- EOG increases the reserve potential of the Eagle Ford shale to 3.2 billion boe from 2.2 billion boe reflecting an increase of 45%.
- EOG is well-positioned in the Bakken & Permian Basin to achieve the crude oil production target of 27% and the overall growth of 11.5 percent in 2014.
- Despite scoring abnormal growth in production, EOG has been able to reduce financial leverage.
- The growth in production coupled with optimized efficiency will be reflected in a higher bottom line, which in turn, ensures higher dividend payments and capital gains.
EOG Resources (NYSE:EOG) is the largest acreage holder and a top producer in the Eagle Ford Shale. It also has one of the best core positions in North Dakota's Bakken. Similarly, the company has an emerging position in the Permian Basin. Altogether, EOG is by far the best-positioned oil company in America. It is the strong position of the company that has enabled it to grow its production by an average of 43% over the past three years.
The shale boom in the US has taken the company's stock to the next level, but what about the future? Will the company be able to sustain the growth in production and earnings? This is the concern that needs to be addressed. In an attempt to address this concern, let's start by discussing the company's position in its key areas.
Eagle Ford: the Star Performer
EOG has been the largest oil producer and acreage holder in the Eagle Ford shale. Thanks to technological advancements in completion techniques, the company increased its resource potential by 45% to 3.2 billion boe from 2.2 billion boe. This signifies that there is still a lot of space to develop the play and produce better results.
Due to the increased well productivity and the production rates in the play in 2013, the company plans to allocate a large portion of its $8.1 - $8.3 billion capital budget to the Eagle Ford shale. It plans to drill 520 net wells, up from 466 net wells in 2013, across its Eagle Ford acreage. In addition, the company has identified approximately 7,200 net well locations, 6,000 of which will be drilled across EOG's 120 mile crude oil window.
The company is also working on reducing the cost of its completed wells. It reduced the cost from $7.2 million in 2011 to $6.1 million in 2013. Going forward in 2014, the company is determined to save around $324 million in well costs by setting the completed well cost target at $5.5 million.
Bakken: a growth story
Bakken has also transformed from a steady development to a high growth play through completion improvements and cost efficiencies. During 2013, the Bakken contributed gross production of 86 MBoed, reflecting an increase of 38 percent.
The successful drilling results in the Three Forks formation have led the company to test additional benches during 2014. It plans to drill 80 net wells this year up from 54 in 2013. The company will be focusing on two areas: the Bakken core and the Antelope extension. During 2013, the average well performance of the Core and Antelope increased by 50 percent from 894 Bopd to 1,342 Bopd by the end of 2013. Similarly, the average cumulative oil production (100 days) also improved by 63 percent. The potential of the two areas can be seen in the figure below.
Source: Investor presentation
The US Energy Information Administration estimates that around 35 percent of the Bakken natural gas production was flared or otherwise not marketed due to lack of midstream infrastructure. But the recent step taken by Energy Transfer partners (NYSE:ETP), such as the construction of the pipeline, will help EOG to increase the production to the next level.
EOG drilled 61 net wells to develop liquid rich Leonard and Wolfcamp plays in 2013. The company holds 73000 net acres in the Leonard Shale and in the Wolfcamp Shale; it holds 134000 net acres in the Delaware Basin and 113000 net acres in the Midland Basin.
During 2013, net production from the basin averaged 23 MBbls, reflecting an increase of 40% compared to 2012's level. Going forward, the company plans to continue the expansion and development of the Leonard and Wolfcamp plays by drilling approximately 65 net wells.
Source: Investor Presentation
EOG's net proved reserves increased by 17 percent, reflecting reserve replacement of 264 percent at a total reserve replacement cost of $13.42 per barrel of oil equivalent. The higher reserve replacement at a lower cost ensures business for the company for many years to come. In addition, EOG has been able to reduce financial leverage from 0.44 in 2012 to 0.38 in 2013.
The Eagle Ford shale continues to be a star performing asset for EOG. The company is planning to drill wells within tighter spaces to unlock the reserve potential of 3.2 billion boe. Similarly, the Bakken and Permian Basin will be contributing to the achievement of the production targets. Therefore, I recommend buying the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.