Why Did Shares of EOG Resources Drop 10% in August?

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What happened

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Shares of EOG Resources (NYSE: EOG), extending their 8% decline through the first seven months of the year, fell 10% in August, according to S&P Market Intelligence. Although there were several highlights from the company's second-quarter earnings report, the company, overall, disappointed investors. 

So what

Booking revenue of $2.6 billion in the second quarter -- a 47% increase year over year -- EOG Resources beat analysts' expectations of $2.4 billion. Unimpressed with the top-line improvement, investors emphasized the company's inability to meet analysts' earnings estimate of $0.10 per share for Q2. EOG Resources reported earnings, adjusted for non-recurring costs, of $0.08.

Besides missing analysts' estimates, investors were disheartened by the company's rising costs. EOG Resources reported operating expenses of $2.49 billion in Q2, which, compared with the $2.06 billion it reported in Q2 2016, represented a 20% increase year over year. According to the company's 10-Q, the increase was driven by a $37 million year-over-year-increase in lease and well expenses related to increased operating and maintenance costs in both the United States and United Kingdom.

But the blemishes in the company's earnings report weren't the only reason the stock fell in August.

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The price of West Texas Intermediate crude reversed course from its 11% rise throughout July, falling nearly 4% in August.

Now what

The dog days of summer may have taken a bite out of EOG's stock, but investors should recognize this as an overreaction -- not as a red flag. They should focus, instead, on the causes for celebration in the company's earnings report. EOG, for example, reported total crude oil volumes of 334,700 barrels of oil per day. In addition to a company oil production record, this also represented a 25% increase year over year. According to the company's press release, the future looks bright as well. Because of strong well productivity improvements, management increased its full-year 2017 U.S. crude oil growth target from 18% to 20%. Further contributing to an auspicious outlook, management expects the depreciation, depletion, and amortization rate will drop 9% in 2017 from where it was in 2016.

There are other signs that suggest an auspicious future. The company, for example, reported that it signed a new multi-year contract to supply future natural gas volumes to the National Gas Company of Trinidad and Tobago Limited beginning in 2019. In the press release, management noted, "The new contract opens opportunities for additional investments that can deliver rates of return competitive with EOG's premier on-shore oil plays." And looking further into the future, management, on the conference call, noted, "In addition to strong growth this year, we continue to execute our robust exploration program to capture low-cost acreage in plays that we believe could contain premium quality rock that would add to our growing 10-year inventory of premium drilling locations."

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Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.