Over the past few years, Texas' Eagle Ford shale has been one of the most talked about and highly sought-after U.S. shale oil plays. And with good reason.
Eagle Ford oil production surpassed the 1 million barrel per day mark in August, according to the U.S. Energy Information Administration, and is poised to continue growing at a rapid clip this year, as energy producers continue to drill aggressively in the play.
For those looking to invest in the Eagle Ford's rapid growth, I'd suggest taking a closer look at EOG Resources (NYSE:EOG), one of the largest and most profitable producers in the play.
EOG's aggressive shift to oil
Over the past few years, EOG has aggressively and successfully transitioned toward high-margin liquids production growth at the expense of less profitable dry gas drilling. Oil and natural gas liquids (NGLs) now account for nearly 90 % of the company's North American revenue, up from just 53% in 2010.
As CEO Mark Papa reaffirmed in the company's third-quarter earnings conference call, no other oil company of similar size has come close to matching EOG's oil production growth rate in 2013, or as a six-year average. Last year, its oil production grew by 39%, slightly higher than its six-year average growth rate of 38%.
By comparison, Chesapeake Energy (NYSE:CHK), which has also aggressively transitioned toward oil-led growth in recent years, reported 23% year-over-year growth in oil production last year, while Pioneer Natural Resources (NYSE:PXD), another oil-focused peer with a market capitalization about half the size of EOG's, saw its third-quarter oil production grow by roughly 17.5% year over year. Only smaller competitors like Kodiak Oil & Gas (UNKNOWN:KOG.DL), whose market cap is roughly one-fifteenth that of EOG's, have managed to best EOG's oil production growth rate, with Kodiak delivering a 54% year-over-year increase in third-quarter oil production.
No signs of slowing down
With a whopping 639,000 net Eagle Ford acres under its belt, EOG shows no signs of slowing down, either, as evidenced by recent encouraging well results. Not only does the company continue to fire on all cylinders in the eastern part of the Eagle Ford, but its well results in the western portion of the play -- generally considered to be of lower quality than the eastern portion – continue to impress.
In the third quarter, it set a new record with a western well in Atascosa County that posted an IP rate of 2,815 barrels of oil. What's more is that this well wasn't an outlier; the company reported several other western wells with IP rates in excess of 2,000 barrels of oil. Not surprisingly, EOG's average 120-day cumulative production per well has surpassed 60,000 barrels of oil, up 30% from a year earlier.
This drastic year-over-year improvement in well performance is thanks in part to optimization of frac designs, including using more self-sourced sand, which is not only boosting IP rates, but is also helping reduce costs and improve decline rates slightly. As a result of these and other improvements, EOG's after-tax rates of return are now around 200% in the Eastern Eagle Ford and 100% in the Western Eagle Ford, a sharp improvement over just a year ago, and some of the best returns for any oil company.
With these kind of stellar returns, it should come as no surprise that EOG's profitability metrics have improved meaningfully. The company's return on equity (ROE) for 2013 is estimated to be 15.3%, up from 11.8% in 2012, while its return on capital employed (ROCE) is expected to come in at 11.4% for 2013, up from 9.4% the year before.
The bottom line
Though EOG hasn't announced its 2014 capital program yet, the company is likely to once again allocate the largest portion of its capital budget toward the Eagle Ford, as well as toward North Dakota's Bakken and the Permian Basin's Leonard shale, all of which are currently generating more than 100% direct after-tax reinvestment rates of return for the company.
With more than 12 years of remaining drilling inventories across both the Eagle Ford and the Bakken, and with frac design improvements continuing to boost production rates and reduce costs, EOG's output should continue to grow at a rate similar to the 38% annual rate it has enjoyed over the past six years, delivering continued strong growth in both earnings and cash flow for many years to come.