2 Reasons To Buy This Overlooked Energy Stock Today

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

U.S. natural gas prices remain under pressure from oversupply due to weak winter weather last year and from a boom in shale production. EOG Resources (NYSE: EOG) is in good position due to its success in increasing liquid production. The main drivers of this success are EOG's involvement in two major oil plays: Eagle Ford Shale, and the Bakken Shale.

There is no doubt that energy companies are feeling the pinch because of natural gas prices. U.S. natural gas inventories are about 9% higher than they were a year ago. ExxonMobil (NYSE: XOM), the energy giant, is not immune. ExxonMobil's purchase of XOM Energy has proven to be troublesome as natural gas prices have not rebounded. Chesapeake Energy (CHK), the country's second largest natural gas producer after ExxonMobil, has been selling off assets in the last year in an effort to pay down debt.

All is not lost in the natural gas market. Partnering with other companies has proven to be a wise decision in the current market. As an example, EOG Resources is experiencing success in the Kitmat Liquefied Natural Gas (LNG) project, which is owned by EOG Resources, Apache (APA), and Calgary-based Encana (ECA). The Kitimat LNG project is expected to cost $15 billion and startup is expected in 2017, with capacity to export 10 million tons a year of LNG for about 20 years. The company is Approval for contracts with contracts for Asian buyers. This will open the door to a quickly expanding energy market and prove fruitful down the road.

At some point natural gas prices will bounce back and energy companies will begin to see rising profits in the gas sector, but EOG is not going to sit around waiting for that to happen. The company has shifted its focus toward sites that have potential for oil production as opposed to gas. It is an aggressive approach that is proving to be a success.

The Bakken Shale is an oil play straddling the U.S. border with Canada and running through North Dakota and Montana, as well as the two Canadian provinces of Saskatchewan and Manitoba. EOG Resources is one of the largest producers in the Bakken Shale. In this play, the company's 90,000 net acre Core Parshall Field has proven successful due to the company drilling wells on tighter densities. Initial testing in the over-pressured Core area along with increased production rates from nearby existing wells indicate significant amounts of recoverable crude oil still remains. The company plans to further develop the Core Parshall Field on 320-acre spacing and test even tighter drilling densities. It is a major play that is already producing nice results for the company.

But the Bakken Shale is actually being out produced by the Eagle Ford play. The Eagle Ford play might be the largest net discovery of oil in the past 40 years. The company will be building 330 wells there this year, 30 more than it originally planned.

The company is having tremendous success because of these projects. It has seen a 40% increase of liquid production over the third quarter last year. Its 3rd quarter 2012 net income of $355.5 million was earnings of over $1.30 per share. Discretionary cash flow increased by 37% and crude oil production by 45%. These are good times indeed for EOG investors.

The Eagle Ford play is projected to support current drilling rates for another 40 to 300 months. It will continue to be an abundant source for oil production for a few more decades at a minimum. EOG Resources, Statoil (NYSE: STO), and ConocoPhillips (COP) have been the primary benefactors due to the locations of their assets in the play and by effectively utilizing technologies to increase efficiencies and production rates. Statoil has a joint venture asset in the eastern section of the play and expects to be at full production in the near term. EOG's initial production of 4,000 barrels per day is the highest among the firms on the Eagle Ford play. Aggregate production on the Eagle Ford play is projected to increase 1.5 to 2 million barrels of oil per day from its current rate of over 600 thousand barrels of oil per day.

The combination of the unrest in the Middle East and the bailout in the euro zone has recently helped support higher oil prices. While unease surrounding the euro zone debt crisis and the U.S.'s fiscal issues can slow the global economy and thus oil consumption, the consensus is that oil demand will grow at a steady pace. The OECD, EIA, OPEC and IEA all project oil demand to increase throughout 2012 and 2013. Demand is expected to be soft in the U.S., Japan, and Europe but strong in Brazil, the Middle East, and Russia. Growth in emerging markets is expected to support oil demand outpacing global output. EOG is well positioned to capitalize on the growth in demand in these emerging markets.

EOG has seen tremendous growth this last year and nothing indicates that the company is slowing down. It is in a great position to see huge returns once natural gas inventories stabilize and the price increases somewhat. It still holds many leaseholds, and has invested in long-term assets that will pay-off deep into the future. Its aggressiveness in shifting focus to oil is driving much of its current success, and the future looks even brighter. Its ability to transform itself so quickly is proof of a great organization and great management.

EOG is trading around $114 with a ratio around 26. Based on its increasing oil production this stock will hit $145 in 2013. If natural gas prices show any upward pressure, there is no reason this stock will not see $130 in 2013. It's a great deal any way you look at it.

jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.

blog comments powered by Disqus