Don't Skip This Stellar Performer
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
EOG Resources (NYSE: EOG) turned in an exceptionally strong second quarter earnings report last week, surpassing Bloomberg’s average analyst estimate by $0.24 with adjusted earnings per share of $1.16. This is in part because EOG’s total liquids production is up 49% year over year and its total production is up 16.5% quarter over quarter, despite a 7% fall in North American natural gas production. This led EOG to an upward revision in its production growth targets for the year for the second consecutive quarter as the company now expects to hit a 35% overall production growth target and a 9% liquids production growth target without any increase in its capital expenditures. This leads me to expect that its revenues will continue to increase on existing momentum, resulting in better margins and an even more positive future, thanks in large part to its activities on the Eagle Ford.
EOG Optimizes Production on the Eagle Ford
The Eagle Ford Shale is a major contributor to EOG’s current success and future growth, with the company planting 16 wells on the play in the second quarter alone that posted 2,500 bbl or better IP rates, all 16 of which EOG operates with a 100% working interest. As EOG CEO Mark Papa noted on the second quarter earnings conference call, no other operator on the Eagle Ford is posting results at this level, which Papa attributes to the quality of EOG’s holdings and its completion expertise as well as its optimization strategy. Despite strong results, the company plans to begin a shift towards the west with its drilling strategy in the second half while apportioning a greater percentage of its activity to wells with lower working interests.
EOG is facing opposition against its proposed frac sand mining operation in Cooke and Montague Counties, Texas, with residents noting concerns about air quality and potential carcinogens in the silicate EOG wants to produce. EOG still does not have a permit for processing sand in the mine, despite a $30 million investment in the project to date. Once operational, EOG expects the mine to produce just over 2,700 tons of ready to mix frac sand, or slightly less than the standard amount required for the first fractures on two completed wells.
This opposition to its plans could be detrimental to EOG’s business plan, considering that the firm saves $0.5 million per well using frac sand from its operational frac sand facility in Wisconsin. The savings from its Texas frac sand operations could be meaningfully higher, considering that these facilities are much closer to its key operations on the Eagle Ford, potentially reducing transportation and time costs. This gives the company an edge over certain competitors on the Eagle Ford, including Apache (NYSE: APA), Cabot Oil & Gas (NYSE: COG), and Marathon Oil (NYSE: MRO).
Apache has the second largest acreage position on the Eagle Ford, and recently saw the value of that acreage bumped up thanks to a joint venture that Cabot signed with Japanese firm Osaka Gas Co. Ltd. in June. The joint venture valued select acreage held by Cabot in the southern reaches of the Pearsall Shale, which underlies the Eagle Ford, at $14,000 an acre, which is on the high end of what can be supported by results from this play. Marathon is steadily developing its Eagle Ford position, and its Executive Vice President and COO David E. Roberts, Jr. is scheduled to speak at Hart Energy's 3rd Annual Developing Unconventionals Eagle Ford conference this coming October about Marathon’s output and well optimization plans and results.
EOG plans to run just one dry gas rig next year, a decision prompted by the fact that nearly all of the dry natural gas holdings the company owns and plans to hold will be held by production by the end of this year. Undoubtedly, concerns that dry natural gas prices will not return to normal until at least 2014 are also playing into this decision. EOG expects to sell between $1.2 and $1.25 billion in property this year, essentially matching the divestitures the company made in the first quarter, and it seems likely that most or even all of these divestitures will be dry gas heavy, given EOG’s renewed focus on liquids growth. This will put additional pressure on competitor Chesapeake Energy (NYSE: CHK), which is attempting to divest billions of dollars of dry gas assets itself – though Chesapeake is also holding oil heavy assets for sale.
Despite concerns that international shale gas will eventually depress prices for shale oil and gas below the cost of production, Mark Papa is confident that any such moves are at least ten years into the future. Papa bases his prediction on the fact that no commercial quality shales are known outside of North America, and the need for large numbers of wells at low costs per well to make shale extraction economically viable, a major difficulty in some areas of the world.
In a move that is sure to please shareholders, Papa announced a small change to his retirement plans on the second quarter earnings conference call. Instead of retiring as Chairman and CEO of EOG in mid-2013 as originally planned, Papa will retire as CEO in mid-2013 but remain as Chairman until the close of 2013.
EOG is trading around $110, giving it a price to book of 2.2 and a forward price to earnings of 17.0. This is a premium price, but given its strong second quarter earnings and its proven ability to overcome detrimental price differentials, EOG looks better positioned to navigate the next few quarters than many of its competitors. For reference, Apache is trading around $88 with a price to book of 1.2 and a forward price to earnings of 7.0, Cabot is trading around $43 with a price to book of 4.2 and a forward price to earnings of 42.4, and Marathon is trading around $27 with a price to book of 1.1 and a forward price to earnings of 7.4. Chesapeake is continuing to plug along thanks to a second quarter earnings report that was more positive than expected, and is currently trading around $20 with a price to book of 1.0 and a forward price to earnings of 9.7.
I believe that even with the premium to competitors and its book price EOG is a solid value, not only for its underlying physical assets but also for certain intangibles. These intangibles include the leadership of CEO Mark Papa, who still has a year at the helm, and the management team supporting him that shows an ability to accurately forecast challenges and more positive changes in the oil and gas landscape.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. 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.If you have questions about this post or the Fool’s blog network, click here for information.