February 8, 2008
This marks the first time I've written about independent E&P EOG Resources (NYSE: EOG ) , but it definitely won't be the last. I've long admired EOG from afar, and the year-end conference call highlighted exactly what I like about this company.
First and foremost, I appreciate the firm's focus on all the right metrics. Just like Devon (NYSE: DVN ) , EOG pays great attention to finding costs, and its results in that realm remain excellent. For 2007, the firm's all-in F&D's came in at $2.24 per thousand cubic feet of gas equivalent (EOG, like Chesapeake Energy (NYSE: CHK ) and XTO Energy (NYSE: XTO ) , is a pretty gassy E&P). In the U.S., where EOG really shines, drill-bit finding costs were less than two bucks. Thank you, Barnett shale.
Another key metric is return on capital employed. It's not enough to find the cheap stuff -- you have to be able to deliver the goods. EOG is delivering, all right. Not only is the company blooming in the Barnett, it's also having a blast in the Bakken. The company is exceeding 100% after-tax rates of return in this North Dakota oil play. The Bakken doesn't get much attention, but EOG contends that it will one day be recognized as "a very, very big oilfield." EOG is happy to tell the world about this play, because it has bundles of Bakken leases.
Finally, there's EOG's commitment to keeping a lean capital structure. The company's debt-to-capitalization ratio, where capitalization represents debt plus equity, closed out 2007 at 14%. This is about as conservative as it gets in E&P land. Coupled with capex that didn't reach too far beyond discretionary cash flow, this balance sheet is a sign that EOG is very careful when it comes to capital allocation.