Energy Prospectus

EOG's adjusted EPS crushed what I had in my forecast model. I was expecting $0.82 EPS for Q4. They reported $1.15. - Dan

EOG Resources, Inc. (EOG) reported fourth quarter 2011 net income of $120.7 million, or $0.45 per share. This compares to fourth quarter 2010 net income of $53.7 million, or $0.21 per share. For the full year 2011, EOG reported net income of $1,091.1 million, or $4.10 per share, as compared to $160.7 million, or $0.63 per share, for the full year 2010.

Consistent with some analysts’ practice of matching realizations to settlement months, and making certain other adjustments in order to exclude one-time items, adjusted non-GAAP net income for the quarter was $309.0 million, or $1.15 per share. Adjusted non-GAAP net income for the fourth quarter 2010 was $92.0 million, or $0.36 per share. The results for the fourth quarter 2011 included a $249.1 million, net of tax ($0.93 per share) impairment of certain North American non-core natural gas assets, gains on asset dispositions of $33.3 million, net of tax ($0.12 per share), the write-off of fees associated with revolving credit facilities of $3.7 million, net of tax ($0.01 per share) and a previously disclosed non-cash net gain of $145.5 million ($93.2 million after tax, or $0.35 per share) on the mark-to-market of financial commodity contracts. During the quarter, the net cash inflow related to financial commodity contracts was $96.9 million ($62.0 million after tax, or $0.23 per share).

EOG is #1 in the Eagle Ford Shale:

2011 marked a significant year in the development of EOG’s single largest asset, the South Texas Eagle Ford. Production at year-end was 66 thousand barrels of oil equivalent per day, net, 78 percent of which was crude oil.

Starting 2011 with a 12-rig drilling program that ramped up to 26 rigs in December, EOG drilled and completed 244 net wells during the year with a focus on optimizing completion techniques, in addition to reducing drilling days and overall well costs. Moving into development mode early in 2011, EOG began shifting its attention to increasing recovery of the oil-in-place in the field. To test the impact of well spacing on reserve recoveries, EOG drilled eight pilot programs that included 33 total wells. Based on production analysis from these pilots and reservoir modeling, EOG is now pursuing development drilling on 65 to 90-acre spacing, significantly tighter than the original density of 130 acres between wells.

After taking into account both the excellent results from the 375 wells it has drilled to date across its 120-mile acreage position and the results from the down-spaced drilling tests, EOG has increased its estimated potential reserves in the Eagle Ford from 900 million barrels of oil equivalent (MMboe) to 1,600 MMboe, net after royalty (NAR). The 700 MMBoe, NAR, or 78 percent increase represents an estimated 6 percent recovery factor. On its 572,000 net acres in the prolific oil window, EOG has identified approximately 3,200 remaining drilling locations and increased its average per well estimate to 450 thousand barrels of oil equivalent (MBoe), NAR.

mkt sure didn't like something. took a 2.8% hit with a very bearish candlestick friday.

This is why I will be moving EOG back into the Sweet 16:

From their CC:

The Eagle Ford was our biggest oil growth engine in 2011 and will again be the biggest component of our 2012 growth. A long time oil field axiom is that big fields tend to get bigger over time and that's certainly the case here. This continues to be the hottest and highest reinvestment rate of return play in North America, and EOG has the largest and best situated acreage position in the crude oil window. We continue to be the largest crude oil producer in the Eagle Ford with net after royalty production of 66,000 barrels of oil equivalent per day at year end, 88% of which was liquids.

Our press release contains multiple well results including the 6 outstanding wells on the Henkhaus lease, which IPd of approximately 3,100 barrels of oil per day with 560 barrels per day in NGLs and 2.8 million cubic feet a day of natural gas per well. This is the best package of wells we've drilled to date. Rather than provide you a well-by-well recitation, I'll provide some content regarding the overall play. There are 4 key points. First, we now have up to 200 days of well performance for multiple down spacing test, and we've concluded that our original 130-acre spacing was too wide to maximize NPV and recovery factors. Based on reservoir modeling and pilot results, we now calculate the spacing of 65 to 90 acres is more appropriate and will vary across the field depending on a number of factors including lease configuration, geology and reservoir conditions. Using this new spacing, we have a total of 3,200 additional wells yet to drill plus the 375 we've already drilled for a total potential recoverable reserve estimate of 1.6 billion barrels of oil equivalent net after royalty.

This is a 700 million barrel oil equivalent net after royalty or 78% increase from our previous estimate. Just this net increase of 700 million barrels of oil equivalent is larger, we believe, than any net domestic discovery by any company in recent history. And the total size of 1.6 billion recoverable barrels is the biggest U.S. discovery net to any one company since Prudhoe Bay in the late 1960s, in our opinion, including the deepwater Gulf of Mexico. We tend to kind of rollover some of these numbers and sometimes one gets lost in the numbers, but this is an extremely significant number and I want to quote it you again, the total size of 1.6 billion barrels of oil equivalent net after royalty that we've captured in Eagle Ford, we believe, is the biggest U.S. discovery including the entire deepwater Gulf of Mexico net to any one company since Prudhoe Bay in the late 1960s.

IMO the Eagle Ford will get a lot of positive press this year. It does not have the weather problems or limited takeaway capacity that the Bakken has. ROSE is almost a "pure play" on the Eagle Ford and I'm eager to see their Q4 results. - Dan

More from the EOG CC:

The second point relating to the Eagle Ford is that our Wisconsin sand mine is now up and running, and we currently expect our average 2012 Eagle Ford well cost will be $5.5 million, generating an 80% direct after-tax reinvestment rate of return. We believe these are the best economics in the entire industry for a large-scale hydrocarbon play. Our well costs are consistently $1 million to $2 million less than other operators drilling similar wells.

Third, we currently have 572,000 net acres in the Eagle Ford oil window. Now that we drilled 375 net wells, we anticipate we'll be able to readily hold all this acreage. For example, for lease retention, we only need to drill 40 wells this year. Last year, we drilled and completed 244 net wells and this year, we expect to drill approximately 280 net wells to optimize development.

And fourth, during 2011, we encountered no major liquids or gas takeaway issues relating to the Eagle Ford. We're still in on a bubble regarding take away capacity for the next 5 months until midyear when the new Enterprise gas plant and crude oil pipeline are in service. This will improve both our logistics and net backs.

To simply summarize the Eagle Ford, I can't think of a more substantial, profitable oil discovery in the entire industry in recent times. It's huge, located in Texas, has excellent economics, and it's not speculative.

I think this is why the stock sold off a bit on Friday. Q1 production may be flat to Q4. See 2nd paragragh below.
My take is "so what!". EOG is all about the HUGE value it has in the Eagle Ford. 1.6 Billion bbls of recoverable light oil in Texas is worth a heck of a lot. At $20/bbl it is worth more than EOG's current market cap. - Dan

From the CC:
Now I'll address our 2012 business plan. We expect our 2012 total CapEx to be in the range of $7.4 billion to $7.6 billion, of which approximately $1.2 billion will be devoted to facilities, midstream and other infrastructure. We expect 90% of our CapEx will be focused on liquids-rich plays. We're increasing our previous 27% total company 2012 liquids growth target to 30%. We are now targeting 30% total liquids growth consisting of 30% oil and 30% NGL growth year-over-year. I'll mention that this growth is back-end loaded with the real liquids growth showing up in the third and fourth quarters.

During the first quarter, we are adding frac spreads in a number of plays and we'll have pattern wells offline due to offset fracs. We'll also will have some gas processing capacity downtime in some of our Texas liquids rich plays. And in addition, we expect some liquids dispositions in the first quarter and we've taken all this into account in the first quarter guidance.

My updated forecast model for EOG is now available under the Watch List Tab.

Dan, could you plz explain for us non-accountant types...

When I look at a company like EOG, I first jump to Yahoo and get the "Key Statistics"...one of the items I look at is ROE...for EOG, this isn't a stellar number...is ROE a "bad" number for evaluating E&P's? Why?

TIA!

It seems to me that EOG's dominant acreage position in the oil window of the Eagle Ford may be a huge competitive advantage to them going forward, making EOG an almost unique investment opportunity. EF has no weather issues like the Bakken, has no transport issues, due to pipelines coming online in mid-year and under construction for later opening, and is in an oil friendly jurisdiction. This may amount to a competitive advantage that is difficult/impossible for any competitor to match and could justify a premium price. As an investment, I submit that EOG has been substantially "de-risked" and that a heavily overweight position is justified. THoughts?????

It is EOG's dominant position in the Eagle Ford that makes it so attractive. Earnings are never a good way to compare E&P companies. You need to compare them based on their proven reserves + the upside potential.

EOG uses the Successful Efforts method of accounting. Therefore it expenses all exploration costs as they are incurred, including dry hole costs and they take impairment on individual properties based on Fas 21. Successful Efforts is much more conservative than Full Cost accounting. You need to understand this when comparing them to other companies.

The best thing to look at is cash flow per share. For 2011 EOG had $15.65 CFPS. Based on my forecast they will generate close to $18.50 CFPS in 2012. A share price of 8X CFPS is very reasonable for a company with this much upside.

EOG now has an estimated 1.6 billion bbls of recoverable oil in just their Eagle Ford acreage. That is HUGE. There are very few billion bbl oil fields discovered these days. They also have a top five position in the Bakken. They have growth potential in the Barnett Combo (their second best area), the Permian Basin and Niobrara. All of these are liquids plays.

I rate EOG as one of the top five takeover targets for one of the majors.

Thanks, Dan, for the insights...but whenever I consider EOG as an investment, I always compare it to APA...and for my "accounting-challenged-mind", APA always looks better. Using Yahoo's numbers, I get EOG is about 8x cash flow, APA is about 5x. You mentioned cashflow/shr...again using Yahoo (ttm), I get EOG is about $15/s, while APA is $23/s... Now as to reserves/shr, I find it difficult to do a comparison...maybe you can assist here...how can I compare EOG's Eagle Ford 1.6Bbrls with what APA has in Egypt?

Perhaps I should just buy equal amounts of both...but I already have APA, so am trying to convince myself that buying some EOG would be better than addl APA...bottom line: is EOG a better investment than APA?

I just think the Eagle Ford is going to get a ton of press this year. It is turning out to be much better than people thought. Wait until you see the impressive results from ROSE. I think the Eagle Ford production will surpase the Bakken in a couple years. You should read the transcript of the EOG CC.

As we know from holding TGA, Wall Street is not going to value reserves in Egypt the same way.

I think EOG is on a lot of radar screens as a takeover target.

I do like APA and you should hang on to it.

What is impressive is that the 1.6 Billion recoverable is based on a 6% recovery factor. The OOIP is 27.9 Billion, around 100 barrels per diluted share. Surely there is a good probability that eventually the company will be able to increase the recovery factor. That seems to be the trend in most of these plays.

Adam

Has anyone done any tests to see how CO2 tertiary recovery works on fracked shale wells? Sure would be interesting to have some data.

Since the Shales are all in the very early stages of development, it will be a long time before "tertiary" methods are even tried. I have been told (can't remember by whom) that we should not expect waterfloods or CO2 floods to work on the shales since the fractures are so small. Waterfloods and CO2 work best on sands.

Keep in mind that the Barnett Shale has been producing for decades. What I think we will see is that as individual well production goes sub-economic, they will re-enter the wells and refrac them to stimulate more production. Many Barnett wells have been refraced several times with very good results.

As the U.S. becomes more dependent on the shale plays the oil field service firms are in very good shape. Refracing a well can cost over $1 million.

just a quick question...are those 1.6 billion BARRELS, or BOE ? fwiw, the official conversion is 6:1 while the real/market ratio is about 40:1...

Mark - 1.6billion BOE, 71% oil, 16% NGLs and 13% gas. 45% of 2012 gas production hedged at $5.44.

Adam