Large cap energy companies are typically large, integrated businesses producing slow but steady growth, such as Exxon-Mobil (XOM) or Conoco Phillips (COP). Finding serious rates of growth in the energy sector usually requires investor research into smaller exploration and production companies. EOG Resources (EOG) breaks these stereotypes. This is a $31 billion market cap company growing net income by better than 50% per year.
EOG Resources is the former Enron Oil and Gas. The company separated itself from Enron and changed the name in 1999 to start trading as a separate company. In the year 2000, EOG Resources was the second most active energy drilling company in the U.S, and has remained one of the most active U.S. focused energy exploration companies over the last dozen years. In the first half-decade of the new century, the company focused on natural gas exploration and production, rapidly increasing production and reported net income. With the energy and commodity boom, the EOG share price took off from the low $20s in early 2004 to peak above $140 per share in May 2008.
While the company was making piles of money from high priced natural gas, it was building the foundation for the current sources of revenue and profits - crude oil and natural gas liquids production. In 2006 and 2007, EOG Resources started and increased drilling in the North Dakota Bakken, producing primarily crude oil and NG liquids. In 2010, the company secured over 500,000 acres in the South Texas Eagle Ford, now a major oil production region. This focus on drilling for liquid energy products over the last five years has allowed EOG to become the leader in horizontal drilling for crude and liquids, while the competition in horizontal drilling has remained focused on drilling for and producing natural gas. The shift in focus has worked out very well for EOG Resources. The prices of crude and natural gas peaked in 2008 at about $145 per barrel and $13.50 per mcf, respectively. After the peak, crude oil dropped to $40, but recovered steadily, and has been trading around $100 since the end of 2011. Natural gas prices just kept dropping and are now in the low $2 range - using the Henry Hub spot price. In 2011, EOG earned an average of $92 per barrel of oil, $50 per barrel of NG liquids and about $4.00 per mcf of natural gas. Natural gas at that price is worth about $22 per barrel of oil equivalent.
In 2010, EOG generated more revenue from liquids than gas for the first time. In 2011, 72% of revenue was from oil and NG liquids. The company forecasts 84% of 2012 revenue will be from liquids production. The early switch to horizontal drilling for liquids has put EOG Resources well ahead of peers such as Chesapeake Energy (CHK). In 2011, Chesapeake Energy produced revenue growth of 24% but net income declined slightly. In comparison, EOG revenues increased by 66% and net income exploded by 550%. Just a note so you don't get too excited, for 2011, EOG's adjusted EBITDAX - probably a better measurement of profit growth - was up by 52%.
Going forward, EOG Resources expects total liquids production to increase by 30% in 2012 and natural gas production to decrease by 11%. Currently 90% of the projected 2012 capital expenses will go towards the production of crude oil and NG liquids. At this point, the company is actively growing reserves faster than it is producing oil and gas. In 2011, new added reserves equaled 167% of production for the year. Reserve replacement costs were under $20 per barrel or barrel of oil equivalent. Although the company has scaled back on natural gas production, it still maintains all of its leases and reserves and is keeping production at levels to maintain lease holdings. If natural gas prices start to move upward at some point in the future, EOG could quickly ramp up natural gas production to profit from the higher prices.
Although the fortunes of energy exploration and production companies like EOG Resources are closely tied to energy prices, this company has shown the foresight and flexibility to shift production to the most profitable energy products. EOG has been able to stay ahead of the competition to exploit new energy finds and is a leader in horizontal drilling, the most efficient way to extract oil and gas out of shale formations. The stock should be an excellent long term hold and a home run investment if oil and gas prices stay at current levels or move higher.
An interesting item to keep an eye on is the status of the EOG Resources operation in Argentina. The company is drilling its first well on 100,000 leased acres in the country's high energy potential region. Problems in Argentina could stem from the country's heavy handed regulation of foreign energy companies. If EOG can generate serious production and profit numbers in South America, it will show the quality of company management.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.