EOG Resources (EOG) continues to be one of my favorite large caps in the oil space. Its 2012 adjusted net income was $1.17/share, which was a penny better than estimates. When mark to market and one time charges are added, EOG earned $1.20/share. Discretionary cash flows for the first quarter were $1.3 billion.
This is a story of liquids, and EOG's ability to increase production. Total crude and condensate production was up 49% year over year. This growth is attributed to better than expected performance in the Eagle Ford and Bakken. The Eagle Ford is no surprise, as it is EOG's flagship play. It production in Gonzales County is the best on land in the lower 48. EOG's Bakken play has been pushed to the side as it has focused on the Eagle Ford. For the full year, it has increased its liquids growth target to 33% from the previous guidance of 30%. Unit costs are in line, and EOG is not raising capex.
Year over year growth, for a company this size, is excellent. In the first quarter of 2012 year over year, it has increased GAAP EPS by 131%, non-GAAP EPS by 72%, adjusted EBITDAX by 39%, and DCF by 39%. Much of this is being pushed through oil production in the Eagle Ford. Recent well completions have had IP rates of 2,000 to 3,000 Bopd, using normal chokes. Also, 30-day IP rates are holding up to 1,500 Bopd, and it will be interesting to see these wells after 90 days of production. It is currently testing spacing of 40 acres, as it is comfortable with 65 to 90 acre spacing. Drilling efficiencies have allowed EOG to reduce its number of rigs in the Eagle Ford from 26 to 23. It will still make company guidance of the number of wells drilled, even with fewer rigs. It is self sourcing all of its frac sand in the Eagle Ford, decreasing well costs by a half million dollars/well. This may be the most important factor in the Eagle Ford. In early 2013, it will commence dry gas injection to improve recovery factors (enhanced oil recovery) in the Eagle Ford. All of this is bullish for Magnum Hunter (MHR) and Penn Virginia (PVA), as both have acreage positions in Gonzales County near EOG's best wells.
The Bakken/Three Forks had promising results in its core area. In downspacing this area, from 640 acre to 320 it had very good IP rates ranging from approximately 1,000 to 1,300 Bopd. More importantly, the older 640 acre spaced well offsetting these three saw a doubling of production. This provided production from the new wells, and old. The true reason for the improved production in old wells is unknown, but a guess is that the offset wells with tighter spacing actually stimulated older rock that the initial frac on the old had not. By doing so, the fractures released more oil and increased production.
It is also downspacing its light area to 160 acres from the original 320. In its Antelop Extension area, it drilled four Three Forks wells, which had IP rates of 900 to 3,400 Bopd with 1 to 3 million of rich gas. A Bakken well drilled in the same area produced 2,300 Bopd with an equivalent amount of rich gas. Its Stateline area in western Williams and eastern Montana saw 7 wells start production, with the IP rate between 540 to 1,100 Bopd. EOG began water floods in Parshall Field for the purpose of testing the increase of oil recovery. Results are expected by the end of 2012. This would be positive for all producers in the area, as secondary recovery may be possible in other areas such as the Sanish Field which has been developed by Whiting (WLL) and Fidelity (MDU). There are worries associated with water floods and the possibility of weather the liquids may cause the shale to swell and close off the fractures. It is also possible it will work, and in that case we could see the value of acreage in North Dakota and Montana increase.
EOG continues to have success in the middle Wolfcamp, but there are several variables such as spacing that are being worked out. The upper interval has had successes to date, but more data is needed before it can give any concrete information. EOG estimates the average middle Wolfcamp well will produce 430 MBoe. Its Barnett Combo will provide the second largest increase in liquids production for EOG. A typical well here has an EUR of 300 MBoe, with 85% liquids production. There are several other plays EOG is participating in, but these four are its focus.
Back to the Bakken, EOG's St. James crude by rail facility received its first Bakken crude on April 15th. This is significant as it provides LLS pricing. This differential has widened to $15 in comparison to WTI. This crude by rail system gives EOG a flexibility with its crude to capture the best price for the Bakken, Eagle Ford and Wolfcamp at either St. James or Cushing. It will continue to send Bakken oil to St. James, while it sells its Eagle Ford crude to Houston or Corpus Christi. St. James can handle 50,000 Bbls/day and will expand to 70,000 Bbls/day by year end.
In summary, EOG has quite a bit going for it in the short to long term. Its Eagle Ford acreage gets better with each quarter. As EOG describes the play as its 1,000 pound gorilla, and is finding tighter spacing throughout. It has also improved drilling times enough to decrease the number of rigs needed to hit its 2012 target, which should decrease costs. The Bakken/Three Forks is very exciting as it not only has decreased spacing, with very good results, but also it is stimulating an increased production in wells that have been producing for four to five years. Right now it believes it can recover 12% of oil in place (up from 8%), but would increase this number if the water floods work. Its crude by rail system is increasing the price received, while its self sourced frac sand is decreasing costs significantly. This is a very good, and well managed company, and well worth the investment.
Additional disclosure: This is not a buy recommendation.