Hydrocarbon energy specialist EOG Resources (EOG) might be in a position to benefit from the current geopolitical backdrop. As such, options traders appear to be eyeballing a potential bullish opportunity in EOG stock. In particular, the threat of supply chain disruptions could make the underlying natural gas market quite intriguing, especially for upstream entities like EOG. Therefore, I am bullish on the energy giant.
EOG Stock Should See Its Relevance Expand Amid a Geopolitical Crisis
On paper, EOG stock has long been a relevant investment. Specializing in the development, production, and marketing of crude oil, natural gas liquids, and natural gas, the company helps feed the growing global consumption of key energy resources. However, Russia’s invasion of Ukraine sent this narrative into overdrive.
Last year, S&P Global reported that natural gas had become the new oil. “The European gas market – until recently nearly isolated, with prices largely depending on pipeline flow dynamics between Russia and Norway – can now be driven by anything across the world, from an LNG cargo diversion in the US to a river drying up in China and tensions over Taiwan,” the research report noted.
Prior to Russia’s invasion, Europe had its gas transferred from Russian facilities via midstream pipelines. Following the geopolitical crisis, European nations began weaning off this dependency. Instead, Western powers began importing natural gas in the form of liquefied natural gas (LNG) from multiple sources. These include Nigeria, Qatar, and, significantly for EOG stock, the U.S.
Nevertheless, the threat of supply chain disruptions looms large. For one thing, Europe hasn’t cut off its gas supplies from Russia entirely. Therefore, as the conflict in Ukraine continues, the Russians may be able to use its gas outflows as leverage against Western nations supporting Ukraine.
Just as importantly, though, there are other geopolitical risks to consider. For example, the Middle East is hardly a bastion of stability. Conflict could erupt at any moment, especially in the presently charged arena. Moreover, China has long been flexing its geopolitical muscles, which could easily send shockwaves to energy markets.
Bottom line, the message is clear: the available inventory of critical resources like natural gas can be disrupted at a moment’s notice. Therefore, it’s imperative that the world has access to as many reliable sources of energy assets as possible. That’s where EOG stock can benefit.
Options Traders Sense Opportunity in EOG Resources
One intriguing aspect of EOG stock focuses on sentiment in the derivatives market. According to TipRanks’ unusual options activity screener for the energy giant, options traders appear to be betting on EOG. Further, many are attempting to generate income on the entity by betting that its shares won’t fall below specified strike prices.
For example, during the August 16 session, the most bullish wagers with the highest volume were sold (also known as written) put options. Natively, put options provide holders with the right (but not the obligation) to sell the underlying security at the listed strike price. By buying puts, a trader is betting against the market, profiting as the underlying security falls in value.
However, selling puts can be a neutral to bullish tactic. Basically, the seller is underwriting the risk that the underlying security will not fall in value or may even move higher. In either case, the seller pockets the total premium received for underwriting said risk.
Also, traders have taken directional wagers on EOG stock. During the August 15 session, the most bullish option of that day was 804 contracts bought of the EOG Sep 20 ’24 120.00 Call. That’s basically a bet that EOG will rise significantly higher than $120/share. Since this option was in the money at the time of acquisition, the premium for the derivative would be much higher than if it were out of the money.
Fundamentals Justify the Optimism
On the surface level, EOG stock appears almost to be overvalued. Right now, shares trade hands at 3.09x trailing-year revenue. That’s noticeably higher than the upstream oil & gas industry’s average multiple of 1.94x.
Moreover, analysts project that Fiscal 2024 sales may land at $24.07 billion. That’s down 0.5% from last year’s print of $24.19 billion. Plus, 2025’s sales may only reach $24.27 billion, which would imply less than 1% growth. Finally, the year after that may see revenue decline a hair to $24.16 billion.
While not particularly encouraging, there’s a good chance that these projections are understated. Interestingly, the high-side estimates for 2024 to 2026 call for $25.13 billion, then $27.09 billion, and finally, $29.5 billion. These estimates seem more realistic due to the aforementioned threat of geopolitical disruption.
The average projected revenue for the years 2024 through 2026 stands at $27.24 billion. Generally, the company’s share count doesn’t really fluctuate upward that much. If rounded up to 570 million shares, the projected average price-to-sales ratio – based on the current market price of $128.24 – sits at 2.7x.
To be fair, that still wouldn’t be considered objectively undervalued relative to the upstream industry. However, keep in mind that natural gas is the new oil – as mentioned earlier – in part due to rising demand. Thanks to accelerating growth in key Asian markets, upstream gas enterprises should only rise in relevance.
That’s good news for EOG stock. It also helps to explain why options traders are so bullish on the company.
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, 12 Holds, and zero Sell ratings. The average EOG stock price target is $146.33, implying 14.1% upside potential.
The Takeaway: Ugly Geopolitics Could Smile on EOG Stock
While EOG Resources has long been relevant, thanks to its core hydrocarbon upstream business, the ugly geopolitical backdrop may offer a boost to the enterprise. Essentially, the threat of global supply chain disruption is clashing head-on with rising demand. Therefore, the world needs access to not only greater resource quantity but also more reliable supply chains. This appears to be a core reason why options traders are bullish on EOG stock.
