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With peak oil fading fast in the rear-view mirror, investment in energy exploration and production companies is more focused on the quality and life of the energy assets, and the ability of a company to exploit those assets in cost-effective ways.

Commodity prices could be volatile for some time. The impact of the Iranian embargo by Europe and the U.S. has yet to be quantified. Macroeconomic factors in the EU have the European economy trying to salvage itself. These, together with the slowdown in emerging market growth and the continued economic doldrums domestically, have left oil prices lurching around $79 to $87 in the last two weeks and natural gas prices trading off their two-decade lows, but still below $3 per mcf.

EOG Resources, Inc. (EOG) is an independent producer of oil and gas, primarily in North America with some operations in Trinidad and Tobago, Argentina, China and the U.K. In the current portion of the energy cycle, EOG's survival is all about the execution of its strategy to move into high-margin oil and natural gas liquids (NGLs), grow organically through exploitation of its existing assets, and carefully explore new opportunities that fit to its focus on oil and NGLs.

In the first quarter of 2012, the company delivered 49% growth in crude and condensate production and 48% increase in total liquids production over the first quarter of 2011. Volume expanded 11.1% from the prior year. Quarterly earnings were up 72% from the same period last year. As a result, EOG increased its 2012 guidance for growth in liquids production to 33% from 30%.

The first-quarter results are as a result of execution in Eagle Ford operations, successful drilling in the Bakken, and positive results from the Williston Basin, Texas Barnett and Permian Basin. EOG's success in the Bakken is mirrored by Newfield Exploration Co. (NFX), Chesapeake Energy Corporation (CHK), and Marathon Oil Corporation (MRO).

EOG's CEO and Chairman, Mark G. Papa, is quoted as saying: "Simply, the marked improvement in productivity from individual wells is flowing to EOG's bottom line. The Q1 performance underscored early mover advantage in prolific domestic crude oil shale plays where EOG continues to hone its drilling and completion acumen."

Moody's Investor Services provided in April an improved rating for EOG from "negative" to "stable." The upgrade was based on EOG's improved balance of NGLs and dry natural gas production that has improved margins and credit quality. A number of energy producers have shifted output to oil and NGLs, which command higher prices than dry natural gas, which is trading at historic lows.

Moody's expects the company will increase liquids production from the current 43% to 45% in 2012, as EOG shows strong production growth and reserve replacement. Liquids output growth is expected to continue for the next 12 to 18 months as a result of the company's diversified drilling inventory across properties in North America.

To get a rating upgrade, EOG needs to continue to grow production and reserves relative to its debt levels. The company has negative cash flow due to high capital expenditures. Asset sales in 2012 are expected to offset its spending program. EOG will probably have negative cash flow into 2013. As a result, a rating upgrade is unlikely anytime soon.

EOG, like SandRidge Energy, Inc. (SD) and Newfield, is focusing on oil and liquids-rich plays. 85% of its North American wellhead revenue came from liquids in the first quarter. The company expects capital expenditures to be $7.4 billion to $7.6 billion in 2012. Because of low natural gas prices, its gas weighted production and reserve base exposes it to fluctuations in the natural gas markets, as 61% of its resources were natural gas in 2011. EOG is largely a North American producer, lacking international diversification of any consequence.

In February, the company announced a raise in annual dividend, which came on the heels of last year's 9.4% year-over-year production growth. The hike marks the 13th increase in as many years. The 2011 annual dividend was $0.45 compared to $0.21 in 2010. The company declared a dividend of $0.17, or $0.68 annual rate, for the quarter ended March 31, 2012.

EOG's common shares currently trade around $93.The stock has a 52-week range of $66.81 to $119.97. At the time of this writing, the price-earnings ratio was 19.14 and dividend yield was 0.80%. The trailing twelve months earnings per share are $4.76. EOG has total cash of $294 million and total debt of $5.01 billion. The current ratio is 1.10. Its book value per share is $48.19. The float is 93.1% held by institutions and 0.69% held by insiders. 1.6% of the float is short at June 15, 2012.

EOG is a sound company with good domestic prospects. Domestic production comes at a higher price due to labor, environmental and transmission costs. EOG does not have significant production in lower cost regions to offset its costs in the U.S. That is not to say that it could not find a way to cut costs in North American production and find a way to increase cost-effective production in foreign operations.

The organic production growth has been great, the program shift to oil and NGLs has been successful, and the dividend rewards to shareholders have been generous. Even though the stock is tightly held by institutions, there is some room for a retail investor to make a move in this stock. In the interim, however, until there are some solid economic numbers to rely on, a wait-and-see attitude for the conservative investor is advised.

Source: EOG Resources: A Hidden Gem In A Tumultuous Market