They say life is full of surprises, but that's not necessarily a good thing. So, one would assume that when EOG Resources (EOG +1.47%) unveiled three big surprises for investors this quarter that they should brace for the worse. That, however, is simply not the case because each of these surprises represented very good news.
The earnings surprise
Analysts were expecting the worst after oil prices fell more than 20% during the quarter. The consensus was that EOG Resources would report an adjusted loss of $0.30 per share. Turns out that they were way off, with the company reporting a surprising profit of $13.5 million, or $0.02 per share. While that is well below the $729.6 million or $1.31 per share it earned in the year-ago quarter, it was still much better than the loss analysts' feared. It is worth pointing out that without adjustments the company did report a $4.1 billion loss, though that's entirely due to noncash impairment charges relating to lower oil and gas prices. If oil prices rebound, this value could go back on the books.
The key to EOG Resources' surprising adjusted profit was its ability to deliver better-than-expected production due to improved well productivity and its ability to keep its costs at bay. Those cost reductions were evidenced by a 5% sequential reduction in per-unit lease operating costs, which are now down 17% year over year, an 11% reduction in pre-unit transportation costs from the year-ago quarter, and a 6% reduction in total general and administrative expenses.
The billion barrel surprise
Another major surprise was the announcement that the company is updating its net resource potential in the Delaware Basin. It now believes that it can recover 2.35 billion barrels of oil equivalent, or BOE, which is one billion BOE more than its previous estimate. Half of that increase is coming from the increased expectations it has for the Wolfcamp thanks to advances in targeting and completion technology. In addition to that the company now expects to recover 500 million BOE from the Second Bone Spring Sand oil play. Between the two plays EOG Resources now expects to drill 2,200 additional wells in the basin, bringing its total to 4,900 net wells.
The Delaware Basin is proving to be a very rich oil play with Devon Energy (DVN +1.38%) also recently reporting an increase in its potential within the stacked oil formations underneath its acreage. Devon Energy now estimates that it will be able to drill at least 5,100 wells in the Delaware Sands, Leonard Shale, Bone Spring, and other plays. However, Devon sees the potential for that number to grow to upward of 16,300 wells, which could enable it to recover up to 6 billion barrels of oil. This suggests that there could be additional potential upside for EOG Resources in the region as well.
The acquisition surprise
In some ways, the final surprise is the biggest of them all. EOG Resources made not one but three acquisitions during the quarter. This is quite a surprise for a company that hasn't made one in years because of its preference for organic growth because the returns are higher.
That said, the company obviously felt these opportunities were too good to pass up. Overall, it is acquiring 26,000 net acres in the Delaware Basin via three tactical acquisitions for a total cost of $368 million. Most of the acreage is adjacent to its existing operations, so there are a lot of synergies to be had. Further, this acreage is developmental, with current production of just 750 BOE/d. So, while technically an acquisition instead of an organically grown acreage position via signing leases, this still isn't akin to Devon Energy's $6 billion Eagle Ford shale acquisition last year, which was its first foray into that play.
Investor takeaway
All things considered, EOG Resources reported a surprisingly good quarter. Its costs continue to come down, its oil recovery potential keeps going up, and it made a really smart acquisition without deviating from its organic growth focus. Combined it puts the company in an even better position to capture and create value when oil prices finally improve.
