It's a well-known fact that patience plays a huge role in creating a portfolio of winning investments. Even so, patience can be one of the most challenging virtues to inculcate when it comes to following oil and gas stocks. One in particular, EOG Resources (EOG), can try an investor's patience.
Like most companies, EOG Resources requires that an investor look past the performance of a couple of quarters and look forward to the long-term prospects. With this in mind, I believe EOG Resources is a smart buy-and-hold company when viewed through a wide-angled lens.
EOG Resources (formerly Enron Oil and Gas), is a large independent oil and natural gas company with proved reserves in the United States, Canada, offshore Trinidad and the United Kingdom's North Sea. Like other energy companies such as ConocoPhillips (COP) and Chesapeake Energy (CHK), EOG Resources is realizing it can generate more revenue from liquids than from gas, considering depressed U.S. natural gas prices. This is why EOG Resources' strategy going forward is to make better use of the drill bit.
The company has been increasing liquid gas drilling production in Central, East, and South Texas, North Louisiana, and Rocky Mountain areas, but its greatest push is in Eagle Ford Shale with a position of almost 650,000 acres. This area alone makes EOG Resources' growth look so promising. The company's net recoverable reserve estimate here grew from 900 million barrels of oil equivalent to 1.6 billion barrels, translating to a spectacular 78% increase. Moreover, the company has identified another 3,200 drilling locations to add to its 375 drilled wells.
In a February statement covered by Reuters, the company said, "Because EOG's outlook for natural gas prices is weak for the next several years, EOG plans to invest the minimum amount of capital expenditures necessary to hold its core acreage positions." The company plans on using just a tenth of its 2012 exploration and development capital budget, (roughly $7.4 billion to $7.6 billion), on dry natural gas drilling activity.
EOG Resources is on a roll in increasing its liquid production. The company increased its 2012 liquids growth target to 30% from 27%, while its overall growth target is just 5.5%. That is down from 9.4% growth in 2011, partly because its 2012 North American natural gas production is expected to fall by 11%.
Liquid growth for all U.S. producers is expected to climb though. According to EOG Resources CEO Mark Papa, due to the continued growth of shale plays, U.S. operators should add another 1.5 million barrels per day of oil and liquids production by 2015. It was in 2007 that the company decided to shift from gas to oil. EOG Resources' revenue from liquids is up 21% from 2006 to 72% in 2011, with expectations for an 84% liquids share this year.
Patience also plays a key role when looking at what it will take for EOG Resources to accomplish these ambitious plays. The cost for production increases as more energy companies turn to increasing drilling activities. Finding qualified, trained personnel is just one of the challenges as well as designing creative drilling techniques.
Currently, EOG Resources employs a unique operational model using a technique called pattern drilling/fracking, in which four to five wells are drilled simultaneously in a pattern. The result is that production from these wells is added in a single gush instead of one at a time. Some experts believe that this technique reduces drilling costs and makes optimum use of available resources.
Increasing liquid production is becoming costly for other players as well. Swift Energy (SFY), also drilling in Eagle Ford with 80,000 net acres, estimates that the cost to drill and complete a well with a 6,000 foot lateral will range from $8.5 million to $9.5 million. Pioneer Natural Resources (PXD) is also active in the Eagle Ford Shale and estimates that gross well costs in 2012 will range from $7 million to $8 million per well.
Even with the additional costs involved, EOG Resources will come out a better, grounded company in the long term. EOG Resources' total capital expenditure for 2011 was around $7.5 billion, and the company intends to strip assets worth $1.2 billion to make up for any shortfall in funding. This includes the $340 million sale of predominantly natural gas properties, which, as we've seen, might be considered a blessing.
EOG Resources is a solid company making smart moves toward the future. It is a $31 billion market cap company growing net income by better than 50% per year. In February, the company reported a greater-than-expected rise in quarterly profit. Net income for the fourth quarter rose to $120.7 million, or 45 cents per share, from $53.7 million, or 21 cents per share. This is a 125% growth over the previous year's comparable period. EOG earned $1.15 a share, compared with the 88 cents per share expected by analysts.
The company also raised its quarterly dividend to 17 cents per share, for an annual payout that will be 6.25 percent higher than before, to an annual rate of 68 cents per share. The company has grown its dividend by a compound annual growth rate of 21% since 1999.
Other companies that recently increased dividend payouts include TransCanada (TRP), which boosted the company's quarterly payout by 5% to 44 cents per share.
With patience, EOG Resources is a long-term investor's stock. The company's management is focused on production growth, while timing a rather unpredictable market well. It has staked out leading positions in not only the Eagle Ford Shale and various other onshore shale and unconventional resource plays, but continues to seek new liquids plays elsewhere (establishing a rail line to bring Bakken output from North Dakota to the Gulf Coast at St. James, Louisiana), and in international areas like Argentina.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.