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EOG's Papa Picks His Favorite: Eagle Ford Oil

It's no secret that weak prices have made natural gas a stepchild to oil and natural gas liquids (NGL), but perhaps nowhere else is the clean-burning stuff more out of favor than in the halls of Houston-based EOG Resources Inc., where CEO Mark Papa can't seem to distance himself from the Mcfs fast enough.

"Why anybody in the industry pays the slightest attention to [any company's] natural gas growth in North America is beyond me...natural gas...is barely profitable, at best..." Papa told financial analysts, more than once, during a second quarter earnings conference call Friday.

What he does like is oil, particularly that coming from the Eagle Ford Shale in South Texas.

"As most of you know, this is the hottest play in the U.S., and EOG has the largest net position in the oil and wet gas windows, 561,000 acres, of any company in the trend," he told the analysts. "We continue to be the biggest producer from the oil window with net after-royalty production of 34,000 boe/d at the end of the second quarter, 83% of which is crude oil. I expect we'll consistently be the largest Eagle Ford net oil producer for the next decade."

Early in its transition to a liquids-focused company EOG targeted the Eagle Ford and amassed an acreage position in the sweet spot of the crude oil window. During an earnings conference call with financial analysts Friday, Papa praised the wisdom of this move. "The wealth of [Eagle Ford] drilling, completion and production data at our fingertips is reflected in the steadily rising momentum of our operations and success in achieving more predictable results."

The company said the majority of its Eagle Ford wells are being completed to sales at initial production rates exceeding 1,000 b/d of crude oil. EOG ramped up its drilling activity from 10 rigs at the beginning of 2011 to its current program of 22 rigs.

In Gonzales County the King Fehner Unit #2H, #4H, #5H and #6H wells began initial production at maximum rates ranging from 1,238 to 1,487 b/d with 1.2 to 1.6 MMcf/d of rich natural gas. "These are the first Eagle Ford wells that EOG has tested with a tighter spacing pattern. If downspacing proves economically viable, we have the potential to significantly increase our reserves in the Eagle Ford," Papa said.

"With the 77% crude oil mix of our Eagle Ford acreage position, this large, highly rated resource play has become a significant contributor to fueling EOG's transition to an oil company in a short period of time," Papa said.

EOG total production increased 13% in the first half of 2011 compared to the same period in 2010. Driven by a 60% rise in United States crude oil and condensate production during the second quarter, EOG delivered 46% total company crude oil, condensate and natural gas liquids production growth versus the second quarter 2010. Leading the crude oil production growth was the South Texas Eagle Ford Shale followed by the Fort Worth Barnett Shale Combo. Also contributing to the increase were newer crude oil and liquids-rich plays such as the Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp and New Mexico Leonard, the company said.

"Demonstrating the depth and quality of our portfolio, EOG's crude oil and liquids-rich plays delivered strong, consistent second quarter production results, driving our overall first half 2011 production growth," said Papa. "Just as we had forecast, EOG's natural gas production is decreasing due to asset sales and the priority we have placed on developing our outstanding crude oil and liquids investment opportunities."

EOG said it is on track to achieve its targeted 9.5% organic production growth for 2011. Total company 2011 crude oil and condensate production is projected to increase by 52%, while total company crude oil, condensate and natural gas liquids production is forecast to rise 47% over 2010.

The company's North American natural gas production decreased 1.6% in the second quarter compared to the same prior-year period due to reduced drilling and gas asset sales. In the United States, where EOG is employing drilling capital to maintain core leasehold positions, the company said it posted "strong operational results" from its Marcellus Shale and Haynesville/Bossier shale natural gas horizontal resource plays. In Canada, EOG's gas production decreased due to asset divestitures and the reallocation of capital toward liquids-rich opportunities.

Elsewhere in EOG's world, despite weather challenges in the North Dakota Williston Basin over the last eight to nine months, EOG continued its drilling and production activities, as well as operating its proprietary crude-by-rail transportation system. Completion operations were impacted and area flooding remains an issue, the company said.

"EOG's early innovative crude-by-rail midstream investments in the Bakken and Eagle Ford have proven valuable in delivering our crude oil directly to major market hubs given the current lack of available pipeline capacity in these two prolific plays," Papa said. "Our Bakken crude oil rail transportation system was particularly beneficial during the recent North Dakota flooding because it enabled EOG to continue to make crude oil deliveries."

EOG reported second quarter net income of $295.6 million ($1.10/share) compared with net income of $59.9 million (24 cents/share) in the year-ago period. Adjusted net income for the second quarter was $299.2 million ($1.11/share) compared with $44.9 million (18 cents/share) in the year-ago quarter. Results for the second quarter included a $226.2 million impairment of certain noncore North American gas assets, gains on property dispositions of $105.2 million and a noncash net gain of $189.6 million on the mark-to-market of financial commodity contracts.

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