EOG Resources Could Jump 20% By 2014

| About: EOG Resources, (EOG)

EOG Resources (NYSE:EOG), the fourth-biggest US independent oil and natural-gas producer by market value, is a company that explores, develops, produces and markets natural gas and crude oil primarily in producing basins in the United States, the United Kingdom, Canada, The Republic of Trinidad and Tobago (Trinidad), and The People's Republic of China. While in competition with the likes of Anadarko Petroleum (NYSE:APC), Apache (NYSE:APA), Chesapeake Energy (NYSE:CHK), and Lucas Energy (LEI), the company is in another world when it comes to ingenuity and creative business practices. EOG Resources runs as if it is working to survive the depression. It saves chunks of money, and then reinvests it in clever plays; it buys only what it knows it can afford and only that which will benefit long-term gain for the company, and it is stingy with any windfalls it might come into. I feel this company is managed by my grandmother, only wiser, which is why I believe this company to be such a great bargain.

For the past four quarters, the company has seen double-digit year-over-year revenue growth. During that time, the company has averaged growth of 66.3%, with the biggest increase coming in the second quarter of the last fiscal year when revenue rose 89.3% from the year earlier quarter. It is no wonder the company is doing so well. EOG Resources is constantly seeking new plays and new ways to get energy products to market. The company recently completed a pair of horizontal wells in the Turner sandstone area, uncovering an average of 310 barrels per day of oil and 1.9 million cubic feet of rich gas per well.

The company controls 240,000 net acres in Wyoming's Powder River basin. In Argentina, the company recently completed its first vertical well in the potentially huge Vaca Muerta Shale. The company continues to aggressively pursue oil. In Texas alone, the company has filed for permits to drill two 9,000-foot wells, one in the Escondido Creek field and the second in the Borregos field, permits to drill two 11,500-foot horizontal wells and one 10,600-foot horizontal well in the Eagleville field, one to drill a 12,000-foot horizontal well in the White Point East field, and a permit to drill a 15,150-foot well in the Midway South field. This is just in Texas alone.

EOG Resources is also thinking outside of the box when it comes to products used to find energy sources. As the need for hydraulic fracturing increases in the U.S. due to sources found in shale, the necessity for what is known as "frac sand" increases as well. The precious sand is needed as material that holds the cracks open, or fissures in the shale rock created when high-pressure steam is used, to prop open fractures in shale formations and allow oil and gas to flow out. These hydraulic operations used about 28.7 million tons of sand in 2011, up from six million tons in 2007. In 2008, EOG Resources decided to operate its own sand mine in North Texas after foreseeing the price of sand going up. The company also operates a sand mine and plant in Chippewa Falls, Wisconsin, producing sand used by the company's drilling operations in Texas's Eagle Ford Shale. The cost of drilling a single well is about $8 million, but EOG Resources' wells run close to $6 million because they own their own sand.

EOG reported great first quarter results including net income that moved up to $324 million or $1.20 per share, from $134 million or 52 cents per share previous year.

Total revenue in the quarter went up nearly 48% year over year to $2,806.7 million. The company's management pointed out in the quarterly statement that approximately 85% of its North American wellhead revenue came from liquids in the first quarter. Over the trailing 12 months, the gross margin for EOG Resources is 60.9%, while operating margin is 18.0% and net margin is 12.1%. In addition, the company's Board of Directors has declared a dividend of $0.17 per share on EOG's Common Stock, payable July 31, 2012, to stockholders of record as of July 17, 2012. The indicated annual rate is $0.68.

According to a statement by CEO Mark Papa, the first quarter good news was due to good flowing wells. "To put it simply, the marked improvement in productivity from individual wells is flowing to EOG's bottom line. Our first quarter 2012 performance reflects both our prudent strategy of reinventing EOG as an oil company and underscores our early-mover advantage in prolific new domestic crude oil shale plays where we continue to hone our drilling and completion acumen."

On the production side, during the first quarter 2012, total volume expanded 11.1% from the year-earlier level to 40.9 million barrels of oil equivalent (MMBoe), or 449.8 thousand barrels of oil equivalent per day (MBoe/d). Crude oil and condensate production was 140.8 thousand barrels per day (MBbl/d), up 49.1% from the year-ago level, driven primarily by contributions from the company's big plays in the South Texas Eagle Ford, the North Dakota Bakken (EOG Resources is the largest Bakken oil producer in North Dakota), the Fort Worth Barnett Combo and the Permian Basin Wolfcamp and Leonard. Natural gas liquids (NYSE:NGL) volumes increased 44.3% from the year-ago quarter to 51.1 MBbl/d.

Like competitor Chesapeake Energy Corp., the company continues with its asset divestiture program, using cash for more positive energy resources. EOG Resources recently put up for sell certain Oklahoma properties in a sealed bid offering. For sale is 100% gross working interest (75% to 87.5% net revenue interest) in 14,730 net acres in Ellis County with potential producing formations that include the Atoka, Cherokee, Cleveland, Cottage Grove, Douglas, Marmaton, Morrow, Oswego and Tonkawa zones.

This is just part of EOG Resources' plan to sell $1.2 billion in assets this year building a nest egg for future expansion. EOG Resources had cash and cash equivalents of $294.1 million and long-term debt of $5,010.5 million, representing a debt-to-capitalization ratio of 27.8%, which it plans to keep below 30% in 2012. During the quarter, the company generated approximately $1,316.3 million in discretionary cash flow, compared with $946.6 million in the year-ago quarter.

For obvious reasons, EOG Resources is seen as a success, but looking deeper, it becomes clearer that the company is staging a foundation for very long-term growth which makes this company look very attractive. EOG is currently trading around $98. Based on my analysis above, I anticipate the stock will trade close to $125 by the end of 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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