EOG Resources (NYSE:EOG) has stated its intention to look into the drilling of three high-impact wells in the next 18 months. This is great news for stockholders, especially as the drilling comes with a fairly high chance that the company will increase its current oil production significantly. Generally speaking, EOG has performed very strongly recently. For example, it increased its revenue significantly over the last few years and this is a trend that is expected to continue making it one of the safer oil company bets. This great increase in revenue can be attributed to a combination of factors, including the regular yearly increase in the number of barrels produced by the company, a significant increase in the oil price of late, contributions from another well, specifically West Firsby WF-9, and a decrease in the number of breakdowns (and the frequency of bad weather that lead to halts in production).
Provided EOG is given a positive ruling in its appeal against the Surrey County Council, which refused permission to drill an exploration well in the Surrey area, it will result in developments there sometime in 2013.
In other news, Jeffries & Co. recently increased the price target and earnings estimates for EOG, based on the assumption that oil prices will increase. However, despite this increase, EOG is currently not considered to be a good bet by Jeffries and it is therefore advised that, at present, you hold back in terms of your commitment to the stock.
EOG has recently been described as showing signs of weakness. This is based on a five year analysis of the company. Although at first glance EOG may appear to have a great growth profile in the long-term, a short-term analysis of the situation is far from being optimistic, as there are a number of mitigating factors, such as the recession, to take into account. On top of this, the company made a few errors in terms of its natural gas estimates for the year; prices that were expected to increase to remain stable are in fact dropping steadily.
It is generally thought that an increased interest in natural gas resources has led to there being an overproduction, with estimates that this will cause the price to continue plummeting. The backlash this will have for EOG is obvious. Although these predictions about the future are not absolute, the chances are high that they may occur, making EOG one of the companies that are a less than desirable stock option at present. Once there is a better idea of what price fluctuations will occur in the market, it will be easier to make a final decision regarding the stability of EOG stock.
This recent development in natural gas, namely the drop in prices, has inspired more and more companies to move away from a focus on natural gas. However, two of EOG's competitors are currently engaged in efforts that may increase the demand for this product. The CEOs of Chesapeake Energy (NYSE:CHK) and Devon Energy (NYSE:DVN) are pushing for an increased use of natural gas in the U.S. economy. If the changes these companies are attempting to instigate come about, the use of natural gas will increase and the price of the product will increase along with it. Although in the long run this will, of course, have a positive effect on EOG shares, the companies that benefit first will be Chesapeake and Devon.
This may make competition for EOG from these two companies seem strong. However, all is not well with the two companies. Chesapeake, for example, has recently come to the attention of the media mainly due to the personal loans that its CEO, Aubrey McClendon, has reportedly defaulted on. McClendon reportedly has been using his stakes in Chesapeake as collateral for the loans. Despite this, Chesapeake reports that it is not worried by these developments as the company as a whole is protected; it holds first liens on oil and natural-gas wells that McClendon used for collateral. However, the news of these loans did cause Chesapeake's shares to tumble dramatically recently. And stockholders are far from being comforted by the news that the company's assets will not suffer as they still see these events reflecting badly on the management of the company as a whole. Chesapeake has a rocky road ahead as investors begin to treat the company with increased suspicion.
Because of the decrease in natural gas prices that have affected companies such as EOG drastically, the move for most companies has been towards liquid natural gas. Natural gas is easier to transport and yields higher profits. One company that seems to be ahead in this regard is Apache (NYSE:APA), which recently signed a preliminary deal with Chubu Electric Power Company Incorporated. The deal basically states that when the Wheatstone plant that is currently under construction in Western Australia is complete, Apache will sell significant amounts of liquid natural gas to the Japanese company. This means a bright future for the oil company which is successfully trading on the fact that Japan needs to find a substitute for nuclear power quickly and easily. If EOG plans to stay in the running, it will soon need to switch its focus to the ever-expanding field of liquid natural gas. As things stand, it is allowing competitors like Apache to take the lead.
Anadarko Petroleum (NYSE:APC) and Enterprise Products Partners L.P. (NYSE:EPD) are also forces to look out for as they too are involved in the movement towards a focus on liquid natural gas. These companies are developing a liquid natural gas pipeline that will extend from Colorado to Texas. Companies like EOG are never safe from competitors grabbing market share through new deals and findings. For it to stay competitive, EOG will need to make its share of big moves. This makes the announcement of the company's intention to look for high-impact wells all the more promising, though some may think that an investment into natural gas would be wiser. We will just have to wait and see.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.