Billionaire Jim Chanos Is Bullish on This North Dakota Stock
During the 1990's technology bubble, Jim Chanos single-handedly vindicated short-selling by uncovering the ongoing frauds at Enron, WorldCom, and Tyco.
During the financial crisis, Chanos made billions by betting against homebuilders and student loan companies.
And more recently Chanos has been shorting China, claiming that the country's hyper-stimulated economy is not sustainable and is heading for a crash. So far his bet is paying off.
So is the world's greatest short-seller bullish on anything? Actually, yes. And he's betting big on America's energy revolution.
Should you follow Chanos into the oil stock?
Over the past year Chanos' Kynikos hedge fund has been accumulating shares of EOG Resources . According to recent SEC filings, the fund owns 99,000 shares in the oil company, which ranks as the firm's third-largest long position behind Citigroup and SanDisk.
So why does Chanos like EOG? Because the company is sitting on two great American shale plays: the North Dakota Bakken and the Texas Eagle Ford. This power duo has allowed EOG to grow its production at a 37% compounded annual clip over the past seven years.
But there are several reasons why production growth could continue.
First, recent reports suggest that the North Dakota Bakken could be significantly larger than originally expected. According to the most recent U.S. Geological Survey, the Lower Three Forks, located directly under the Bakken, could contain some 3.7 billion barrels of undiscovered, technically recoverable crude oil. That's slightly larger than the Bakken and could provide a hidden catalyst for the stock as EOG de-risks its North Dakota acreage.
There are also murmurs in the industry that the West Texas Spraberry Wolfcamp could be the largest shale discovery yet. According to early estimates from Pioneer Natural Resources , the Spraberry could contain some 50 billion recoverable barrels. If those numbers are even remotely accurate, the Permian Basin could dwarf even the mighty Eagle Ford.
Recent drilling results have also been impressive. Last quarter one Pioneer well produced a 30-day average production rate of 1,087 boepd of which 75% was oil.Given that the company is one of the larger landowners in the area, this could also bode well for EOG.
This could result in some stellar top-line growth for the company. According to Rystad Energy, EOG's production could surpass 500,000 bpd by 2018 -- up from roughly 230,000 bpd today. To put that figure into perspective, that would make EOG the largest oil producer in the United States, surpassing both Chevron and ExxonMobil.
Trickle down profits
Of course, amid America's shale boom hundreds of companies are growing production at double-digit clips. EOG stands out ahead of its peers because of the price it receives for its production.
EOG is actually in a position to sell its own oil at a higher price than West Texas Intermediate by shipping its production to Louisiana by rail through terminals the company built itself. At the moment the company is earning $5 to $10 per barrel more than anybody else is earning thanks to this investment.
And more of those impressive top-line numbers are trickling to the bottom of the income statement thanks to the falling cost of doing business in the oil patch.
Continental Resources , another large player in the Bakken, has seen its average well completion costs fall by $1.2 million to $8 million over the past year. Management credits this to the shift to pad drilling, the falling price of hydraulic services, and other operational efficiencies.
EOG has seen similar savings, with average well-completion costs falling by $950,000 to $6.2 million per well over the past year. When you multiply those cost savings over the 493 net wells the company is expected to drill this year, EOG will save $470 million annually. That's money that can be reinvested back into the business to grow operations even faster.
Foolish bottom line
It never hurts to peak over the shoulders of the world's top investors. EOG is set to be the fastest-growing oil producer in North America. Combined with an endorsement from billionaire Jim Chanos, other investors may want to add EOG to their own watch lists.
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The article Billionaire Jim Chanos Is Bullish on This North Dakota Stock originally appeared on Fool.com.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. 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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