EOG Resources (EOG 0.09%) recently announced that the company was divesting a majority of its Canadian assets. The sales, which were part of two separate transactions that recently closed, netted the company $410 million in cash. While the deal is rather small on the surface, it does have some important implications for investors.
Drilling down into the deal
The assets being sold include 5,800 producing wells that are spread across 1.1 million net acres. The production from these wells averages 7,050 barrels of oil per day, 580 barrels of NGLs per day, along with 43.5 million cubic feet of natural gas per day. However, it is important to note that a vast majority of those wells, 5,255 to be exact, were natural gas wells. Given that EOG Resources is focused on being the fastest growing oil company in its class, these wells really didn't fit within the company's profile. In fact, as the following slide notes the company has really allowed its North American natural gas production decline over the past few years as it has put nearly all of its capital behind oil projects.
Further, picking up $410 million in cash could turn out to be important for the company down the road as the current downdraft in the oil market is going to shrink its cash flow. Not to mention the fact that the deal also frees up $150 million in restricted cash, which had been earmarked for future abandonment costs for the wells it has now offloaded. The company plans to reinvest this cash into its high return oil assets in the U.S., which should yield a much better long-term return for investors given that the company can earn very compelling returns even at lower oil prices.
Keeping an eye on the upside
That being said, EOG Resources isn't entirely giving up on its future in Canada as the company has retained 282,100 net acreage in Western Canada's Horn River Basin as well as some other exploration areas. While the Horn River Basin is a gassier basin, it has a lot of upside to future natural gas exports out of Western Canada. While that upside is a few years away from being realized the company has decided that for the time being it should hold on.
However, right now all of the company's upside is in oil, despite today's weaker prices. As this next slide shows, the company has a deep inventory of crude oil assets in the U.S. to develop.
Most of these future drilling locations can earn triple digit after-tax returns at $80 oil, while still generating a positive return even if oil prices fall to $40 per barrel. Because of that, it makes sense for the company to continue to develop its acreage at today's oil price. That said, given the fall in oil prices, EOG Resources cash flow -- which is what has been funding its development -- is starting to contract a little bit. This is why exiting its Canadian assets with little to no upside makes sense as the cash proceeds can be used to bolster the funds it has available to drill more wells in areas that do have upside.
EOG Resources knows where its upside is and right now that's not in Canadian natural gas. That's why it's willing to part with these assets in order to reinvest the proceeds into the assets that it knows can create value for investors today, which are its U.S. oil assets. It's another smart, value-focused move from a company that continues to focus on prudently developing the vast oil resources it has discovered over the past few years.