Has EOG Resources Finally Spoiled Mr. Market?

It was a wild, somewhat inexplicable, ride for one of the bigger independent producers this week. Perhaps EOG Resources' (NYSE: EOG  ) rough ride has been the hardest to justify, with the company announcing third-quarter earnings that topped consensus expectations by nearly 13%, only to see its share price buffeted to the tune of 6.5% on the downside between Monday and Thursday (before finally bouncing Friday).

That compares with another independent, Anadarko Petroleum (NYSE: APC  ) , which earlier in the week announced per-share earnings that ballooned by 35%, but fell $.03 below expectations. That company gave up 6.2% in share price during the same four-day period. However, the biggest of the independents, ConocoPhillips (NYSE: COP  ) , which exited October by announcing a 6.1% increase in year-over-year earnings per share, was far calmer through Thursday, with a price slippage of just 1%.

It appears, then, that EOG is something of a victim of its own success. Even after their price slide, shares remain up nearly 40% year to date. So it may require a better than lights-out performance to fend off a sour response from a clearly spoiled market.

More solid metrics
For the quarter, the company's net income came in at $462.5 million, or $1.69 a share, up an impressive 30% on the earnings line from $355.5 million, or $1.31, a year earlier. Sans special items, the per-share number was $2.32, compared to the $2.06 analysts had projected. Revenue was up 20% to $3.54 billion.

You likely recall that when ExxonMobil reported its third-period results last month, its quarter was generally considered a success on the basis of a 1.5% year-over-year gain in total production. Match that against EOG's oil-equivalent average daily output, which was up 9.6% in the same period. Largely as a result, EOG's management has raised its production growth expectation for the full year to 9%, from the prior 7.5% guidance.

Scoring with the Eagle
EOG continues to be a leader in two of the hottest plays in the onshore U.S.: the Eagle Ford of South Texas and the Bakken, primarily in North Dakota. It's also active in the venerable Permian Basin, into which exciting new life has been breathed by horizontal drilling and hydraulic fracturing.

In the western Eagle Ford, the company has instituted new completion techniques that have expanded initial production rates by 20% since the first quarter of this year. In the eastern portion of the same play, EOG completed seven wells that all began with production of at least 3,200 barrels per day. EOG has 100% working interests in all seven wells.

In both the Bakken Core and its Antelope Extension, the company completed a number of wells, most with initial production near 2,000 barrels per day. As CEO William Thomas said in announcing the company's results, "Every quarter, EOG's technical understanding of the Eagle Ford and Bakken/Three Forks expands, as we further modify completion techniques that boost overall well productivity and economics."

In the Permian, the company completed a trio of wells in the Leonard play of the Delaware Basin, on the New Mexico side of the huge formation. Its intention is to increase its drilling there in 2014.

Oil and gas prices
Mark Papa, EOG's former CEO and a current board member, discussed prospect oil and gas prices during the company's post-release conference call. Relative to black gold, he said, "We continue to be pragmatically bullish regarding oil prices, partially because we don't expect any large international shale oil plays to impact global supply for at least five years." It's noteworthy that about 88% of the company's production is in oil and natural gas liquids.

As to still-moribund North American natural gas prices, Papa said: "I believe that gas prices will stay depressed until the 2018 time frame. The current Marcellus location differential is likely just a harbinger of chronic Appalachian prices dislocations that we will see over the next multiple years."

Foolish conclusion
As Thomas also said on the call:

EOG has captured the best horizontal oil acreage in North America, and our high performance operational teams continue to execute superbly. Wells are getting better, unit costs are coming down, and oil production continues to increase peer-leading growth rates. We have a very strong inventory of crude oil and liquids-rich drilling prospects with high after-tax rates of return.

Having watched EOG Resources for some time now, it's difficult for me to expand on that assessment of this stellar independent producer.

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