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Leading U.S. oil driller EOG Resources (EOG +0.65%) recently reported its second-quarter results. While the headline numbers of that report were atrocious, with the company reporting an adjusted loss of $292.6 million, or $0.53 per share, those numbers masked the real story. That story is the progress the company is making on three key numbers, which is setting it up for a much brighter future.
1. A 75% increase in its premium resource potential
Over the past several quarters, EOG Resources has been digging through its drilling inventory and separating its wells into premium and non-premium drilling locations. Premium locations are those that the company can earn a more than 30% rate of return at a $40 oil price, while non-premium wells are those that earn weaker returns. Heading into the quarter the company had identified 3,200 premium drilling locations, which contained an estimated 2 billion barrels of oil equivalent (BOE) in resource potential.
However, thanks to a combination of advances in well completion technology, precision targeting, longer laterals, and cost reductions, the company announced that it had increased that inventory by 34% to 4,300 locations. For perspective, at its current drilling rate that's enough to last the company more than a decade. Even better, these wells are believed to contain 3.5 billion BOE in resource potential, which is 75% higher than it previously thought.
2. 10%+ oil production growth once oil is above $50
Before the downturn in oil prices, EOG Resources was delivering best-in-class oil production growth. However, it slammed the brakes on growth during the downturn to focus on improving its drilling returns. As evidenced by its vast premium drilling inventory, it has done just that.
With industry fundamentals starting to improve, and with that premium inventory in hand, the company is ready to return to growth mode in 2017. Under current assumptions, EOG can grow its oil production by 10% per year through 2020 at a flat $50 oil price. Meanwhile, that growth rate would accelerate to 20% if oil averaged $60 a barrel over that same timeframe.
For perspective, that is a similar growth rate to what rival Pioneer Natural Resources (PXD +0.00%) projects to achieve over the same timeframe. In Pioneer's case, it expects to grow its total output by a 15% compound annual rate through 2020 while remaining cash flow breakeven at $55 oil. In an industry where most companies are just trying to survive, the ability to deliver double-digit growth without breaking the bank is remarkable.
3. $425 million in asset sales
EOG Resources' focus going forward will be to develop its premium drilling inventory. As such, the company plans to monetize its non-premium inventory to pull that value forward and reinvest the cash back into its premium locations either by developing new wells or for bolt-on acquisitions. The company's monetization process is already under way, with it announcing that it has received $425 million in asset sale proceeds so far this year. The company has additional asset sales in progress that it anticipates closing by year-end.
It would not be surprising to see EOG Resources reinvest some of these proceeds back into acreage acquisitions. While the company typically avoids acquisitions, it noted that drilling longer horizontal laterals was one of the keys to improving rates of return. As such, it could look to acquire acreage that is adjacent to drilling locations that would earn premium returns if the company locked up enough land to drill a longer lateral. That is something it did last year when it bought 26,000 acres in the Delaware Basin because the properties were adjacent to its existing operating areas in the high rate of return oil window.
Investor takeaway
EOG Resources' focus during the downturn has been to improve its drilling returns so that it can thrive in a low oil price environment. That focus is paying off, evidenced by the huge boost in its premium drilling inventory, which will drive strong double-digit growth through the end of the decade, while allowing the company to pull value forward by monetizing its non-premium acreage. The company is now part of an elite group that can thrive at low oil prices while the rest of the sector is still trying to survive.
