Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



3 Reasons Why EOG Resources Inc. Stock Could Rise

Photo credit: Flickr user Paul Lowry.

Shares of EOG Resources (NYSE: EOG  ) are up 40% in the past year alone. This surge in the stock price has been fueled by the company's oil-based organic growth plan, which could continue to push shares up in the year ahead. Here are three key factors that could fuel further gains for investors.

Peer-leading organic crude oil production growth

There is an old saying in Texas that folks should "dance with the one that brung you." It was a favorite expression of former University of Texas football coach Darrell Royal, and to him it meant to go with the players and plays that would result in a win. For EOG Resources to keep winning it needs to continue delivering best-in-class oil production that is disciplined and focused on returns.

Since 2009, EOG Resources has grown its oil production by a compound annual rate of 39%, which is the best rate among large independent oil and gas companies. That focus on oil has more than doubled its cash margin, so the company is now earning twice as much money per barrel of oil equivalent than it did in 2010. Moreover, the company has avoided excessive debt in doing this, instead reinvesting its cash flow to fund growth. This has yielded returns on equity and capital employed that are quite simply the best in the business, as the following slide shows.

Source: EOG Resources Investor Presentation.  

As long as EOG Resources continues to focus on return-driven oil production, its stock has the potential to keep rising.

Exploration program yielding more new plays

This year, EOG Resources plans to spend $6.5 billion on exploration and development. While most of that money will be used to grow oil production, some is aimed at finding new oil-weighted plays that can fuel future growth. It spends this money to identify additional targets within its existing plays, as well as to acquire acreage to explore for new plays.

This has been money well spent, as EOG has uncovered five new oil-weighted growth plays this year. Even better, four of the five plays are expected to deliver direct after-tax rates of return above 100%. These four plays -- Parkman, Codell, Turner, and the Second Bone Spring Sand -- joined the Eagle Ford, Bakken, and Leonard as the oil plays driving EOG Resources' high rate of return growth, as noted on the following slide.

Sources: EOG Resources Investor Presentation.

New high rate of return plays like these could be the fuel to push EOG Resources' stock even higher.

Continued innovation maximizes value

In addition to exploration, EOG Resources' other big growth driver is to get more out of its current assets. EOG has focused on using technology to improve its completion designs, as well as to increase its drilling density, which allows it to drill more wells on its acreage.

By focusing on innovations that can maximize the value of its assets, EOG Resources has seen a substantial amount of growth in its core Eagle Ford shale asset. As the following slide notes, the company originally thought its position would eventually produce 900 million barrels of oil equivalent.

Sources: EOG Resources Investor Presentation. 

This slide also shows the remarkable value EOG Resources has created by focusing on optimizing its acreage. By tightening up the spacing between wells, EOG has grown the number of wells per section from five to 16. This has increased the reserves per section from 1.6 million barrels of oil equivalent to 7.2 million. This has also increased the net present value of each drilling section from $23 million to $114 million, which improved its total net potential reserves to 3.2 billion barrels of oil equivalent.

The Eagle Ford is just one example of EOG Resources using innovative new ways to maximize the value of its acreage. Continued innovation across the rest of its portfolio will be key in its ability to continue delivering best-in-class growth. For example, EOG estimates that its Delaware Basin position holds 1.35 billion barrels of oil equivalent. However, optimizing that play could push recoveries higher, which would give the stock a reason to keep rising.

Investor takeaway

Three keys could push EOG Resources stock higher in the future. First, it needs to continue to deliver return-focused oil production growth out of its existing assets. The company also must continue finding new plays while maximizing its existing assets. Should EOG accomplish all three goals, the stock shouldn't have much problem rising even further. 

Do you know this energy tax "loophole"?

You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2014, at 8:54 AM, ChuckXX wrote:

    Matt; This is a very interesting article. Please keep up the great work. Iam long EOG and will continue to add to my position on any weakness. THANK YOU.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3082961, ~/Articles/ArticleHandler.aspx, 9/2/2015 12:48:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 3 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:00 PM
EOG $76.02 Down -2.29 -2.92%
EOG Resources, Inc… CAPS Rating: ****