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EOG Resources Thoroughly Trounces Its Competition

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During the past couple of weeks, I've had the opportunity to tell Fools about the solid performances turned in by such members of the all-important energy sector as Chevron (NYSE: CVX  ) and National Oilwell Varco (NYSE: NOV  ) . At this juncture, however, it's tough to point to another company that stands head and shoulders above its peers as does Houston-based, largely liquids producer, EOG Resources (NYSE: EOG  ) .

EOG's numbers for the quarter give only a hint of its excellence. The company earned $395.8 million, or $1.47 per share, compared with $295.6 million, or $1.10 a share for the second quarter of 2011. However, excluding one-time items, EOG earned $1.16 for the most recent quarter, a significant beat versus the $0.91 per share consensus forecast from the company's analysts.

Working where it matters
With major positions in the two most prolific U.S. oil and liquids plays, the Eagle Ford of south Texas and the Bakken, principally in North Dakota, EOG's total production of crude oil and condensate jumped by 52% year-on-year in the quarter. And amazingly, even with natural gas production included in the mix, the company still boosted its total output by a hefty 49% over the second quarter of 2011.

Much of EOG's exploration and production efforts occur in the U.S. In addition to the Eagle Ford and the Bakken, the company operates in the significantly revived Permian Basin of southwest Texas and southeastern New Mexico. Its other domestic plays include Colorado's Powder River and Denver-Julesburg basins, along with such major shale plays as the Haynesville and Marcellus.

Internationally, EOG has completed its first horizontal oil well in Argentina. In the East Irish Sea, the company has a 100% working interest in a crude oil development project that is scheduled for start-up during the second half of next year. East of Trinidad and Tobago in the Columbus Basin, the company has seen its gas takes increase on the basis of higher-than-expected local demand. It's worth noting that gas price realizations there were nearly 65% higher than in the U.S. In British Columbia, Canada, EOG is a 30% participant in the Kitimat LNG export facility, which is operated by Apache (NYSE: APA  ) , with its 40% interest.

Helping the Eagle soar
To provide a better look at EOG's strengths, it's appropriate to focus on the Eagle Ford, where the company is the largest producer, at about 103,000 barrels of oil equivalent per day. As CEO Mark Papa said on the call following the company's release of earnings, "On our May earnings call, I described EOG's Eagle Ford position as our 800-pound gorilla." He then noted that, based solely on the company's results in the past 90 days, "...we still...believe our acreage is the largest domestic net oil discovery in the past 40 years and generates the highest after-tax reinvestment rate of return of any current large hydrocarbon play."

Papa then went on to describe several noteworthy aspects of the company's accomplishments in the play:

  • In the past quarter, EOG drilled 16 "monster wells" there, meaning that the the wells each showed initial production of 2,500 to 4,800 barrels per day, plus gas and natural gas liquids. As he added, "...we haven't seen any announcement by other Eagle Ford operators of even one such monster well to date."
  • "...our rate of learning on optimizing oil recovery from this asset continues to dramatically improve."
  • Management has raised its drilling target for this year in the Eagle Ford to 330 wells, from its previous 300-well expectation.
  • Following the close of the quarter, the company's marketing capabilities improved when it connected with the new Enterprise Products Partners (NYSE: EPD  ) 24-inch pipeline linking the Eagle Ford with refineries near Houston.
  • EOG is now able to save $0.05 million per well by self-sourcing its own Wisconsin frack sand. As Papa admitted, however, with the company now "pumping bigger fracks," and with escalating gel costs, the price of an average well has risen to about $6.0 million, versus its $5.5 million target.

I'm always benefited -- especially with energy companies -- when macro assessments are included in earnings releases or related calls. As Papa said looking at the big picture, "Regarding oil, we still think the global supply demand balance is tight, and we expect prices to strengthen throughout the year." And later, he noted that, "We continue to have a cautious long-term view regarding North American gas, but we do believe that 2012 marks a nadir for natural gas prices."

The Foolish bottom line
Finally, I believe that the CEO appropriately summed up the attractiveness of EOG relative to most of its fellow independent producers when he said: does an investor decide which company to own when its seems like every independent E&P is trying to become a liquids-rich company? How to decide when every company is touting new, often unproven, or marginal liquids-rich plays upon which they allege they'll drill thousands of wells. It's really simple. Go with the company that's generating results quarter after quarter, year after year. In this business there's a lot of hype. Results matter, and they're easy to measure.

So, there you have it: one unquestionably exemplary independent producer. If any company arguably belongs in your portfolio, or certainly on your watchlist, it's EOG Resources. Simply click here to add the company to the latter.

Fool contributor David Lee Smith doesn't own shares in any of the companies named in the article above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of Chevron, National Oilwell Varco, and Enterprise Products Partners. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2012, at 2:32 PM, JJButlerISA wrote:

    EOG is the best run large independent E&P and has a strong balance sheet. EOG's Eagle Ford position is every bit as good as Mark Papa says. Unfortunately, it's priced into the stock.

  • Report this Comment On August 06, 2012, at 6:50 PM, getrdone wrote:

    Yeah, all sounds just great, but perhaps Mr. Papa learned to tout EOG stock as a former executive for Enron Oil & Gas Company (Enron Corp.). The market was told daily how Enron was the "best and the brightest" with a "strong" balance sheet too!

    Might want to remember little details like these, when you hear comments such as "In this business there's a lot of hype. Results matter, and they're easy to measure" (or the lack thereof just as easy to hide). Might go easy on the "hook,line and sinker adviceh?

  • Report this Comment On August 07, 2012, at 11:37 AM, birge1 wrote:

    EOG should pay down debt .... and split its stk 4:1 now plus announce 11:10 splits for next 5 yrs. show the mrkt mgmt has confidence. all cos should.

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