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EOG Resources Inc. (NYSE:EOG) has been concentrating on the Eagle Ford shale formation and this seems to be working for the company. The preliminary data from the Texas Railroad Commission indicates that daily output in March 2013 from the nine fields that make up most of the Eagle Ford showed a year-over-year increase to 529,874 barrels of crude. The key properties of the company continue to be strong and the resource potential of the Eagle Ford acreage has increased by 600 million barrels of oil equivalent (MMBoe) touching 2.2 billion barrels of oil equivalent (BBoe) driven mainly by production improvements. The company now has enough drilling inventory for more than 12 years.

Though the company expects to cut North American gas production by 15%, liquids production is expected to increase by 23% this year. This growth will be driven by production in Eagle Ford, Barnett and the Permian Basin. Crude oil production should show a third consecutive year of double-digit growth at 28% while natural gas liquids are expected to grow 23%. The decline in unprofitable gas production will be made up for by the higher margin production of liquids.

First quarter 2013 financials

EOG reported robust financials for the first quarter with net income of $494.7 million ($1.82 per share) compared to $324 million ($1.20 per share) in the corresponding quarter of the previous year. Adjusted non-GAAP net income amounted to $489.9 million ($1.80 per share) compared to $317.5 million ($1.17 per share) in the same quarter of 2012. The results of the first quarter of 2013 include net gains on asset sales net of tax of $115 million and a non-cash loss of $67.2 million after tax as a result of marking financial commodity contracts to market. Discretionary cash flow grew by 26% while EPS grew by 52%.

Total crude oil production increased by 33% during the first quarter of 2013 when compared with the same quarter in the previous year. U.S. crude oil production grew by 36% in comparison. The company's Eagle Ford crude oil operations were well ahead of expectations because of improvements in completion techniques. The New Mexico and West Texas operations in the Permian Basin also added to the growth in production. The company also saw record rates of return from the Bakken. As of May 1, 2013, EOG had realized approximately $500 million of asset sales, which is approximately 90% of its goal. At March 31, 2013, EOG's total debt outstanding was $6.3 billion for a debt-to-total capitalization ratio of 31%. After accounting for cash of $1.1 billion, net debt was $5.2 billion for a net debt-to-total capitalization ratio of 27%.

Reasons to consider the company positively

The company has been comfortably ahead of the consensus bottom line estimates in five of the last six quarters (it was slightly ahead in the other quarter) and the average performance over the consensus in the past four quarters has been in the region of 40%. The growth in revenues is higher than the industry average of 9.7% and gross profit margin extremely high at 81.4%. The company's net profit margin of 15.6% is also above the industry average. Net operating cash flow has increased to more than $1.4 billion, an increase of 32% year over year. The consensus analyst estimate for revenue growth in 2013 is approximately 18% and the five year projected PEG at around 0.9% is satisfactory. The balance sheet is strong and cash flow generated by operations has doubled since the end of 2010. The stock is currently selling for around seven times trailing cash flow. The debt/ equity ratio is below the industry average and shows quality management of its finances.

The bottom line

Analysts have been bullish about the stock and Stifel Nicolaus upgraded the stock from "Hold" to "Buy" in early May with a $150 target price. S&P have a "Buy" rating and a price target of $161. The median price target among 33 analysts covering the stock is $155 against the current price of just over $129. There is no reason to believe that the company cannot continue its impressive production growth and shift its production towards liquids away from unprofitable gas, leading to even larger profit margins. As a result, I believe EOG has great potential as a long-term investment.

Source: EOG Resources Is Making The Most Of The Eagle Ford Shale Field