Thesis Dec. 07, 2009
With the help of its low-cost asset base, clean balance sheet, and strong 2009 hedge book, EOG stands to
strengthen its competitive position during the next few years as its rivals struggle with high leverage and weak
commodity prices. We anticipate EOG will accomplish this by acquiring acreage on the cheap in existing plays and in
new ones. Moreover, EOG is shifting the balance of its portfolio; oil and natural gas liquids are expected to
represent 50% of production by early next decade.
EOG has historically shunned acquisitions, preferring to find and develop reserves on its own. Although its production growth hasn't been as impressive as some of its competitors', EOG operates one of the lowest-cost asset bases in the industry. The firm's low-cost structure helps improve its odds of remaining profitable even during the bottom of the industry cycle. Moreover, by minimizing capital costs and operational costs, EOG enjoys solid returns on capital.
EOG is one of the largest leaseholders in the prodigious Barnett Shale near Fort Worth, Texas. EOG's results in the
Barnett have been impressive, and performance continues to exceed expectations. In 2008, Barnett production grew
more than 50% year over year. However, we are more impressed by the firm's ability to keep costs in check in
the escalating cost environment that persisted through most of 2008. One way EOG has been able to minimize
costs has been by cutting the time it takes to drill a well in half. More recently, the firm acquired a sand mine south
of Fort Worth, as well as built its own gathering and processing in western Johnson County. This willingness to
vertically integrate exemplifies what sets EOG's management team apart, in our opinion.
One of the more exciting plays EOG is involved in is the Bakken Shale in the Williston Basin, which spreads across
North Dakota and Montana. It appears EOG has found the sweet spot of the play, holding an enviable position within
the Parshall Field. The play is economical down to around $50 per barrel. Expected recovery rates are still relatively
low, but they could increase over time through tighter well spacing and secondary and tertiary recovery techniques.
However, minimal work has been done on this front. The company curtailed production in the early part of 2009
because of weak regional oil prices and a transportation issue. The main oil pipeline is full, and current prices don't
justify trucking oil to market. The infrastructure situation should improve throughout the course of 2009 and into
2010 as new pipelines and rail capacity is added.
In the hope of leveraging the knowledge gained in the Barnett Shale, EOG has been working on several emerging
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