This Company Is The Best Oil Producer in America

The surge in U.S. oil and gas production has made stars of several independent producers. In my rarely tentative opinion, the leaders of the group must include EOG Resources (NYSE: EOG  ) and Anadarko Petroleum (NYSE: APC  ) .

These two companies are really quite different. While Anadarko is busy in several U.S. on- and offshore locations, it's also working feverishly in such faraway spots as Ghana and Mozambique. EOG, on the other hand, is the figurative leader of the pack in such major onshore domestic plays as the Eagle Ford and the Bakken and one of the first U.S. operators to turn decidedly toward away from natural gas to concentrate on oil.

Conference comments
Nevertheless, it was somewhat surprising to hear EOG CEO Bill Thomas respond in the negative when he was asked last week whether the company intends to head south of the border, with Mexico now on the verge of being opened up to foreign producers. After all, Eagle Ford geology effectively extends well into Mexico, so there'd be an immediate familiarity there for the operator. But Thomas, who was speaking at the Sanford Bernstein Strategic Decisions Conference, eschewed any notion that the company would be found operating beyond its homeland in the near term.

In reality, it doesn't need to stray. As Thomas was quick to point out, EOG has "big positions in all the major plays," meaning the abovementioned Eagle Ford and Bakken, along with the Permian and DJ basins. EOG Resources can also take credit  for becoming the industry leader in developing optimal well spacing and completion techniques, both there and in North Dakota.

On the grow
A direct result has been annual oil production growth of 40% for the past three years, which is likely to continue through the conclusion of this year and beyond. As such, the company sports an unusually solid set of financials, with returns on equity nudging 16%, free cash flow of more than $5 billion, and a balance sheet that's rock solid.

Expect substantial growth to be maintained, but, as Thomas made clear, as in the past, it'll continue to be organic. "We decided to do that years ago instead of growing the company the typical way, by acquisitions and mergers. We have historically chosen to (do it) through exploration," he said. Going the other way, however, there's no certainty that EOG wouldn't constitute a tasty treat for, say, Chevron.

More big ones?
Are there likely to be more major plays that measure up to the Eagle Ford and the Bakken, which together produce 75% of all horizontal oil in the U.S.? Thomas thinks not. He notes that even Permian rocks and technical qualities don't measure up to those found in the two other areas. But just in case, "We have a very decentralized company," he says. By that he means that EOG operates through nine separate divisions. It's therefore likely to be among the first to find any currently unknown plays of consequence.

For now, he is pleased to report that his company has come upon a pair of tight sandstone plays in the Powder River Basin of southeast Montana and northeast Wyoming. (That region currently produces about 40% of total U.S. coal output. So the locals are likely ecstatic about the area's new oil prospects.) Beyond that, EOG also is working a couple of new plays in the DJ basin, which lies primarily in Colorado but also extends into parts of Wyoming and Nebraska.

More immediately, in addition to tinkering with spacing and other techniques that cut drilling times and consequently expenses while raising production, EOG is now employing enhanced recovery approaches to raise its total hydrocarbons capture. Thomas says that It currently has a water injection pilot project in the Bakken and a gas injection pilot in the Eagle Ford.

Foolish takeaway
It's clearly a good idea for energy-investing Fools to keep a close eye on EOG Resources. The company is unlikely to surrender its U.S. oil and gas leadership anytime soon.

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