EOG Resources Doubling Down on the Eagle Ford

For an E&P company with a market cap north of $50 billion, EOG Resources Inc (NYSE: EOG  ) has been posting quite rapid growth rates. Maybe now is the time for investors to take a closer look at this potentially great long-term investment, as EOG Resources' plan to continue focusing on its core shale plays while seeking incremental output growth from offshore oil and gas fields will yield market-beating returns for investors.

Since 2009, EOG Resources Inc has been able to grow its oil output by an average of 39% (compounded annually) each year, from 55,000 bpd to an estimated 284,000 bpd in 2014. To get there, EOG Resources has built up a premium portfolio of assets targeting the best oil shale plays in the United States.  

Its favorite bird
EOG Resources has a diverse asset base, but its one true love remains the Eagle Ford, which is where 70% of its wells are going to be completed in 2014. With 520 of its 743 well completions planned in the Eagle Ford this year, EOG Resources is making good use of its 12 years of drilling inventory in the area. A larger drilling inventory can give investors piece of mind, knowing that even if EOG Resources ramps up its drilling program there still will be plenty of untapped locations to keep growing for years.

In its last quarter, EOG Resources' production from its Eagle Ford assets grew by 62% year-over-year to 207,000 boe/d. Aided by its 564,000 net acres in the oil window, EOG Resources Inc is pumping out a very oily production mix, which has been instrumental in its stellar oil output growth. The average Eagle Ford well produces 78% crude oil, 10% NGLs, and 12% dry gas. Through its extensive drilling program in the South Texas region, EOG Resources Inc was able to grow its U.S. crude output by 45% year over year and raised its full year guidance for U.S. crude output growth to 29% from 27%.

Plenty of places left
With 7,200 potential drilling locations left on its Eagle Ford acreage, there are still plenty of opportunities for EOG Resources. EOG Resources doesn't even include all the possible drilling locations with an ATROR (after-tax rate of return) of less than 60%. As EOG Resources Inc continues to lower well completion costs through self-sourced sand while increasing well productivity through improvements in completion techniques, some of those locations could move past the 60% ATROR threshold. A larger drilling inventory would enhance EOG Resources' overall valuation and be a bullish catalyst for the stock.  

Part of this will be aided by EOG Resources holding all of its Eagle Ford acreage by production sometime around the middle of 2014. In order to get to this point, EOG Resources Inc had to build out infrastructure in the area while also drilling retention wells, giving it an idea of the potential of each unit. Now that all the pieces are in place, EOG Resources can go back and further develop each unit through pad drilling. By having most of the necessary infrastructure in place and soon gaining greater flexibility in its development plan, EOG Resources Inc sees 5% to 10% in future cost savings. 

Cost reductions and the quicker drilling times that pad drilling provides, combined with lower costs by self-sourcing sand used in the fracking process will boost the ATROR from its future wells. This will open up more high return drilling locations for EOG Resources Inc to utilize, boosting its drilling inventory which will in turn boost its 3.2 billion BOE of potential reserves in the Eagle Ford.

Needs something new
Most of EOG Resources' operations are in shale plays, but management is also seeking incremental production growth from international offshore plays as well. In the Republic of Trinidad and Tobago, EOG Resources has a three-well development program planned for this year to expand its current operations in the area, which produced 22 million BOE last year.

At the end of 2013, EOG Resources had just 89 million BOE of reserves in the area, or just enough to support four more years of production. Unless EOG Resources can uncover additional reserves, which is predominately weighted toward natural gas with oil-linked prices, it will have to close up shop. Luckily, geography and history are in EOG Resources' favor. 

Follow the leader
Trinidad and Tobago are two islands that lay just north of Venezuela, which according to OPEC's website houses more hydrocarbons than Saudi Arabia. 

BP plc  (NYSE: BP  ) is by far the largest operator in the Republic of Trinidad and Tobago through its subsidiary BP Trinidad and Tobago, which is 70% owned by BP plc and 30% owned by Repsol. After the 2010 disaster, BP plc had to curtail production as it underwent massive upgrades in Trinidad and Tobago. Now that the improvements have been completed, BP plc can focus on growth once more. 

The Savonette field, which BP plc discovered and subsequently developed, is estimated to hold 2.4 tcf of natural gas. In 2012, BP plc's Savonette-4 appraisal well uncovered 1 trillion tcf of natural gas, substantially bolstering its reserve base. 

BP plc recently completed drilling its Savonette-6 well and began drilling the Savonette-7 well. Petrochemical producers in the region are now able to breathe a sigh of relief, as BP plc is responsible for 60% of Trinidad and Tobago's hydrocarbon production. 40% of BP plc's natural gas is used in petrochemical production, while the rest is exported as LNG. 

Due to BP plc's tremendous success in uncovering new fields over the past 50 years in Trinidad and Tobago, there is little reason to believe EOG Resources won't be able to uncover additional resources to capitalize on. Over the past four years, EOG Resources has been able to slowly grow its Trinidad and Tobago output from 61,500 boe/d in 2010 to 65,600 boe/d in its latest quarter. Another major find in the region would keep the lights on and keep growth alive. 

Across the world in the United Kingdom, EOG Resources expects production from the Conway prospect in the East Irish Sea to start up by the end of the year, with an estimated peak production rate of 20,000 bpd of crude. An extra 20,000 bpd of output would grow EOG Resources' total output by 3.5% (versus Q1 2014), but crude/condensate production would increase by a much higher 7.5%. 

Foolish conclusion
The Eagle Ford will remain EOG Resources Inc's bread and butter for some time, as wells with 100%+ ATROR will allow its South Texas operations generate free cash flow through 2024 and beyond. A very bullish short term catalyst will be when EOG Resources can officially say its Eagle Ford acreage is fully held by production, allowing it greater flexibility in its drilling program which will ultimately boost reserves while lowering well completion costs. With wells producing amazing returns in this region, investors should note that just because EOG Resources is a big company doesn't mean it can't still grow the bottom line by solid double digits each year.

2014 should also mark the beginning of production from EOG Resources' offshore production in the United Kingdom, which would generate substantial FCF that can be returned to investors. Management has already stated it seeks to boost its dividend, which grew by 33% this year yet still only yields a small 0.5%.

EOG Resources seems to be firing on all cylinders, allowing it to grow its bottom line by 33.6% year-over-year to $660.9 million in its latest quarter. Factoring in upward revisions in production growth, dividend increases, and a solid long-term growth plan, EOG Resources Inc could be a great investment. 


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