Why Oppenheimer Downgraded EOG Resources And Marathon Oil

In separate reports published Sunday, Oppenheimer analyst Fadel Gheit downgraded shares of EOG Resources Inc (NYSE: EOG) to Perform from Outperform while removing his previous $105 price target. The analyst also downgraded shares of Marathon Oil Corporation (NYSE: MRO) to Perform from Outperform while removing his previous $32 price target.

EOG Resources: Expected Losses & Cash Flow Troubles

According to Gheit, EOG Resources is expected to see a cash flow deficit of $1.3 billion in 2015, only to recover slightly to a $0.8 billion deficit next year.

As of the end of the second quarter, the company's net debt increased $260 million sequentially to $5.0 billion for a net debt ratio of 22.4 percent.

Gheit noted that EOG Resources' management stated that its key U.S. onshore oil plays can still generate a 30 percent after-tax return at $50 oil and it will not grow production until oil prices recover. However, the analyst noted that the company held a similar view of the U.S. gas market, but its recovery "never materialized."

Gheit concluded that shares of EOG Resources historically traded at a premium given its strong oil production growth rate. Absent a strong growth rate, the analyst suggested that the premium valuation in the stock is "unjustified."

Marathon Oil: Budget Deficit In Focus

According to Gheit, Marathon Oil is expected to report a cash flow deficit of $2.2 billion this year and $1.3 billion next year should oil prices remain below $75 a barrel. The expected deficit also puts into question the company's dividend payouts.

As of the end of the second quarter, operating cash flow of $590 million partially funded $868 billion of capital expenditure and a dividend payout of $143 million. The company's total debt stood at $8.4 billion with cash on hand of $1.6 billion.

Looking forward, Gheit estimated the company will lose $1.38 per share in 2015 (unchanged from a prior estimate) and a loss of $1.24 per share in 2016 (previously estimated at $1.36).

Based on the analyst's 2016 estimates, shares are trading at a 5.0x P/CF multiple and 8.0x EV/EBITDA – bot of which are above the company's 10 year average of 4.8x P/CF and 4.0x EV/EBITDA.