EOG Resources Analyst Conference Review: 4 New E&P Plays

| About: EOG Resources, (EOG)

These are my EOG Resources (NYSE:EOG) analyst conference notes with a little commentary added. Key points followed by detail from the conference: 

  • Production guidance going up: 2009 and 2010 go to 13 to 15% growth from the previously stated 10% level. It's important to note that these new volume levels do not include assumed production from the new plays. 
  • Much of this will be crude, attributable to their Bakken play. They said on the last conference call they are getting more oily and here you have it.
  • Four New Plays Disclosed:
  • Barnett Shale Oil Play: After drilling 8 horizontal oil wells in the Fort Worth Basin they see reserve potential of 225 to 460 mm BOE here on their acreage across three counties. First significant production will come in 2009 (part of the reason for the upped oil guidance.
  • North Park Basin, Colorado - Horizontal Oil Play - they see 10-80 mm BOE reserve potential here (again, we're talking oil and 2009 when this impacts numbers). "This could be as big as their Bakken oil play of North Dakota"
  • British Columbia - Horn River Basin - Shale Gas Play Analogous To The Barnett. Drilled 3 horizontal gas wells with encouraging results so far. No economics given, just some IP's in the 3 to 5,000 Mcfepd range. They through out a number for reserve potential of 6 Tcfe here which is pretty stunning given: 1) their normal predisposition towards conservatism and 2) the early nature of the play - they must really like what they see here.
  • Jefferson Davis County, TX - Mississippi Chalk Play where they see 200 Bcf of reserve potential having drilled 3 horizontal wells to date.
  • In summary, they have about 600,000 acres in these four new plays which estimated combined reserve potential of 1.2 to nearly 1.6 billion BOE (mid point would be 18% of current reserve estimates)

Holdings Watch: Before I get started we did a little trading here yesterday:

  • (EOG) Day trade on their annual analyst meeting: 
  • Bought the April $125 calls for $5.30 as the meat of the call was getting underway.
  • Sold same for $10.50 (up 98%) 2 hours later as the moved on to the potatoes (their existing plays and financials)
  • Gordon Gecko Was Wrong Watch: Greed is not good unless you count taking a 2 hour double as good and then I guess he was right but those April calls last trade was $8.20 and with the thought some big name analyst could downgrade the stock in the morning after a $25 rally without batting an eye.
    • I didn't realize at the time but the Sterne Agee analyst cut his rating to hold after lunch.
  • After a 20% point move I'm biding my time for re-entry into long dated calls.  

Opening Comments from CEO Mark Papa - He believes there is a major sea –change coming due to horizontal drilling that is  underestimated in magnitude by both Wall Street and other E&P companies. "Horizontal drilling will change the face of E&P worldwide" and they claim industry leadership here in:

  • Identifying which plays are horizontal well compatible
  • Well completion technology in horizontal wells

EOG will drill nearly 60% of their wells this year as horizontals so they kind of have to be good at it. Papa cited examples from Johnson County in the Barnett which show them to be drilling and completing much better wells than other companies there.

Papa closed by saying he'd like to go debt free and noted that unlike many of their peers their capital budget is satisfied out of cash flow. Debt to total capital is a very low 18%.

In this post I'm going to go over the highlights of the four new plays and skip the rest of the story (and it is a good story) due to time and space constraints.  

Ok, On To The Four New Plays: 

1) Barnett Shale Oil Play: Montague and Clay  counties

  • (accumulated 250,000 acres over several years)
  • large play 40 miles East-West by 20 miles North-South - that's massive.
  • High rock quality with oil was well known but everyone assumed that can't get oil to flow through the tiny pores of the shale.
  • EOG going to exploit through horizontal wells, 
    • They see more hydrocarbons per square mile than in Johnson County - the heart of the Barnett Shale gas play
      • (33 mmbo + 115 bcf per sq mile)
    • This is not an urban area like the core area of the Barnett Shale
  • Associated gas is very rich very wet (rich) - will build own plants.
  • This area looks like the sweet spot of the gas play, have viola underneath-very low reserves per well…could be a lot of upside as knowledge increases.
  • 60% of acreage has good frac containment with the viola underlying
  • Spacing is likely to be similar to that of the central part of the gas play. 
  • Took full cores on 3 wells - very extensive technical suite here to determine reserve potential.
  • 230 miles 3D planned for this year.
  • 8 completed horizontal wells
  • 275 bopd + 400 mcfpd - e central Montague - 3 months ron cheek #2 - fits the model below
  • 235 +600 tunnicliff #2
  • 320+550 weise #2
  • 50+750 - central montague - paul swift - think they know why on the gas vs oil here
  • 150+200 - scaling ranch - Clay county - 42 miles west of paul swift well
  • plan to drill 60-80 wells 2008
  • same completion technology as in Johnson County
  • Plan to build an oil pipeline - Pecan Pipeline- See first production 4Q08
  • Aggressively buying more acreage
  • 250 bopd IP is the model with a steep decline down to 40 bopd in a year
  • For $2.5 million per well they're thinking Gross EUR 100,000 bo and 0.45 Bcf of gas  or net of: 75,000 oil, 0.26 Bcf, and 34,000 barrels NGLs at a 75% NRI).
  • Last 10,500 foot well was drilled in 11 days. Many of the wells will be shallower at 5 to 7,000 feet.
  • very repeatable, solid economics - 65% after tax IRR (with very low recovery assumptions)

1a) Update on Barnett Shale Gas: Seeing Better Than Expected Recovery Factors In Johnson County

  • In Johnson county, the heart of the core of the Barnett Shale, management thinks they are recovering 50% of gas in place which is astounding. When the play in the development stage way back in the early part of this decade, EOG thought they could recover 10% of the gas in place here. More recently (late 2006) they thought the recovery factor would be more like 30% .
  • Currently only booked 1.4 Tcfe of the 5.0 to 7.2 Tcfe. This shows how they can optimize the targeting and the completion of wells.

With the addition of the oil play, they are planning to double Barnett Shale total quivalent production from just under 400 MMCFEpd to close to 860 MMCFEpd by the end of 2010.

2) North Park Basin, Colorado - Horizontal Oil Play - "could be as big as the Bakken"

  • Large thick, oil saturated pays  - 90 to 450 feet thick.
  • light (38 degree), sweet oil
  • drilled first well in 4Q07 - Buffalo Ditch 1-32H
    • 4,000 foot, single lateral, multi-stage frac
    • Initial Pproduction (NYSE:IP) of 550 bopd. First 30 days averaged 320 bopd
    • $6 million initial cost, likely to trend lower
    • 250,000 barrels EUR
    • As a confirmation to what they are seeing with their horizontals they have local well control in the form of 3 old vertical wells in this area, each of which produced > 100,000 barrels
  • 36 square miles of 3D will be in house early in the second quarter,
  • they then begin "confirmation drilling" on 640 spacing; 1 riig, 7 well program for remainder 2008.
  • evaluating takeaway infrastructure
  • 10 to 80 mm barrels recoverable (1 to 5% recovery factor),
  • first real oil 2009

3) British Columbia - Horn River Basin Play (3 years in the making - a stealth mode Barnett)

  • Quietly Accumulate 140,000 acres - Their words "could be the next Barnett Shale"
  • rock parameters look very similar to the Barnett - permeability roughly equivalent to Barnett.
  • EOG acreage is in the gas-richest part of the play,
  • More gas in place than the Barnett (2.5x as much!). 318 Bcf per square mile vs 131 Bcf in average Barnett mile,
  • Thicker than the Barnett. 530 feet thick average shale vs 355 in thickest part of Barnett,
  • Estimate reserves at 6 Tcf, net
    • 6.3 Tcf at a recoverable estimate of 20%
    • 9.3 Tcf if you assume 30% recovery
    • or looked at another way, using 40 acre spacing per well you'd get 2,100 wells…at 4 Bcf per well that equates to 8.4 Tcfe (6.3 Tcfe net)
    • or at a potential 6 Bcfe per well that yields 9.5 Tcfe
    • so they are pretty comfortable with the early read on reserves here.
  • Drilled 3 vertical and 3 horizontal wells to date. (drilling 4th hz well),to "half lateral" wells - 1700 feet.
    • vertical test in 2006 - 0.75 mmcfpd
    • 2nd and 3rd horizontal test  were half lateral wells - short 1,700 laterals which tested at 3.5 and 4.2 MMcfepd.
    • they basically think you can take those rates and double them to see what a dual lateral well would yield (7 to 8 Mmcfepd)
  • Plan to drill 4 to 8 to firm up the play this year. There is infrastructure in the area for takeaway capacity and CO2 treatment  (about 10%) and sales start June 2008. They indicated that the 450 MMcfepd treatment plant will need to be expanded in the 2010+ time frame if they are right about the size of the play.
  • One caveat Lower Rate of Return than the Barnett Shale due to:
    • due to remoteness so well costs are high (cold, wet conditions)
    • low recovery factor (which may improve over time if EOG's history is any model)
    • location differential is also high to Henry Hub

4) Jefferson Davis County, TX - Mississippi Chalk Play- area thought to be tapped out, low permeability but the horizontal

  • 14,000 acres
  • Area thought depleted via vertical 235 vertical well completions
  • drilled 3 horizontal wells - finding its not depleted if you go horizontal.
  • good economics: 2.5 Bcf for $3.6 million per well
  • 0.2 Tcfe net reserve potential
  • expect volumes in 2009

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