The Best Energy Ideas for 2013: EOG Resources


As New Year's Eve quickly approaches, and we all prepare to make our 2013 investing resolutions, it is a good time to reflect on the energy sector in the year that was 2012. In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the energy sector. Enjoy, and Fool on!

Bluntly perhaps, I believe that there are few companies among the oil and gas producers set -- integrated or independent -- that measure up to Houston-based EOG Resources (NYS: EOG) . I therefore can conceive of none that exceed it as a compelling investment opportunity for the approaching year.

While a number of independent producers likely will shine in future days when natural gas regains at least a portion of its prior luster -- the once nearly iconic Chesapeake Energy (NYS: CHK) among them -- EOG is already reaping the rewards of an almost singularly liquids-dominated position. And since I'm convinced that our macro world bodes well from a perpetuation of steady-to-increasing crude prices, the latter company's prospects appear as bright as has been its past performance.

Location, location, location
The significance of location has long been attached to success in real estate investing. Today it is no less crucial in the production of hydrocarbons. For EOG, a U.S. concentration in what easily constitute the most noteworthy liquids-prone venues has stood the company in extremely good stead. For starters, I'm speaking of the Eagle Ford Shale of South Texas, and the Bakken and Three Forks portions of the Williston Basin, primarily in North Dakota.

Beyond that, the company is involved in the Permian Basin, a decades-old producing play in Texas and New Mexico that has been granted a revived life and a newly enthusiastic reception by the implementation of advanced production techniques. EOG is also positioned in the Powder River Basin of Wyoming and the Denver-Julesburg Basin, primarily in Colorado.

Operations in these strong plays have been largely responsible for the company's having increased its North American crude oil production by 45% in this year's third quarter and by 51% in the first nine months of 2012. However, EOG won't be left in the lurch when North American natural gas prices rebound. Its domestic positions also include acreage in the Haynesville Shale of Texas and Louisiana, the Marcellus Shale, which underlies much of Pennsylvania, New York, and West Virginia, and the Barnett Shale of North Texas.

While admittedly of lesser significance than its domestic operations thus far, it is nevertheless important to note that EOG Resources is also involved in several international ventures. Relatively close to home, it holds a 30% stake in the Kitimat LNG export facility, which is operated by another solid independent producer, Apache Corp. (NYS: APA) , in British Columbia. Additionally, it's active in the Columbus Basin near Trinidad & Tobago, and is in the early stages of operations in the Irish Sea and in the promising shale formation of the Neuguen Basin in Argentina.

Management matters
As the past few years have demonstrated across the industry, however, success for oil and gas producers, in addition to involving optimal positions in the most prolific plays, also requires solid operating approaches. For instance, EOG has responded to reduced natural gas liquids price realizations -- versus relatively steady crude prices -- by reducing its activities in "combo plays," such as the Barnett and the Permian, in favor of targets that yield a higher percentage of crude, including the Eagle Ford and the Bakken.

Further, as CEO Mark Papa noted during the company's third-quarter post-release conference call, plans for 2013 include a significant reduction in capital expenditures vis-a-vis 2012 levels. Specifically, as he said: "This year we spent roughly $700 million, primarily in the Haynesville, Marcellus, and Horn River converting leases to 'held by production' (status). We expect to spend only about $100 million next year on dry gas drilling."

As a result, unless circumstances change unexpectedly, the reduced capex will almost certainly work in tandem with increased production to approximately balance the company's cash flow and its expenditures. A key result will clearly be a strengthening of the EOG Resources balance sheet. And while Papa and his team anticipate "another peer-leading oil growth year," they'll hardly rest on their laurels. Instead, they expect to "continue to fund North American greenfield (new) oil ideas, as well as concepts to improve recovery factors."

The Foolish takeaway
I could continue by, for instance, detailing EOG's spectacular successes in the Eagle Ford. And while I'm strongly in favor of a balance in energy portfolios, to include such solid companies as National Oilwell Varco (NYS: NOV) from the oil-field services group and Tesoro (NYS: TSO) among the refiners, by now you likely recognize that I'm hard-pressed to recommend a more solid independent producer for 2013 than EOG Resources.

National Oilwell Varco is one of the the safest investments in the energy sector. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if NOV is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.


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David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. Motley Fool newsletter services recommend National Oilwell Varco. 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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