We have maintained our Neutral recommendation on a major independent oil and gas exploration and production company, EOG Resources Inc. (EOG), following the second quarter 2011 results.
The company reported stellar earnings in the second quarter that topped our expectation on the back of almost 50% crude oil production growth. It also registered a significant 60% growth in U.S. crude oil and condensate production for the first time in the company’s history during the quarter. This was primarily driven by significant contribution from the South Texas Eagle Ford play followed by the Fort Worth Barnett Shale Combo. Additionally, contribution from newer crude oil and liquids-rich plays such as Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp and New Mexico Leonard were significant.
EOG is in the process of transitioning to a more oil-weighted company from a natural gas company. We appreciate the company’s increasing interest in oil in a favorable price environment, which will be further augmented by its deep focus on major oil and liquids rich plays. Management highlighted that about two-thirds of the North American revenue will be derived from liquids this year.
The company also remains upbeat on its production profile and expects to achieve its targeted total organic production growth of 9.5% for the current year. It further anticipates its crude oil and condensate production to boost 52%, while total company crude oil, condensate and natural gas liquids production to rise 47% on an annualized basis.
EOG intends to spend approximately $6.4–$6.6 billion of capital in 2011, 80% of which would go toward increasing and developing its oil asset base. The remaining 20% is committed for Haynesville and Marcellus drilling in order to hold acreage. The company aims to fund the capex through its asset sale program, which was increased to $1.6 billion from the original target of $1 billion for 2011.
The positives are all the same offset by a few negative pointers that keep us on the sidelines. Despite the company’s efforts to transition to a more oil-based production profile it still has a gas weighted production and reserves base, not talking of cost overruns. Additionally, EOG’s international expansion seems to be not enough, being still regarded primarily as a North American producer.
On the basis of the above-mentioned points, both pros and cons, we believe that Houston, Texas-based EOG Resources will perform in line with its peer group, such as Chesapeake Energy Corporation (CHK) and Noble Energy, Inc. (NBL). The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
EOG RES INC (EOG): Free Stock Analysis Report
NOBLE ENERGY (NBL): Free Stock Analysis Report
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