6 Oil and Gas Stocks With Continued Upside: Part VIII

Includes: APA, CHK, CVE, EOG, HES, MRO
by: Michael Filloon

>> See Part VII

The eighth installment of Oil and Gas Stocks With Continued Upside focuses on companies with market caps above $20 billion. Chesapeake Energy Corp. (NYSE:CHK) is the second largest producer of natural gas in the United States. It is also a top 15 producer of liquids. With 149 operated rigs, it is the most active driller in the United States. Chesapeake collects 20% of all drilling information in the U.S. It estimates 50% of drilling capital in 2011 is going to liquids. 2012 drilling capital will increase to 75% liquids. Chesapeake has had 21 consecutive years of sequential production growth. Last year, average daily production growth was 14%. Chesapeake estimates from 2010 to 2012, liquids production will increase by 190% and gas by 6%. 15.2 Tcfe of proved reserves at 2010 year end. Chesapeake has 13.3 MM of net onshore leaseholds. It has 27.9 MM of 3-D seismic.
Starting in 2009, Chesapeake began buying up unconventional liquids resource locations. It was able to buy significant acres at a discount. Chesapeake's expertise in horizontal drilling techniques further aids in obtaining resources. In 2010, it invested $4.7 billion on undeveloped leaseholds. JV sales have since generated $4.45 billion. Chesapeake is also in the process of monetizing assets at a goal of $5 billion. From 2011 through 2012, Chesapeake has a "25/25 Plan". This plan will reduce long term debt and increase production by 25%. This is an aggressive plan, but if Chesapeake can pull it off there is significant upside.

Cenovus Energy Inc.
(NYSE:CVE) is a western Canada focused company. It had 2010 proved and probable reserves of 2.4 BBoe. Cenovus has lease rights to 1.4 MM net acres. It has refining capacity of 226 Mbbls/d. Cenovus is increasing oil production. In 2010, it produced approximately 60% oil and liquids. In 2014, oil and liquids production will be 80%.
Foster Creek will produce 51 to 54 Mbbls/d in 2011. It will have between $11.10 and $11.85 operating costs per barrel. Cenovus will drill between 110 and 120 wells. Christina Lake will produce 9 to 11 Mbbls/d in 2011. 50 to 60 wells are planned and operating costs are $18.65 to $19.40 per barrel. Pelican Lake will produce between 21 and 23 Mbbls/d in 2011. Operating costs are between $14 and $15 per barrel. 40 to 45 gross wells will be drilled this year. Cenovus maintains these properties will add significant oil production growth in the near term. Over the long term, Cenovus has additional properties to increase oil production:

  • Narrow's Lake 65000 net bbls/d
  • Grand Rapids 180000 net bbls/d
  • Telephone Lake 35000 net bbls/d
  • Winefred Lake 30000 net bbls/d
  • Foster Creek (Other) 30000 net bbls/d
  • East McMurray 30000 net bbls/d
  • West Kirby 30000 net bbls/d
  • Steepbank 30000 net bbls/d

Cenovus also has refining capacity. It has 356 Mbbls/d crude throughput at Wood River. Borger provides 146 Mbbls/d crude throughput. Cenovus is increasing throughput capacity at Wood River. The combination of increased crude production and refining capabilities provide upside.

EOG Resources (NYSE:EOG) is converting to liquids production. It has the strongest horizontal oil inventory in the exploration and production industry. EOG has 1.8 Bnboe, which is 69% crude and 18% NGLs. Like Chesapeake, EOG was in early. This decreased per acre costs, and allowed for large leaseholds in good locations. EOG believes it can be cash flow neutral in 2011 (including asset sales). EOG closed $673 million in asset sales for 2010, and plans $1 billion in 2011. EOG differentiates itself from other companies by not participating in JVs. EOG will have full control and receive 100% revenue from its resource plays. It is currently creating organic liquids growth:

  • 2010-33% growth
  • 2011(estimated)-49% growth
  • 2012(estimated)-27% growth

EOG's acreage in the United States' shale plays is formidable. Its current shale plays are:

  • 600000 net acres in the Bakken Three Forks
  • 520000 net acres in the Eagle Ford
  • 300000 net acres in the Niobrara
  • 120000 net acres in the Wolfcamp
  • 120000 net acres in the Leonard
  • Strong position in the Barnett Combo

EOG is also re-activating vertical oil fields:

  • Permian Basin (Bone Spring)
  • Manitoba Waskada
  • Mid-Continent Cleveland
  • Horn River- convert gas field to oil indexed field

EOG is well known for gas production:

  • 183000 net acres in the Haynesville/Bossier (11Tcf)
  • 210000 net acres in the Marcellus (3.3Tcf)
  • Uinta Basin (7Tcf)
  • Barnett, South Texas, Green River, etc.

EOG's 2011 estimated cap ex will be $6.4 to $6.6 billion. 80% will be focused on liquids, with the other 20% spent on dry gas to hold acreage. In 2006, EOG's revenue mix was 21% liquids. It is estimated by 2012, liquids revenue will be 73%. Even though the change is quite large, it is possible with these assets.

Apache Corp. (NYSE:APA) made this list based on its being the 8th largest liquids producer in the United States. From the fourth quarter of 2009 to the fourth quarter of 2010, Apache increased U.S. liquids production by 29.6%. The last quarter of 2010, it had production of 729 MBoe/d. Total production growth was 24%. North American natural gas is 17% of revenue. Apache's daily production by location is:

  1. Egypt 169 MBoe/d
  2. Canada 120 MBoe/d
  3. GOM Shelf 113 MBoe/d
  4. Permian 86 MBoe/d
  5. Australia 71 MBoe/d
  6. North Sea 53 MBoe/d
  7. Argentina 47 MBoe/d
  8. Central 43 MBoe/d
  9. Gulf Coast 20 MBoe/d

Apache is well diversified. 92% of liquids production is oil, and 60% of oil is brent. It has 3 million gross acres in the Permian (82% liquids), and one million acres in the Granite Wash. At the beginning of 2010, Apache had two rigs drilling liquids plays in the US. By the end of March of 2011, that number had increased to 24, or an increase of 1100%. Areas outside the United States are:

  • Egypt 11 million acres
  • Australia 12 million acres
  • Canada 8 million acres

Apache expects 13 to 17% production growth this year. It has 46 million gross acres of inventory. They have significant liquids plays to increase production in the near term (example=5000 drilling locations just in the Permian). Apache is planning to increase the number of rigs in the Permian to 50. It has an 8 to 10 rig program planned for the 200,000 acres in the Granite Wash. International gas plays have better margins, which will be a focus of growth. Apache will continue to increase liquids, and international gas production.

Marathon Oil Corp. (NYSE:MRO) has 66% liquids production. Cap ex for 2011 is $1.5 billion. If opportunities exist, it can increase by an additional $1 billion. Marathon estimates it will be able to increase production by more than 25% per year through 2015. Production mix is estimated to be 72% liquids. In 2007, Marathon's cap ex was 60% liquids production. 2011 estimates are for 92% liquids. Marathon has changed direction with respect to acquiring asset reserves. As opposed to investing in one mega-find it has chosen a smaller, diversified approach. Marathon's U.S. land grab includes:

  • Bakken Shale-391000 net acres, 450 net wells
  • D-J Basin-177000 net acres, 600 net wells
  • Anadarko Woodford-94000 net acres, 350 net wells
  • Eagle Ford-79000 net acres, 350 net wells
  • In-situ-50000 net acres, In appraisal program

There are several opportunities in the United States' land shales. There are further acreage acquisitions in progress. The areas could see down-spacing, increasing overall locations. In December of 2010, Marathon had 15000 Boe/d from its Bakken holdings. It has three rigs in the Anadarko Woodford, and will increase to 8 by the end of this year. The Woodford is in focus due to low net development costs ($10-$15/barrel), and high EUR (750-1000 MBoe). Marathon estimates production of 30000 Boe/d, from the Anadarko Woodford in 2015. Its Eagle Ford position is entirely in the oil window. There is an option to buy an additional 75000 net acres. If all goes well, the current 2 rig program will increase to 6 in 2013. Marathon has the option to add 200000 net acres in the D-J Basin. Much of its current acres are in Goshen County, near Samson (NYSEMKT:SSN) and Chesapeake. Marathon paid a significant amount per acre, roughly double that of Chesapeake's.
International assets are a large part of Marathon's portfolio. It has 21 prospect areas with net unrisked resource in the Gulf of Mexico. Marathon's Kurdistan assets are possibly world class. Kurdistan has 3 BBoe gross unrisked potential. Marathon has 2.3 net acres in Poland. This shale gas play has much better economics than its U.S. counterparts. Marathon is in the process of selling its downstream business. This should create a leaner, more focused oil company.

Hess Corp. (NYSE:HES) is a world oil integrated company. Its 2010 production was:

  • Africa-113 MBoe/d (100% liquids)
  • Europe-113 MBoe/d (91 MBoe/d liquids)
  • United States-107 MBoe/d (89 MBoe/d liquids)
  • Asia-85 MBoe/d (14 MBoe/d liquids)

Hess has over 900000 net acres in the Bakken. It estimates 35% CAGR of production from 2010 to 2015. This does not include acquisitions. Hess has 40 MBoe/d this year. An 18 rig program is planned for 2011 in the Bakken. Valhall field had net production of 30 MBoe/d. Goal of 75 MBoe/d net to Hess is possible at Valhall. Its Thailand JDA, is a long lived international gas asset with production of 250 MMScf/d. Equatorial Guinea Block G has net production of 60 MBoe/d. In the deepwater Gulf of Mexico, Hess produces 20 MMBoe/d. It will resume GOM drilling of suspended wells.
Hess also has several new possible production prospects. The GOM Pony Prospect has 200 MMBoe net resource. Hess has completed 16 exploration wells in Australia. It has opportunities in Ghana, Indonesia, and Brunei. Hess has the opportunity to earn 50% working interest in one million gross acres in the Paris Basin. It has Bakken shale analogue.
Hess' refining and marketing position adds value and free cash flow. Even with oil pushing higher, refineries are doing well on increased demand. Hess' retail locations have been doing well since the economy has begun to improve. As long as the economy continues to grow so will Hess.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EOG, MRO, CHK over the next 72 hours.

Source: Chesapeake Energy Corp., Cenovus Energy Inc., EOG Resources, Apache Corp., Marathon Oil Corp., Hess Corp. Please be sure to study these names before you purchase stock. This is a list of names of companies that fall within a specific dynamic, and not a buy recommendation.

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