I have been following quite a few names in the oil and gas exploration and production sector. Its hard not to get excited with shale technologies implemented for gas drilling now being used to pull millions of barrels of oil from places like the Bakken, Eagle Ford and newer Niobrara. It is difficult to know how much oil can be removed from these shales as many of these companies are just starting to figure out how to place the drill on the toe and pull it from the heal.
Although I have followed the sector for sometime, I am always learning something new. I would recommend to talk to people who know people (thank you, Bill Costello), as they can give you the upper hand with the intangible management factor. Hopefully the combination of assets and management will give an investor enough advantage to make some money.
Before I invest in this type of company there is one thing that must be happening with the company. They must be getting oily. With natural gas prices at very low levels, and oil continuing to push higher, margins are developed here.
EOG Resources (NYSE:EOG) is an oil and gas exploration and production company based in Houston, Texas. They have a 27 billion dollar market capitalization. This company has several things going for it. The first is my favorite play, the Bakken. EOG is the biggest North Dakota oil producer. They are also the number one oil producer in the Eagle Ford, Barnett combo and Niobrara. They also have oil coming from their acreages in the Leonard shale and Manitoba Waskada. Their Horn River play is a gas field currently being converted to an oil indexed field.
EOG has done a very good job of getting to all of these plays early, since the early bird gets the worm. They also see very large increases in acreage value as the oil turns into proven resources. They also have avoided JV dilution.
EOG has large positions in these oil plays:
- Bakken/Three Forks-600000 acres
- Eagle Ford-500000+ acres
- NIobrara- approximately 320000 acres
- Leonard Shale- 120000 acres
- Barnett Combo- 160000 net acres
Although EOG has significant gas assets, an emphasis is being put on their oily assets based on larger margins and growth. EOG's 2011 capital expenditure budget has 80% going to high ROR oil and liquids rich gas. The other 20% is going to Marcellus and Haynesville shales.
Their liquids rich inventory includes:
- Eagle Ford-900 MMboe
- Bakken/Three Forks-420 MMboe
- Barnett Combo-370 MMboe
- Leonard Shale-65 MMboe
The Niobrara DJ Basin area could be substantial. Although much of the 3-D seismic is not back, Chesapeake (NYSE:CHK) has reported their 800000 could prove to have oil resources close to that of the Bakken.
EOG Resources annual production growth in 2010 was 9% total and 34% liquids. 2011 estimates are 10% total but 49% liquids. 2012 total company growth is estimated to be 12% and liquids 26%. If natural gas does rebound in this time frame, a fairly large increase in total growth will be realized.
Although they are not forecasting growth with gas, they can increase production relatively quickly. It is interesting how quickly EOG has been able to change their production weighting with oil and gas. In 2006 they were 80% gas. By last year it was down to 47% gas, and estimated to be 69% oil by 2012. Estimated EBITDA per share growth from 2010 to estimated 2012 is higher than:
- Apache Corp. (NYSE:APA)
- Anadarko Petroleum (NYSE:APC)
- Chesapeake Energy (CHK)
- Cabot Oil and Gas (NYSE:COG)
- Devon Energy (NYSE:DVN)
- Encana Corp (NYSE:ECA)
- Newfield Exploration (NYSE:NFX)
- Noble Energy (NYSE:NBL)
- Pioneer Natural Resources (NYSE:PXD)
- Southwestern Energy (NYSE:SWN)
By breaking down EOG's holdings, we can see that EOG is no longer a play on gas, but an upcoming liquids play. This reason should have created an appreciation of share price, but for a little over a year, they have been locked with a trading range. I cannot predict the future, but this company may breakout in coming weeks. EOG is a company to watch in the short term.
Their Eagle Ford position has been has been written about several times over the past few months ( see here and here). EOG estimates their Eagle Ford position to hold 690 MMbo, 100 MMBbl of natural gas liquids, and 661 Bcf. This provides a total captured reserve of 900 MMboe, NAR. Since EOG was early in, they were able to get the most optimal acreage. Of this acreage, the average well is estimated to have 77% oil, 11% NGLs and 12% gas.
It seems the reserves are quite good here, but more importantly EOG is confident it will be an easy play, and should have a very high success rate. Wells will produce 40% of reserves in the first 5 years. EOG has stated their wells are performing better then original models. This is attributed to their new seismic which extended the sweet spot another 20 miles. Original ten rig development plan with four rigs added this year for quick production. Eagle Ford will have several years of inventory.
EOG has a ten rig development plan in their Bakken/Three Forks play. As EOG and other players in the area are finding out, that longer laterals are increasing production. EOG is optimistic as they found last year that wells correlated with their expectations. Economics of Bakken wells are 86% oil, 11% natural gas liquids and 3% gas. The Three Forks well model is 81% oil and 16% natural gas liquids with 3% gas.
The Fort Worth Barnett Shale combo has revenues more then 90% weighted. 2010 wells are up to expectations averaging 337 Mboe. Numbers could get better as EOG is improving techniques.
The Leonard Shale has 49000 proven acres of the 120000 acre play. Potential reserves are more then 65 MMboe. 11 horizontal wells are completed to date. Lea County well results indicate 400 Mboe/well with mix of 41% oil, 31% natural gas liquids, and 28% gas.
The Niobrara holdings in the DJ Basin, may be an area with outstanding reserves. This area has had quite a bit of commotion recently. Chesapeake (CHK), Haliburton (NYSE:HAL), CNOOC Limited (NYSE:CEO) and Samson Oil and Gas (NYSEMKT:SSN) are all players and estimates of production range from moderate to very high production. CNOOC recently wrote a check for well over $1 billion (see here). EOG results have been good here, although there is not enough information out on this liquid/gas window.
EOG is currently running a three rig program. Initial well tests show:
- Jake 2-01H 1558 Bopd
- Elmer 8-31H 730 Bopd
- Red Poll 10-16H 1100 Bopd
Typical well results are 82% oil, 12% natural gas liquids and 6% gas.
EOG Resources is currently spending a considerable amount to develop their oily plays. As they have seen gas overproduction in the United States, they have jumped on plays early and done a great job of securing very good and sizeable acreages. Many of these are outperforming and/or becoming new sweet spots. EOG plans to outspend 2011 cash flow on developing these areas. They hope that this will make up for the short fall with respect to natural gas. EOG plans to keep 100% of their current horizontal oil plays, not farming out any acreage to JV players. Net debt to total capitalization will have a maximum of 35% through 2012 if oil and gas pricing holds up.
EOG Resources is currently betting that horizontal oil shales will continue to outperform. They have a multi-year drilling inventory and consistent results. As technologies improve, even more oil will come from these sites. By getting in early, they will realize the most growth with respect to oil in the ground and oil production.
EOG believes horizontal oil drilling will continue to have very good margins for years. Even though they are quickly increasing their oil exposure, management is still stressing the same ideals. Good returns, low cost and moderate debt is where EOG will maintain their business.
From what I know of their oil production areas, their Bakken/Three Forks position will have oil production for decades. The Eagle Ford will provide moderate production with high success rates. The Niobrara is a wild card at this point, but with many big names in the area, something special could happen.
Disclosure: I am long SSN and am currently bullish and trading all players in the Bakken/Three Forks, Eagle Ford and Niobrara. Positions are traded daily.