Is EOG Resources Finally Proving Its Potential?


Houston-based EOG Resources (NYS: EOG) is finally doing justice to its huge reserves. The company's second-quarter results have shown impressive production growth with more in store for the rest of the year.

Exactly what we want
Several weeks back, I wrote that the company's ample reserves were being seen in a poor light, thanks to faltering earnings. However, the company has seemingly bounced back by posting impressive operational earnings. The quarter saw earnings before interests, taxes, depreciation, depletion, and amortization stand at $1.2 billion compared to $606 million a year ago. That's almost a 100% growth!

Of course, better market conditions in the form of higher commodity price realizations did aid this growth. However, some fundamental growth and strategic decisions are behind the increased cash flows.

Solid fundamentals
Total production grew 13% in the first half of 2011, compared to the same period last year. Not surprisingly, the U.S. has contributed in a huge way in increasing production. Crude oil and liquids production from this region grew by 60%, thanks mainly to increased production from its South Texas Eagle Ford and Fort Worth Barnett Shale properties.

The shale plays are finally showing results after years of hard work. Exploration and production companies with reserves in the Eagle Ford have all managed to increase production in the foregone quarter. ConocoPhillips (NYS: COP) , Anadarko Petroleum (NYS: APC) , and Marathon Oil (NYS: MRO) have all increased activity in this region significantly.

Management knows its way
Strategically, EOG Resources has moved away from natural gas, whose production fell 1.6% compared to the year-ago quarter. Given the current bearish natural gas market, this does not look surprising. However, the company is well equipped to exploit the natural gas market in the future, with enough resources at hand.

Overall drilling activity has gone up, which is pretty encouraging. The emerging Wolfcamp shale play in West Texas has produced excellent results so far. This is definitely a very good sign of the company's expanding appetite for increased liquids production from non-conventional resources.

The balance sheet looks pretty healthy, with debt-to-equity standing at 43% and a cash balance of almost $1.6 billion -- up from $789 million six months ago.

Foolish bottom line
Overall, the company has produced excellent results which look set to be replicated in the near future. The only probable concern is impairments going up as a result of higher production rates. Foolish investors may want to consider looking at this one.

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At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. 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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