Hot Plays Make EOG A Killer Buy Now

| About: EOG Resources, (EOG)

Analysts at FBR Capital just raised their price target on EOG Resources (NYSE:EOG) by 11%, from $125 to $140. I am confident that this is a realistic long-term outlook. EOG is on a tear as its competitors face various challenges, which is allowing EOG to move nimbly on its acquisitions without negative media coverage.

One of EOG's major moves was to begin operating its own sand mine in 2008, forecasting that demand for frac sand would outstrip production. This prediction proved correct, as industry analysts indicate that fracking operations in the U.S. ran through 28.7 million tons of the material in 2011, a dramatic increase from the 6 million tons used in 2007. EOG can produce 2,700 tons per day of completely processed sand from its Cooke County Sand Mine, which is located conveniently close to its operations on the Eagle Ford. According to EOG CEO Mark Papa, the company's production of frac sand not only guarantees it a supply, but reduces wellhead costs and helps the company avoid transportation bottlenecks.

Pioneer Natural Resources (NYSE:PXD) recently picked up on this cue and joined EOG as a producer of frac sand earlier this year. Its facilities, known as Premier Silica LLC after the acquisition, are located across the U.S. and serve multiple industries beyond Pioneer's own needs. This gives Pioneer an edge on EOG as Pioneer's transportation costs to markets outside the Eagle Ford are reduced through using closer facilities, and also allows Pioneer to generate additional revenue. Prices of frac sand are steadily rising due to the fracking boom across the U.S., which prompted U.S. Silica Holdings (NYSE:SLCA) to become the first publicly traded commercial silica producer.

EOG is also making another predictive move with its St. James rail service, which was placed in service this past April. Ultimately EOG expects (pdf) the rail service to have 100 mbopd capacity for EOG's needs alone, though this will come on a slow growth track as the current prediction is to reach 70 mbopd by the end of this year (pdf). The rail service is notable as it can load from three of EOG's major plays, the Bakken, Eagle Ford, and Wolfcamp, before unloading at either the St. James, Louisiana or Cushing, Oklahoma hubs. EOG also notes (pdf) that it is also considering other locations for its innovative "crude by rail." This, paired with its sand operations, could be EOG's inauguration of a new business model for exploration and production independents.

Growth in Liquids, Hot Central U.S. Plays Sets the Support

EOG recently revised its liquids growth target from 30% to 33% for the year based on strong production on the Bakken and Eagle Ford shales. In recent comments, Mark Papa indicated that the Eagle Ford "generates the highest direct after tax rate of return of any current large hydrocarbon play," adding that EOG is growing more optimistic about the Williston basin as well. However, Eagle Ford is the star of the moment. In a recent investor presentation (pdf) EOG referred to Eagle Ford as the "best asset in North America, and improving." G. Steven Farris, the CEO of competitor Apache (NYSE:APA), agrees, calling the boom across the Eagle Ford and the Permian "a revolution, and we're just scratching the surface." Apache would know, as one of the largest players on the Eagle Ford, behind Chesapeake (NYSE:CHK), which recently was forced to delay a planned volumetric production payment deal on the Eagle Ford just to remain solvent.

EOG remains the largest producer on the Bakken, where it competes with Kodiak Oil & Gas (NYSE:KOG), among others. Recent analyst notes from Capital One Southcoast indicate that Kodiak is a "potential takeover candidate in the Bakken play" on two months of production shortfalls, and I think that should EOG decide to expand its leasehold in the Bakken it might be interested in picking up Kodiak's assets here.


EOG is currently trading around $94, which gives it a price to book of 1.9 and a forward price to earnings of 14.6. For a company of its solid standing, these are extremely attractive value metrics. Looking at a three year trend line, EOG is right on its support level. EOG stock trended down with the rest of its peers in the last few months, driven largely by negative outlooks on natural gas and crude oil. However, EOG still remains more attractive on outlook and on value compared to these competitors.

Anadarko (NYSE:APC) is trading around $63 with a price to book of 1.5 and a forward price to earnings of 12.0, though the company is weighted by an ongoing lawsuit that could ultimately cost it $25 billion. Apache is trading around $83 with a price to book of 1.1 and a forward price to earnings of 6.2, reflecting the risk in Apache's recent diversification into LNG and deepwater, both of which will be siphoning capital expenditures in the coming years. Marathon Oil (NYSE:MRO) is similarly dogged, around $25 with a price to book of 1.0 and a forward price to earnings of 6.1. This is very low for Marathon historically, and could represent a buy opportunity with more risk but a higher dividend than EOG.

To focus on its core assets, EOG is looking to divest $1.2 billion in assets (pdf) this year. The move is hardly necessary given EOG's strong balance sheet and debt to equity of 0.4, but it does show that EOG is uncommonly conservative. I think that this reassures shareholders and analysts and is part of the reason that EOG is enjoying confident ratings from nearly all of the major firms giving it coverage. EOG's commitment to maintaining a net debt-to-cap ratio of 30% or less through year end 2012 is icing on the cake.

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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