EOG Resources: A Solid, Long-Term Bet

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Patience goes a long way in value investing. It's all about putting the long-term prospects of a company into perspective rather than forming an opinion based on the performance or outlook for a couple of quarters.

EOG Resources' (NYS: EOG) stock fell 2.8% following its fourth-quarter earnings release. The market was quick to react as its CEO mentioned that the company may not see sequential growth in oil production volumes in the first couple of quarters this year. However, looking beyond the next six months, here's a stock that I believe is a solid bet given its impressive performance in 2011 and long-term potential that's worth the wait.

Six months back, I spoke about how the Houston-based exploration and production company might be turning around after its stock seemed a little overpriced last June. By the end of the year, EOG Resources seemed to have proved its mettle.

Solid growth
For the fourth quarter, net income stood at $120 million -- a solid 125% growth over the previous year's comparable period. For the whole year, net income grew a mammoth 579% over 2010 to clock in at $1.1 billion. Instead of banking simply on higher crude oil prices to drive up revenue, EOG Resources further doubled the advantage by increasing production volumes by a significant 9.4% over 2010.

Not surprisingly, total revenue grew 66% from 2010 which is even higher than the 56% growth achieved in 2008 when crude oil prices witnessed a "super-spike." Here is a management that is focused on production growth while timing the rather unpredictable market well. This is one of the most crucial things I'd be looking for -- a company with a great business whose focus is on intrinsic growth.

A solid outlook
Looking ahead, EOG Resources' growth looks promising. The company's net recoverable reserve estimate in the attractive Eagle Ford shale play grew a whopping 78% -- from 900 million barrels of oil equivalent (Mmboe) to a staggering 1.6 billion barrels of oil equivalent. The company has identified another 3,200 drilling locations here in addition to its 375 drilled wells.

Management also plans to gradually introduce secondary oil recovery techniques in this prolific shale play in order to extract more oil from the ground. This year should see a pilot project initiated in the Bakken. Over the next 12-18 months, a similar project might get a go-ahead in the Eagle Ford. The quest for organic growth is clearly visible.

Speaking of production volumes, the first two quarters of 2012 may not witness a substantial increase due to a shortage of trained personnel to accelerate the drilling program. Additionally, EOG Resources follows a unique operational model by pursuing a technique called pattern drilling/fracking in which four to five wells are drilled simultaneously in a pattern. As a result, production from these wells is added in a single burst instead of one at a time. My guess is that this technique reduces drilling costs and makes optimum use of available resources. That's an astute move by any standard.

With total capital expenditure for the year pegged at around $7.5 billion, EOG Resources intends to divest assets worth $1.2 billion to make up for any shortfall in funding. In any case, I wouldn't call that alarming since it includes the $340 million sale of predominantly natural gas properties -- a commodity whose market conditions are nothing less than lousy. The natural gas pullback led by Chesapeake Energy (NYS: CHK) , whose balance sheet needed to be tidied up due to burgeoning debt, isn't too surprising. Additionally, investors must keep in mind that EOG Resources is gradually increasing its liquid proved reserves, which are already up to 36% from 28% in 2010.

Foolish bottom line
EOG Resources is a long-term investor's stock, which is why patience holds the key. Foolish investors need not be deterred by short-term market movements. In order to stay up to speed on the top news and analysis on the company, you can start here by adding EOG Resources to your free watchlist.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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