EOG Resources: High-Quality Assets, Production Growth And Strong Financial Position

Aug.25.14 | About: EOG Resources, (EOG)

Summary

EOG Resources has built a reputation of quietly building positions in areas before their potential is widely recognized.

It has one of the highest-quality asset bases among its peers and it continues to add premium return assets to its portfolio.

It has a strong financial position and is expected to grow production significantly over the next several years.

EOG Resources (NYSE:EOG) has built a reputation of quietly building positions in areas before their potential is widely recognized. The company is a leading independent exploration and production company [E&P] and has one of the highest-quality asset bases among its peers. The Houston, Texas based company continues to add premium return assets to its portfolio. It helped discover Eagle Ford formation in South Texas and recently identified Rocky Mountains as the next big thing in North American oil.

The company continues to consistently deliver on its production targets. It has a strong financial position and is expected to grow production significantly over the next several years. EOG's impressive operational track record, its strong management team, solid financial position, high-quality asset base, and production growth combined with attractive valuation make EOG a compelling investment opportunity. The company offers a relatively low risk proposition with attractive upside potential.

EOG is up 28% YTD and 38% in the last 12 months. Over the past 52 weeks EOG shares have outperformed its peers. This outperformance is driven by stronger than expected results. The company not only continues to deliver on its production targets, but has reported better than expected earnings in the last four quarters. Moreover, over the last four years EOG delivered the highest annual organic crude oil growth among its large-cap E&P peers. This best in-class growth is expected to continue through 2017 at least.

Source: Yahoo Finance

New Permian Target Deepens Inventory

EOG recently identified a new target in the Delaware Basin underneath the Leonard shale in Lea and Eddy counties, New Mexico. The Second Bone Spring Sand is a liquids play (70% oil, 14% NGL) and offers attractive economics (100% IRRs) with estimated completed well cost of $6 million. The company believes the play is prospective over the majority of its 73,000 net Leonard acres. While the company has not provided a total resource estimate, it is targeting an average 500 MBOE (70% oil) gross per-well EUR. At the recent earnings call EOG's management noted recent downspacing success that could significantly boost its well inventory across the Leonard 'A' and 'B' zones in the Delaware Basin.

The Second Bone Spring Sand is a fifth oil and combo play addition to EOG's inventory this year. Earlier this year EOG added four new oil and combo plays in the Rocky Mountians (Codell, Niobrara, Turner, and Parkman). These four plays hold net potential of 400 MMBOE from 735 net locations. Similar to the latest addition, three of these four plays (Codell, Parkman, and Turner) are expected to generate 100% or better after-tax rate of returns. Niobrara returns are targeted at 40% but the company expects to improve these returns as it continues to lower costs and optimize completions.

Addressing Investor Concerns

The Houston, Texas based company's efforts in the first half of the year go a long way in addressing some investor concerns about the depth of EOG's inventory. While there is still some debate over the size of EOG's inventory compared to its peers, the quality of the inventory remains the best in-class. Four of the five new plays added this year target an after-tax return of 100% or more. In the Eagle Ford, which is the company's most active basin, EOG has a hurdle rate of 60% to count new drilling locations. This is far higher than most of its peers.

So far this year, EOG has added 2,300 net locations across its portfolio. As the company continues to test the commercial viability of other plays within its acreage and completion efficiencies bring costs to a level that allow more locations to clear the hurdle rate, this number should increase further. The company is expected to spend $8.2 billion in capex this year. EOG has relocated some of its upstream capital with the Rockies poised to see a larger investment the remainder of this year. In the Bakken, EOG plans to drill 80 net wells now as opposed to prior plans of 86 wells. This will also result in a drop in targeted well costs in the Bakken to $9.0 million as opposed to $9.6 million.

Conclusion

EOG outperformed most of its peers in the past 12 months. The company's efforts in the first half of this year go a long a way in addressing investor concerns about the depth of its inventory. Four of the five new plays added this year are expected to return an after-tax rate of return of 100% or more. EOG not only has one of the highest-quality asset bases, it also has an impressive operational track record. It offers strong liquids production growth, boasts a strong management team, and solid financial positions. The company also recently raised its dividend by 34% to $0.1675 per share and as the company approaches an FCF inflection in 2014, I expect the company to increase dividend further.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.