EOG Resources Proves Yet Again That America’s Energy Boom Is Just Getting Started

EOG Resources adds four new horizontal oil plays to its drilling inventory.

May 14, 2014 at 1:35PM

EOG Resources (NYSE:EOG) is no stranger to being a first mover on a new oil play. The company was one of the early movers in the oil window within the Eagle Ford Shale. It began leasing acreage before anyone thought that liquids could be economically produced from that play. That history of being first is repeating itself as the company is adding four new horizontal oil plays in the Rocky Mountains to its portfolio of future drilling locations. Let's take a closer look at what EOG Resources has discovered and consider what this means to the company's future.

DJ Basin Plays: Codell and Niobrara
EOG Resources has identified two horizontal oil plays within the DJ Basin of Colorado and Wyoming. The first slide below details the company's Codell play.

Eog Resources Codell

Source: EOG Resources Investor Presentation (Link opens a PDF) 

As that slide notes the company has drilled five wells so far, each with initial production rates exceeding 1,100 barrels of oil per day. The wells, which cost about $7.3 million to drill, are very profitable as the company is seeing a 100% after tax rate of return on these wells. This play will initially add 225 future drilling locations that should eventually produce 125 million barrels of oil equivalent. That said, EOG Resources has a history of extracting more oil than initially thought.

The next play, the Niobrara, is one investors might have heard of before. Energy companies like Noble Energy (NYSE:NBL) and Anadarko Petroleum (NYSE:APC) were among the early leaders in using horizontal drilling to unlock the oil from this Colorado oil play. The big difference here is that EOG Resources focused its attention on the Wyoming portion of the play. As the following slide shows, it's seeing fairly decent results.

Eog Resources Niobrara

Source: EOG Resources Investor Presentation 

As that slides shows the wells here aren't quite as good as those in the Codell as initial production averages less than 700 barrels of oil per day. Further, at a completed well cost of $9 million, the after tax return is only about 40%. That said, it's still a pretty good play, which is why EOG Resources is adding it to its drilling inventory. Further, the oil rich rocks of the Niobrara are still in the early phases of development. Noble Energy, for example, is still working on finding the right lateral well length and spacing for optimal development. As companies improve drilling techniques it should only push the economic value of these plays higher.  

Powder River Basin Plays: Parkman and Turner
The other major new area of development for EOG Resources is the Powder River Basin in Wyoming. As the following slide notes, the Parkman play is producing strong oil results.

Eog Resources Parkman

EOG Resources Investor Presentation

As that slide noted early wells had strong initial production rates averaging more than 1,300 barrels of oil. Given the $5 million to complete each well, this area is producing after tax returns of more than 100%.

The last Wyoming oil play, Turner, is a lot less oily than the other three but still has the potential to deliver strong results as seen below.

Eog Resources Turner

EOG Resources Investor Presentation 

As that slide noted, this play is much gassier at 43% of production. But the amount of oil and gas that will ultimately be produced from each well is still expected to yield an after tax rate of return north of 100%. That's more than enough to compete for capital within the company's drilling plan.

What this means for EOG Resources' future
Combined these four plays add 10 years' worth of drilling inventory to the company's portfolio. That pushes the company's total drilling inventory to 15 years' worth at its current drilling pace. That's enough to keep the company growing for a long time.

The other thing this does is answer the question of what's next for EOG Resources. While the company has some international operations it's not as geographically diverse as a company like Anadarko Petroleum, or even Noble Energy. Because of that investors have questioned what the company will do when it runs out of high returning shale plays to drill. It has answered that question by simply finding new high-returning shale plays to drill.

Investor takeaway
Many thought EOG Resources oil tanks would eventually run dry. But the company continues to defy the skeptics and find more oil in America. That's bodes really well for the company's investors as there's still plenty of growth left in that tank. 

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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