Why Investors Are Buying EOG Now

| About: EOG Resources, (EOG)
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EOG Resources (NYSE:EOG) has reported highly encouraging results for the first quarter of the current fiscal, as profits more than doubled as a result of its shift to drilling for higher-priced oil and concentrating on its more productive wells. Net income was $324 million for an earnings per share of $1.20 per share compared to $.52 per share on a year on year pieces. The EPS also beat the consensus estimate of $1.14 per share. The company has also raised its production target for crude oil and liquid natural gas for 2012 from 30% to 33%.

Several analysts have recently reported on the stock: FBR Capital currently has an "outperform" rating on the stock and has raised its price target to $140 from $125. Equity analysts at Zacks have reiterated their "neutral" rating on the stock but now have a price target of $96. At the same time, analysts at Goldman Sachs have upgraded the rating to a "buy" rating and have raised the target price from $145 to $149.

EOG and its subsidiaries are in the business of exploring for, producing and marketing crude oil and natural gas mainly in the United States, Canada, Trinidad and Tobago, China and other countries. EOG has made major modifications in its business model, and these changes are now beginning to show results. EOG was formerly a leader in natural gas exploration and production but declining gas prices took their toll on profits and, in fact, the company showed a loss of more than $70 million in the third quarter of 2010. It subsequently adopted major changes in technology and production techniques and perfected horizontal drilling that enabled it to tap large reservoirs of crude oil trapped in shale rock formations instead of gas reservoirs unlike the other companies. As a result, EOG has transformed itself from a natural gas producer to a major producer of crude oil and increased its production of liquids by 40% last year. Profitability is now driven by high crude oil prices instead of rock bottom natural gas prices and the blockbuster earnings are there for everyone to see.

The company is now the largest oil producer in the Bakken Shale in North Dakota as well as the Eagle Ford Shale in South Texas and these are the two shale fields that played a key role in boosting crude oil production and reserves in the United States with total estimated reserves of about 8 billion barrels of recoverable oil. EOG expects to produce 200,000 barrels of oil every day in the current year which would make it among the top three producers of crude oil in the United States. It has half a million acres of property in Eagle Ford Shale which is expected to be its most prolific oilfield by next year. There is also a keen focus on cost which is why the company chose to raise $1.5 billion last year to finance new drilling and exploration rather than borrow money. Given the high cost of pipeline transportation, it saves an estimated $5 to $10 per barrel on transportation cost by moving oil by rail. It has now become an energy company that is regarded as so valuable and profitable that its own management as well as powerhouse investment companies are all looking for a piece of the action. This is what separates the company from other competitors such as Apache (NYSE:APA) and Devon Energy (NYSE:DVN).

EOG is also steadily increasing its drilling rate on the Permian and has received permits for new drills from the Texas Railroad Commission which oversees the production of energy in Texas. However, it should be noted that Apache has received permits for twenty-three new drills recently while Cabot Oil & Gas (NYSE:COG) has also been in the fray. This surge of interest could be a good thing for Chesapeake (NYSE:CHK), which is looking for buyers for some of its Permian assets.

Another reason why EOG is able to maintain its well costs substantially below its competitors in the Eagle Ford Shale is its ability to produce its own sand for fracking operations. The lifetime savings per well are estimated at $500 million. You can realize the magnitude of the savings when you consider that EOG expects to have 600 wells in operation by the end of 2012. For instance, its competitor Pioneer Natural Resources (NYSE:PXD) is acquiring sand mines for just under $300 million and, despite this price, expects to save over $65 million per year. It also had no dry well costs for the first quarter.

EOG considers Eagle Ford Shale to be its best North American crude oil asset, and the outlook is constantly improving. Encouraged by the productivity of recent wells, the company is preparing for more wells by reducing oilfields to 65 acres a well from 130 acres a well. It believes that its existing acreage will allow it to an additional 3200 wells to add to its existing 375. This will give it plenty of room to boost oil production either by itself or in partnership with other producers. The focus on production of liquids and the successful effort to boost its bottom line together with its willingness to consider non-traditional activities such as sand mining and production of the company in a strong position to be successful in the difficult and ever-changing world of energy production.

If you are looking for a solid energy stock, EOG has successfully established its credentials enough for me to recommend buying now. Some people may consider the stock to be overvalued. Yet, if you look at the credentials and growth prospects, there is plenty of upside potential here.

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