Can EOG Resources Possibly Be Topped?


Thus far, earnings season for the energy sector has provided a mix of solid and disappointing results. On Thursday, for instance, a pair of U.S. independent producers turned up on opposite sides of the spectrum, with Apache falling short of expectations and EOG Resource topping estimates by a wide margin.

EOG's as solid as they come
Focusing on EOG, the company's adjusted earnings for the final quarter of 2012 reached $1.61 per share, more than 17% above the consensus expectation of $1.37 per share among the analysts who follow the company. Of equal importance, that result topped the comparable year-earlier per-share figure of $1.15 by 40%. Revenue for the quarter was $3.01 billion, compared with analysts' prediction of $2.92 billion. For the full 2012 year, EOG earned an adjusted $5.67 per share, higher than its comparable result for all of 2011.

From a production perspective, the company's crude oil and condensate production in the quarter came to 162.7 thousand barrels per day, a healthy hike in excess of 20% vs. the final quarter of 2011. Natural gas liquids output was up 14% to 57.8 thousand barrels a day, while -- with drilling efforts having been reduced in the dry gas plays -- natural gas volumes slid to 1,408 million cubic feet per day, a year-over-year decline from 1,533 million cubic feet per day.

EOG Resources operates in several locations. However, the core of the company's compelling story boils down to its successes in the Eagle Ford Shale of South Texas, North Dakota's Bakken and Three Forks in the Williston Basin, and the Wolfcamp and Leonard plays of the Permian Basin of southwestern Texas and southeastern New Mexico.

Winning with an eagle
As CEO Mark Papa said during his company's call with analysts following the release of its results, "The Eagle Ford continues to be our flagship oil asset... ." In the play, which management expects to surpass the Bakken from the perspective of total industry production within the next two years, the company has 569,000 net oil acres. Papa noted that this figure constitutes "the largest and highest quality oil position in the entire play."

Through the end of last year, the company drilled and completed fully 630 net wells on its acreage. Perhaps Papa's key assessment regarding the Eagle Ford vis-a-vis the company's future in the play was that "... we understand the reservoir much better than we did a year ago, and we reached several important conclusions. The bottom line answer is that we are increasing our net potential recoverable reserve estimate (for the play) by 600 million Boe... ."

North to Dakota
Regarding the Bakken/Three Forks, EOG President William Thomas pointed to several reasons for recent and anticipated success in the big play. Included is the application of beneficial new fracking technology, along with a planned concentration in 2013 on a drilling program that is directed to prolific Parshall Core and Antelope Extension areas of the play. The company plans to complete 46 net wells in these two areas this year, up from 28 in 2012.

In the Permian Basin, the company concentrates in the Delaware Basin portion of the play. As Thomas said, it "has multiple pay zone targets in the Leonard and Wolfcamp shale plays, with a combined estimated reserve potential of approximately 1.35 billion barrels of oil equivalent net to EOG." Beyond that, Thomas pointed out that, "In addition to these plays we have smaller levels of horizontal oil activity in the midcontinent, Powder River Basin and South Manitoba."

In discussing his company's decision to sell to Chevron its 30% interest in the Kitimat LNG facility, Papa said, "... the projected Kitimat rate of return did not compare favorably with returns from our domestic shale projects, especially in light of our Eagle Ford Reserve upgrade." The British Columbia, Canada, facility is being operated by Conoco, which also holds a new 50% stake, with the remaining 50% stake now held by the former operator, Apache. Calgary-based Encana is also no longer involved in the project.

Papa's wrap-up
Papa concluded the conference call by emphasizing several key points:

  • "... Our Eagle Ford potential reserve increase gives EOG a domestic shale oil inventory unsurpassed in the industry."

  • "... We have added a new Greenfield project to our portfolio with the Permian Basin and Delaware Wolfcamp, plus a significant Leonard Shale upgrade."

  • "... As predicted, this is the year when we expect to reduce our net debt ratio, based on current (and) future prices."

  • "... Our 10% dividend increase is a tangible signal of our growing confidence and gas flow stream."

  • "Finally, and most importantly, we expect our key financial metrics, such as EPS ... discounted cash flow, return on equity, and return to on capital to show positive year-over-year improvement."

Foolish takeaway
As I noted at the outset of this piece, the oil and gas companies are currently displaying decidedly mixed results. I am, however, hard-pressed to point to a member of the sector that's advancing impressively on all fronts to the extent of EOG Resources. On that basis, I urge Fools with a penchant for energy to study this ultra-solid company carefully.

Chesapeake Energy, which sits at the other end of the oil-gas spectrum from EOG, will report its results next week. You'd be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Fool contributor David Lee Smith has no position in any stocks mentioned. The Motley Fool recommends Chevron and owns shares of Apache. 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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