EOG Resources (EOG 0.43%), a leading independent exploration and production company, is known for quietly building up position in areas before their potential is widely recognized. The company, which helped discover Eagle Ford formation in South Texas, has now identified the Rocky Mountains as the next great opportunity in North American oil. The company has now joined Noble Energy (NBL) and Anadarko Petroleum (APC) in recognizing the significance of Rocky Mountains as the next big thing in American oil.
EOG reported first quarter adjusted EPS of $1.40, topping Wall Street estimates of $1.20 by 17%. Stronger volumes and price realizations across the board, and unit expenses all contributed to strong results. U.S. oil, NGL, and natural gas production all came in at the high-end of the guidance. Moreover, Trinidad natural gas volumes were also better than expected. Operating expenses were below the low-end of guidance. EOG also raised its production growth target for the year from 27% to 29%.
Keeps growing inventory
EOG is one of the best positioned names in the sector. The company offers a very compelling, relatively low risk proposition for investors. EOG has the best horizontal crude oil assets in the country, and they continue to deliver.
While the naysayers would say that the company does not have the depth of inventory that some other names in the industry offer, the fact remains that 12+ years of inventory at EOG is still large, and the company keeps growing it consistently.
Last quarter the Eagle Ford added 2,000 locations and 1,000 mmboe of resources. Before that, tighter spacing and improved completions in the Bakken added 300 locations to the inventory last summer. In the most recent quarter, the company added four new oil and combo plays in the Rocky Mountains that are adding 735 net locations and 400 mmboe of recoverable resource. Most importantly these are all quality assets with 100% or better after-tax rates of return.
The Rocky Mountains
EOG revealed four new plays, two in the DJ Basin and two in the Powder River Basin, that it estimates hold net potential of 400 million barrels of oil (mmboe) from 735 net locations. While the Rocky Mountain reserve base is small compared to the Eagle Ford, the announcement of four new oily resource areas is positive nonetheless and indicative of EOG's ongoing exploration effort that can extend oil growth.
Three of the plays, Codell, Parkman and Turner, are expected to generate 100% or better after tax rate of returns (ATRORs). Niobrara returns are current pegged at just 40% but EOG expects these will improve as it continues to lower costs and optimize completions. The company has budgeted 73 net wells across these four plays for 2014. As a reminder, Eagle Ford, Bakken, and Delaware Basin Leonard plays all generated ATRORs of +100%.
EOG has been one of the most conservative in describing the potential of new developments, so its decision to recognize Rocky Mountains as the next great opportunity is significant. According to an Oppenheimer & Co. Analyst, Fadel Gheit, who covers EOG, when EOG commits to an area, others follow. "They are always, always, always leading the pack," said Gheit. "They tend to sniff things out a lot sooner than competitors."
Eagle Ford continues to lead
The prolific Eagle Ford continues to provide the company's largest growth assets with highest after tax rates of return. To remind readers of the importance of the Eagle Ford and the Bakken, it is important to add here that about half of the growth in U.S. oil production in recent years has come from just these two areas.
EOG will increase activities in three of its highest rate of return areas, the Eagle Ford, The Bakken, and the Delaware Basin in 2014. On the other hand, the company will reduce spending in the Midland Basin and Barnett combo. Eagle Ford, as expected, will take the largest share of capital, the company has budgeted 520 net wells for the year, 54 more than last year. The company is currently running 26 rigs in the Eagle Ford, and the play is the biggest contributor to first quarter and 2014 oil production growth.
Bottom line
EOG has the premier oil shale position in the U.S. The company offers investors superior growth, cash returns, and FCF profile. EOG's dominant Eagle Ford position and high-quality Bakken/Permian assets can drive superior execution, complemented by exploration/extensions driving multiple expansion. The company is projecting 29% oil growth in 2014 and offers visible double digit growth through 2017.
