 Call presents an enticing opportunity.
First, this option pinged as unusual because volume last Friday reached 42 contracts against an open interest of 26 contracts at the time. Here, the pricing of the premium – $6.60 at last count – is moderately attractive because of the “realistic” strike price.
Sure, you can get a much cheaper option; the $150 call for the same expiration date features a premium of only 17 cents. However, it’s unlikely, based on analysts’ projections, that EOG stock will hit $150 by May 17.
Based on the consensus price target of $145.47 and assuming a perfectly linear trajectory, by May, EOG stock may reach $121.54. If so, assuming that you bought the $115 call and exercised it, you would pay a total of $12,160 ($115 strike multiplied by 100 shares added to the $6.60 premium multiplied by 100 shares). That would break just below the parity of the value of the 100 shares at the projected price ($12,154).
So, if you decide to go with this option, you would need to wager that EOG Resources delivers a very robust Q4 print. It can happen, but that’s the main risk with this transaction.
On the other hand, if you want to give yourself a wider time cushion, you could opt for the Jan 17 ’25 133.50 Call. Among the options available from the unusual options screener, this derivative may arguably be the most attractive.
Similar to the May $115 call, the January $133.50 call carried a premium of $6.50 on Friday. However, the benefit, of course, is that you have until early next year for EOG stock to make good relative to the underlying strike price.
Looking at the average price target from analysts, by January, shares should reach $142.81. Under exercise and assuming no time value remaining, the total cost of the January call comes out to $14,000. It’s steep, but the value of 100 shares of EOG stock should land at $14,281, again assuming the analyst consensus holds true.
Now, is a profit of $281 based on the expenditure of $14,000 a great deal? It’s actually not bad. Remember, the total premium for this contract is only $650 ($6.5 multiplied by 100 shares). If EOG stock does hit $142.81 by the exercise date, you will have a contract that gives you the right to buy at the $133.50 strike price.
Further, if EOG stock rises significantly before expiration, you may have time value in your favor as well. On a final note, if the highest price target materializes, your profitability will be even greater.
Risks to Understand
While the above narrative may seem simple enough, it’s important to realize that options can be incredibly volatile due to the underlying leverage. If you’re not vigilant enough, you could lose a lot of money. Worse yet, even if you are vigilant, unexpected market dynamics could easily destroy your position.
Also, any options analysis requires assumptions. In this case, I’m assuming profitability potential based on analysts’ projections. However, analysts are humans, and humans make mistakes. At the very least, investors should consider the lowest analyst price to determine what may be the implied loss if circumstances don’t pan out in a bullish way.
Is EOG Resources Stock a Buy, According to Analysts?
Turning to Wall Street, EOG stock has a Moderate Buy consensus rating based on nine Buys, seven Holds, and zero Sell ratings. The average EOG stock price target is $145.47, implying 28.1% upside potential.
The Takeaway: Accelerate Your Profit Potential with EOG Stock Call Options
With hydrocarbon specialist EOG Resources about to disclose its Q4 earnings, the backdrop for a strong beat seems favorable. Because the labor market is so robust, the dynamic implies increased resource consumption. Therefore, call options – especially the January 2025 $133.50 call – appear to be an intriguing idea.