EOG Resources Plans for $50 Oil And Still Wants to Increase Production

EOG Resources' (EOG 0.59%) stock has rallied last week, despite the company's down quarter.

In this clip from Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman go over the most important numbers from the earnings report and explain why the company is selling off so many of their assets (and, why this isn't as much of a red flag to investors as it might initially seem). Also, they explain EOG's plan for the future, and why gas producers have to keep producing during the troughs instead of waiting for higher prices.

A full transcript follows the video.

This podcast was recorded on July 19, 2016.

Sean O'Reilly: It's earnings season across the stock market. I did want to mention a few companies within our own little sectors here. EOG Resources just reported.

Taylor Muckerman: Yes. Reported a loss.

O'Reilly: Yes. They basically broke even, I guess, in the same period last year. Then, they lost 292.6 million, $0.53 a share. Revenue way down, 28%, 1.78 billion. The two interesting things that I wanted to get your thoughts on -- they talked about asset sales so far this year of 425 million. This isn't always going to be true, but aren't the strong players, which, supposedly, EOG is one of them, supposed to be buying things, not selling them? What's the dynamic there?

Muckerman: What EOG's been doing is kind of assessing their portfolio of drillable assets and trying to quantify which ones are those premium assets, where they think they can get a 30% return at $50 a barrel, or even higher than that as oil prices increase.

O'Reilly: At least 50.

Muckerman: Yes. At least $50 a barrel. I think what those assets sales are doing is basically just saying, "We're probably never going to focus on these based on what we have in our portfolio." I'm just raising cash so that when oil does, maybe, rebound, because we saw it rebound to $50 and now it's back down closer to the high 30s, very low 40s right now, maybe it's just them saying, "We've got our premium assets," and which, these premium wells, I think they increased from 3,200 premium drilling locations before the quarter, and during the quarterly announcement, they said that that's now up to 4,300. That's a 75% increase.

O'Reilly: That's a big jump.

Muckerman: Yes. I think that they've got a few decades, now, of premium locations that they can put this 425 million to work.

O'Reilly: I don't want to put words in your mouth, but if I understand you correctly, they have just so many good wells in Eagle Ford and, you know, they're primarily in Eagle Ford. They have X dollars, so many good options, they're like, "We don't need this other stuff."

Muckerman: Yes. That's right. To go back to what I was just saying, that's 30% return at $40 a barrel of oil, for these premium locations. That's 30% return right now if they decided to drill these increases up. They're looking at 10% production increases if oil is at $50 a barrel.

O'Reilly: That was the other cool thing in the report that I wanted to mention. They're planning on $50 oil, just for all their plans. We don't know what's going to happen. Some companies are more vocal, as we've seen.

Muckerman: This is out to like 2020. I think 50 might be conservative out with the next four years, but for the rest of this year and 2017, that might be spot-on.

O'Reilly: Right. They talked about how, and I guess this is why the stock surged after the report, but the company said that it expects well completions, this year, to more than top their previous guidance of 270. It's going to be, 350 wells are going to get completed. They think that they can grow production at 10% per year through 2020 at $50 oil.

Muckerman: Yes, and 20% at $60 oil.

O'Reilly: Did you like that?

Muckerman: I do like that. You know, it's coming from one of the best producers in the world. Granted, they're pretty much only in the United States. I'm sure if you took them elsewhere, and just plopped them down in a shale field, they'd figure it out and be the best in that area as well, over time. I don't think every company in the business is going to have the same metrics to throw out there if oil's at $50 a barrel. From EOG's perspective, I'm confident that what they say, they're going to do, because they never really go out and overextend themselves in terms of guidance or performance. I think that investors should feel good about that.

O'Reilly: They're not the only low cost shale producer to talk about upping production, like now. The other one that caught my eye was, of course, Continental Resources (CLR), good old Harold Hamm. He's, yes, God bless that man. How do you feel about them just upping production like this? I'm like, why not just leave it in the ground and wait for higher prices? What's the calculation that they make there?

Muckerman: A, they have to keep the lights on. They have debt to service. They need to produce at least that much oil. At the same time, you don't want to lose market share. You don't want to not produce and then have your customers turn elsewhere, your downstream customers. I think that when you're talking about EOG and Continental and Pioneer Natural Resources (PXD 0.10%), itself, said that at $55 a barrel, it's looking at 15% production growth for the next few years. You're seeing the bigger names with a lot of diversified assets within the United States saying, "Hey, we're ready to now continue business as usual, for the most part." I don't see a problem with that. Yes, you might forfeit some future growth, but at the same time, you don't know if oil is going to be at $40 next year, while it's, so, you know, you're going to have to continue to challenge your people to drill and produce at low oil prices, hoping that oil prices rise. Again, you have to keep the lights on.

The energy industry is very reliant on debt markets. They need cash flow.