"If you can buy more of your best idea, why put [the money] into your 10th-best or your 20th-best idea? The more positions you have, the more average you are." Bruce Berkowitz (Fairholme Fund, Barron's, 3/17/08)
There's a lot to be said for the quote above. As I looked at my own portfolio of energy companies, I had to ask myself, "Which is the single best idea or energy company that I own?"
The answer was disappointing. It's the one that I don't own. It's the one that the chairman and CEO owns a breathtaking 1,194,739 shares of the company he leads. That means the chairman and CEO has $112,305,466.00 of his own net worth tied up in shares of his company.
From my research the only entities that have a larger position in this energy champion is Capital Research Global Investors, which owns 21,780,200 shares. That's 8.08% of the outstanding shares and equates to around $2.24 billion dollars worth.
The Vanguard Group and Growth Fund of America Inc. each own close to 5% of the outstanding shares as well.
Even the chief operating officer looks at his company as the best idea among its peers. He owns 473,037 shares which happens to be valued at current share pricing at $44,465,478.00.
Thus the two most powerful officers of this company, one of the world's largest investment management organizations with assets of around one trillion U.S. dollars under management, and two other powerful investment companies own close to a combined $5 billion of shares.
This is an energy company so profitable and so valuable that its own leadership and other powerful investment companies want to own an enormous percentage of the outstanding shares of the company.
It also helps explain why EOG is afforded a forward P/E ratio of over 15 while APA only has a forward P/E of slightly more than 6 times earnings and Devon's number is a little richer multiple of 8.9.
This suggests that EOG has a growth strategy that is unparalleled among its peers and a business model to support it.
Whether you speak with the inner circle of the energy elite in America's oil capital (Houston, Texas) or you listen to well-connected media spokespeople like Jim Cramer, EOG is the "darling" of its industry.
As of December 31, 2011, it had a total estimated net proved reserves of 2,054 million barrels of oil equivalent (MMBoe), of which 517 million barrels (MMBbl) were crude oil and condensate reserves, and 228 MMBbl were natural gas liquids reserves; and 7,851 billion cubic feet were natural gas reserves.
The company held approximately 572,000 net acreage position in the oil window of the Eagle Ford Shale Play near San Antonio, Texas. EOG Resources, Inc. was founded in 1985 and is headquartered in Houston, Texas.
My friend Matthew Carr, the Commodity Specialist for The Oxford Club's fascinating trading service "The Peak Energy Strategist" had this to say recently about the EOG success formula:
"I've been a huge fan of EOG for many years because they did something really smart and forward-thinking. They planned ahead to reduce their costs. Back in 2008, EOG bought into the sand business and began running its own mines.
"The company had the foresight to understand what was about to happen: The price of sand was going to quickly rise as demand skyrocketed. Sand is an integral part of hydraulic fracturing."
Carr pointed out that since the drilling technique EOG uses started to be widely used in 2007, demand for sand from the U.S. oil & gas industry has increased almost 400%. That demand will grow yet another 30% during 2012.
"So, because EOG owns its own sand mine in Texas - right next to the Eagle Ford shale where it operates - the company is able to drill new wells at a much lower costs. Instead of paying an average of $8 million to drill a well in the play, EOG's cost is $6 million to $7 million per well, moving down to $5.5 million", Carr explained.
EOG announced earlier this year that it's planning to drill 280 wells in Eagle Ford in 2012 alone. That will lay the groundwork for significant future growth in production, but it also will increase operating costs and spending.
Mr. Carr pointed out yet another stroke of genius EOG executed on:"At that pace, instead of spending the $2.24 billion based on the average cost to drill a well in the Eagle Ford, EOG's cost will be just $1.54 billion".
That's a big part of the secret of how EOG is able to keep producing more each year while spending less than its competitors.
When you look at a one-year comparative chart of EOG versus APA and DVN you can see that its share-price decline has been far less severe than the precipitous fall in share-price that APA and DVN experienced.
A picture (and in this case a chart) paints a thousand words. One logical conclusion here is EOG outperforms on the way up and holds up better on the way down.
I'd encourage you to listen to Chairman and CEO Mark Papa's presentation at the Citi Global Energy conference on June 5th, 2012.
If you listen carefully you'll hear the vision, the plans, the advantages and the scope of their operations that motivates him to own over $112 million worth of EOG shares.
You can read their "keystones of our successful strategy" by reading a letter Papa wrote in Feb.2012. It's no wonder Fortune Magazine named EOG one of the 100 best companies to work for in 2012.
The primary focus of EOG as a company in their own words? "Be the first to identify and develop crude oil and liquids-rich shale reservoirs using the same horizontal drilling and completion techniques that transformed North American natural gas resource plays."
Is it their leadership, resources, operations strategy, "secret sauce", connections and massive financial funding that makes EOG the Triple Crown winner over rivals Apache and Devon?
The short answers to the above are "yes, yes, yes, yes, yes and yes".
I challenge you or anyone else to compare EOG with the other two and pinpoint the major advantages. Look at them side-by-side and statistic-by-statistic, which yields a great deal more insights.
To do so would be a rich exercise in convincing yourself why EOG is "the best idea"among its peers, and why building a position in this remarkable company makes outstanding investment sense.