How 1 Change Fueled This Energy Stock’s 245% Surge

Over the past five years EOG Resources’ stock is up 245% and investors have one big change to thank for those gains. It’s a change that Chesapeake Energy and Ultra Petroleum are hoping to replicate.

Jul 10, 2014 at 10:45AM

Five years ago EOG Resources (NYSE:EOG) was basically a natural gas company. At that time 59% of its production was dry natural gas. But management made the strategic decision to focus on oil a couple of years prior to that and that change has paid off big time. Today, 88% of the company's production is in oil and natural gas liquids and its stock is up 245% in the past five years. No wonder we're seeing other natural gas heavy producers like Chesapeake Energy (NYSE:CHK) and Ultra Petroleum (NYSE:UPL) hoping to replicate its success.

Oil-fueled gains
Take a look at the following slide that details the dramatic shift EOG Resources has undertaken since 2006.

Eog Resources Liquids Shift

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

EOG Resources' shift to oil was at first fueled by its position in the Bakken Shale of North Dakota. In 2008 the company was able to increase its oil and condensate production by 46% thanks to continued drilling success in the Bakken. But by 2010 the company had secured more than a half million net acres in the mature oil window of South Texas' Eagle Ford Shale. It's that position that has really fueled the company's high speed shift into oil as EOG Resources has really outperformed its peers as the following slide points out.

Eog Oil Production

Source: EOG Resources Investor Presentation 

As that slide points out EOG Resources' Eagle Ford Shale oil production went from practically nothing in 2010 to nearly 120,000 barrels of oil per day this year. It's a shift that others have clearly noticed, which is why we've seen natural gas focused peers like Chesapeake Energy and Ultra Petroleum slowly start making the same shift toward oil.

Looking to join the oil party
While Chesapeake Energy is nowhere near challenging EOG Resources when it comes to oil production growth, the company is making a big strategic shift into liquids. Over the past year the company's natural gas liquids production is up 63%, while its oil production is up 20%. This is slowly shifting the company's production mix toward liquids as 29% of Chesapeake Energy's production is now liquids versus 24% as of the first quarter of 2013. For perspective, that's just where EOG Resources was in 2008, which is right before it really made its big shift into liquids.

Chesapeake Energy Rig Site

Photo credit: Chesapeake Energy  

Meanwhile, Ultra Petroleum is quietly becoming an oil growth story. While 97% of the company's current production is natural gas, that's expected to change over the next few years. After acquiring a position in the Uinta Basin last year, Ultra Petroleum expects to see its oil production surge 586% from 2013 to 2016. Meanwhile, the company's gas production is expected to be virtually flat over that same time frame, yet overall production will be up more than 20%. It's a shift that should produce solid gains for the company as the shift is expected to fuel an increase in EBITDA from about $600 million last year to more than a billion dollars by 2016.

Investor takeaway
A strategic shift from gas to oil has fueled a 245% gain in EOG Resources' stock price over the past five years. It's a shift that both Chesapeake Energy and Ultra Petroleum are now making in hopes of fueling similar stock price gains. While only time will tell if either will see similar success, both appear to be heading in the right direction.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of EOG Resources and has the following options: long January 2016 $25 calls on Ultra Petroleum. 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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