Could This Stock Be The Next ExxonMobil?
In investing, it can be fun to play games of Coulda, Shoulda, Woulda. Take a remarkable business like ExxonMobil for example. Over the past 30 years the company has generated a 13.7% compounded annual return for investors. A $10,000 investment in Exxon in October, 1983, would be worth $471,000 today.
Unfortunately, ExxonMobil is unlikely to repeat that feat again. For one, with nearly a $400 billion market capitalization, the company is running into the law of large numbers. It's just too hard for a behemoth like ExxonMobil to replace reserves, let alone grow production. No, the savvy investor must look for the next ExxonMobil. A new company with exceptional growth prospects that could one day join the ranks of Big Oil. And we might just have one in EOG Resources .
growth, Growth, GROWTH!
Why is EOG Resources the next ExxonMobil? Because the company is sitting on the holy trinity of American shale plays: the Williston, Eagle Ford, and Permian basins. In addition, new technology like hydraulic fracturing and horizontal drilling have unlocked vast quantities of hydrocarbons which have grown EOG Resources' production at a 37% annual clip over the past seven years.
Of course to catch up to the Big Oil titans, EOG Resources will have to sustain that growth rate and continue to make big discoveries. But there's reason to believe EOG Resources is sitting on a lot more oil than currently booked.
The North Dakota Bakken has been one of the biggest industry developments over the past decade. But recent reports suggest that there might be an even bigger play deeper underground. According to the latest survey by the United States Geologic Survey, the Lower Three Forks could contain 3.7 billion barrels of undiscovered, technically recoverable oil. That's slightly larger than the Bakken.
Rick Bott, President and Chief Operating Officer of Continental Resources , described the Three Forks' potential to analysts last month, "What [the Bakken] looks like in terms of recovery factor and recoverable reserves was about 24 billion barrels of oil. But if you add the deep benches and depending on what recovery rate you use, those deeper benches could move the amount of oil in play to 32 billion to 45 billion barrels of oil. So that's an exciting number to be going after."
There are also murmurs in the industry that the West Texas Permian Basin could be the largest shale discovery yet. According to early estimates from Pioneer Natural Resources, the Wolfcamp and Spraberry plays could contain some 50 billion recoverable barrels. If those numbers are even remotely accurate, the Permian Basin could be on par with the nearby Eagle Ford.
All of this means that EOG Resources will have plenty of reserves from which to grow production for years to come.
Trickle down profits
But while those growth numbers are drool inducing for investors, it's important to note that the cost of doing business in these shale plays is falling as well. Kodiak Oil and Gas a big player in the Bakken, has seen its average completion costs fall by $900,000 to $9.5 million per well. Management credits this to the shift to pad drilling, the falling cost of fracking services, and other operational efficiencies.
EOG Resources has seen similar savings with average well completion costs falling by $950,000 to $6.2 million of the past year. This can have a significant impact on the bottom line. When you multiply that cost savings figure over the 493 net wells the company is expected to complete this year, EOG will save nearly $470 million over the course of a year.
Additionally, EOG Resources has also been savvy in its use of rail transportation. Pipeline capacity shortages in isolated plays like the Bakken have slowed production growth, but crude-by-rail transit has allowed EOG Resources to bypass these problems and secure the highest possible price for its crude.
Foolish bottom line
Could EOG Resources join the ranks of Big Oil by 2043? It sounds absurd to be talking in those sorts of timelines, especially in the oil business, but the company just might have a keen enough management team and the asset portfolio to pull it off.
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The article Could This Stock Be The Next ExxonMobil? originally appeared on Fool.com.Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares in 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.