EOG Resources (EOG) engages in the exploration, development, production, and marketing of crude oil and natural gas. The company's main holdings are in the United States but it also has operations in the United Kingdom, Canada, Trinidad, and the North Sea. While natural gas takes up most of the production process for the company, it has been aggressively seeking alternative plays while demand for natural gas remains low.
This aggressiveness is causing more heads to turn in the direction of EOG Resources, and rightly so. It is because of the company's sense of urgency that I believe this to be a business that will continue its growth spurt and be a wonderful investment to add to the long-term category of a portfolio.
Abut 85% of EOG Resources' production is in natural gas. If the momentum of recent focus on energy policy-shying away from high carbon output oil and coal and leaning more toward cleaner natural gas continues and even picks up steam, an increase in demand for the commodity stands to benefit the company significantly. According to numbers put out by the U.S. Energy Information Administration (EIA), there is 60% more gas than normal in U.S. storage facilities. This over supply of natural gas has forced prices to drop by 59% from last summer's peak of $4.85.
The EIA predicts natural gas storage will reach record highs of 4.04 trillion cubic feet by October. Levels already reached 2.5 trillion cubic feet in March. Current prices hover around the $2 mark. In Asian markets, liquefied natural gas (LNG) sells for several times that price. Last year, the Canadian government granted an export license to a LNG export joint venture known as Kitimat LNG that is between Apache (APA), Encana (ECA) and EOG Resources, and is located in Kitimat. When the deal is finalized, which is expected by the end of this year, EOG Resources should end up with about a 30% stake.
Great leadership is always a key factor when determining if a company is worth investing in. EOG Resources' leadership is trying to go where the money is and in addition to offloading its reserves of natural gas where it can get the highest price, it is also going to where the oil can be found. The company's CEO and Chairman, Mark G. Papa, is credited with having the foresight to focus on extracting oil from shale long before the competition did. In a statement made the beginning of this year, Papa said,
Four years ago we realized being a natural gas producer, that's not going to be worth much if gas isn't worth much.
The company began acquiring acreage in Eagle Ford in 2007 paying just $450 per acre accumulating up to 650,000 acres today. Production for that play will contribute 1.6 Billion boe of potential reserves to the company over the lifetime of the asset.
Last year, its net production reached 66,000 barrels of oil equivalent per day, 88% of which was in liquids. Total output is expected to climb 5.5% this year with output of petroleum liquids, such as crude, expected to rise 30% in 2012.
Proactively seeking new sources of oil has become a common trait of EOG Resources. The company is mining sand in places such as Chippewa Falls, WI, and shipping the product by train to South Texas Eagle Ford where it produces about 53,000 barrels of crude oil equivalents each day. There is money here and EOG Resources is making sure to take its cut.
During an interview this past January, Papa said:
Having the facilities to provide self-sources sand for our operations was a key objective for EOG this year. Mining and processing some of our own sand rather than purchasing it from a third party is one way to lower well completion costs in key resource plays such as the Eagle Ford.
The company has been producing well in other areas as well including a substantial amount of petroleum in Canada. Last year, the company produced 11 million barrels of oil equivalent (BOE) there and it says it has 192 million boe of proved reserves in the country.
Just recently the company signed a joint venture with a division of Mitsubishi for a stake in EOG Resources' position in the Tuscaloosa Marine Shale (TMS) play in Louisiana.
Apparently the ink is still wet and concrete information has not surfaced yet, but because EOG Resources recently applied for its first two drilling units in the play, both in Avoyelles Parish, it is believed that the company will control more than 120,000 acres in the deal, primarily on its western edge in Vernon, Rapides and Avoyelles Parishes. The company continues to lease to the east into what has been considered the heart of the play, where Devon Energy and Encana have drilled wildcats.
EOG Resources has a market cap of $29.9 billion, a P/E ratio of 29.5, and P/S ratio of 3. The dividend yield is around 0.6%. The company had an annual average earning growth of 14.9% over the past 10 years. This year, EOG Resources high growth is expected to contribute to its high valuation. The company is expected to make about $4.89 per share, providing a forward P/E ratio of 23, much higher than the industry average of 12.43.
For the fourth quarter of 2011, the company's revenues were up 55% compared to the same quarter 2010, higher than the industry's average growth rate of 23%. The company's net income increased from $53.67 million to $120.7 million, a 125% jump. With this continued growth, it is expected that EOG Resources will earn $6.50 per share in year 2013, up more than 30% from the expected EPS in 2012.
Two of EOG Resources' main competitors are Anadarko Petroleum (APC) and Sonde Resources (SOQ). EOG Resources is whooping the competition with year over year quarterly revenue growth of 59.4% far exceeding them both with Anadarko Petroleum at 34.5% and Sonde Resources at 24.4%.
The company is planning to sell $1.2 billion of assets this year to provide operating cash for more oil drilling, and forecasts that North American gas output will fall 11%. These proactive steps run in line with what EOG Resources has done all along. Staying ahead of trouble and trends is just one more reason to like this energized company.