EOG Resources Inc's Drilling Machine Easily Beat Back Hurricane Harvey

As the largest producer in the Eagle Ford Shale of south Texas, EOG Resources (EOG 0.43%) was in the crosshairs of Hurricane Harvey when it slammed into the state last quarter. However, while the storm's unrelenting rain forced the company to hold back 15,000 barrels of oil per day (BPD) during the third quarter, that didn't dampen its results one bit. In fact, the shale giant delivered expectation-trouncing earnings while reiterating that it's still on track to boost oil production by 20% this year.

Further, EOG Resources once again showed its knack for exploration in the quarter by unveiling not one, but two new premium-return drilling plays. Because of that, the driller has the inventory to deliver high-return growth for investors for years to come.

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Drilling down into the results

Data source: EOG Resources.

Heading into the quarter, EOG Resources thought that production would rise 2.1% from last quarter at the midpoint. However, with Hurricane Harvey bearing down on south Texas, the company joined its peers in shutting down wells and holding back drilling activities. Because of that, EOG produced 15,000 BPD less than it would have if not for the storm, which caused oil production to come in below the low end of its guidance range. That said, oil output was still 16% higher than last year, and would have hit the high-end of its guidance range if it wasn't for Harvey thanks to strong drilling results across its other shale plays.

EOG complimented those well results by continuing the downward pressure on costs. For example, per-unit transportation costs fell 15% due to the expiration of higher cost legacy agreements and the increased availability of infrastructure to handle its higher production volumes. Those two factors helped fuel the company's expectation-smashing earnings.

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A look at what lies ahead

Despite the lost production during the quarter, EOG Resources reaffirmed its full-year guidance that oil output would rise 20% from 2016 -- while living within cash flow -- thanks to the across-the-board success of the company's drilling program. For example, the company completed several gushers in the south Texas Austin Chalk, which is a formation that lies above the Eagle Ford. One of its wells delivered an initial 30-day production rate of 7,760 BOE/D. To put that one well into perspective, Whiting Petroleum (WLL) completed 58 wells in its Redtail area in the Rockies last quarter. However, those wells combined to produce just over 5,000 BOE/D, pushing Whiting's entire output from the region up to 11,750 BOE/D. In other words, EOG got more out of this one well than Whiting got out of 50, which shows the strength of its resource position and drilling capabilities.

One reason EOG is drilling gusher after gusher is because it secured the best spots before anyone else knew they existed by quietly exploring for oil around the country. Those efforts continue paying dividends, enabling the company to unveil two new premium return areas during the quarter, which are those that contain drilling locations where EOG can earn a minimum 30% after-tax rate of return at $40 oil. The first one is in the Delaware Basin, where the company has determined that the First Bone Spring layer has what it takes to fuel premium returns. EOG estimates it can drill 540 wells into this formation over the coming years and earn a premium return. That adds to its already prolific Delaware Basin position where the company now has nearly 4,700 locations across four formations.

In addition to that, the company announced that the Woodford Oil Window in Oklahoma had joined "its growing roster of premium plays." EOG noted that it quietly leased more than 50,000 acres in the region over the past four years at the cost of just $750 an acre. That's a rock-bottom price for land in that part of the state given what rivals Marathon Oil (MRO -1.46%) and Devon Energy (DVN -0.95%) paid to load up on acreage. Marathon, for example, spent $888 million in acquiring PayRock Energy for its 61,000 acres, implying a more than $14,500 per acre price. Meanwhile, Devon spent $1.9 billion to buy Felix Energy for its 80,000 acres at the cost of more than $23,750 per acre. Overall, EOG estimates that it can drill 260 wells on its land, which can all earn premium returns.

These two new plays, when combined with recent additions across EOG's other areas, boosted its premium drilling inventory by 2,000 locations since the start of the year and up to 8,000 future wells. The new additions alone represent a four-fold replacement for the wells it expects to drill this year. That accomplishment led CEO Bill Thomas to say that "EOG is an organic, exploration-driven machine."

One of the best

EOG Resources continues to demonstrate that it's one of the best oil companies in America. It's thriving in the current environment thanks to its access to low-cost oil because it focused on finding the best spots before anyone else got to them. As a result, the company has a top-notch portfolio of high-return drilling locations that will fuel growth for the company and its investors for years to come.