First quarter performance from EOG Resources Inc.'s "big four" plays, led by the Eagle Ford Shale, was substantial enough to raise this year's total company liquids production growth target to 33% from 30% and increase the overall production growth target to 7% from 5.5%.
The big four are the South Texas Eagle Ford Shale, the North Dakota Bakken Shale, the Fort Worth Barnett Combo and the Permian Basin Wolfcamp and Leonard. EOG's U.S. oil and condensate production increased 61% year/year on the strength of the big four. Total company natural gas liquids (NGL) production increased 44% due to liquids-rich gas from these four plays. Overall, companywide crude oil, condensate and NGL production increased 48% from the year-ago quarter.
North American natural gas production declined by 9% in the first quarter 2012 compared to the same period 2011, which was consistent with the company's "pessimistic short-term view" of gas prices.
The star of the show has been the Eagle Ford Shale, which is turning from "an 800-pound gorilla" into a "1,000-pound gorilla," CEO Mark Papa told financial analysts last Wednesday during an earnings conference call. EOG claims the title of the largest crude oil producer in the Eagle Ford with average net production of 77,000 boe/d in March, 90% of which was liquids, Papa said. In the Eagle Ford, EOG is pursuing field development on spacing densities of 65-90 acres between wells. Production flow rates to date confirm well results equal to, or better than, previous patterns. Testing is under way to address the viability of further downspacing and possible impact on well reserves and recovery factors.
"Our confidence level in the Eagle Ford is very high. Even after we implemented denser well spacing earlier this year, individual well performance remains remarkably strong. In fact, based on ongoing completion refinements, 30-day crude oil production rates from recent wells have increased," Papa said.
In the Bakken/Three Forks things are picking up with some recent "exciting results," Papa said. Downspacing is under way throughout the core area of the play, and in late April two waterflood pilots were begun. "We're much more excited than we were a year ago about our remaining Bakken and Three Forks potential," Papa said.
The Barnett Combo play "continues to slowly expand year after year." Papa warned that June could bring a gas processing "pinch point" until more capacity to handle rich gas comes online. In the Barnett Shale EOG production is holding up better than expected given the fact that for the last two years EOG has done only "minor drilling" on its Johnson County, TX, acreage. Decline rates in the Barnett have been a bit less than what the company anticipated, and this should serve to calm investor fears that shale plays fall flat on their face once company's pull back on drilling, Papa said.
In the Wolfcamp and Leonard the company is still experimenting with optimal well spacing. Papa said so far, most of EOG's success has been in the middle Wolfcamp interval.
EOG is looking for greenfield North American liquids plays but only discloses details when they're proven and successful and EOG has all of its acreage tied up, Papa said, adding that the lack of hype might frustrate investors, but they are rewarded for their patience.
The Tuscaloosa Marine Shale in Louisiana is an example of a developing play, Papa said. Here, EOG recently entered a joint venture (JV) with Mitsubishi. "We don't intend to provide specific funding details, but we hope it's a win-win," is all Papa would say about that, adding that any future JVs would be an exception rather than the rule and certainly wouldn't happen in any of the company's big-four areas.
In the near term, Papa said he's bearish on NGLs, particularly ethane, expecting prices during the second quarter to be relatively weak. However, he said during the second half of the year prices will strengthen. "We're a little more bullish than a lot of people that ethane prices will remain decent," he said, "probably in the 40-50% range of crude oil long term." Papa said that going forward, the cheapest place to make ethylene is probably going to be the United States.
"During the first quarter, we made progress toward achieving a number of EOG's 2012 operational goals," Papa said. "Production results and very strong 30-day flow rates from our Eagle Ford wells drilled on tighter spacing indicate we are effectively improving our completions. In addition, we expanded our Bakken operations in two different areas and confirmed economic infill drilling on our core sweet spot acreage. Also, we've rapidly moved into development mode in the West Texas Wolfcamp. The momentum in our operations continues to drive every facet of our exploration and development activities. We are very upbeat about EOG's potential," Papa said.
In April, EOG commissioned its crude-by-rail offloading facility at St. James, LA. At this Gulf Coast sales point EOG can market its Bakken, Eagle Ford and Permian crude oil production at Light Louisiana Sweet oil-indexed prices, which currently are trading at a premium to West Texas Intermediate. In addition, the company's Wisconsin sand plant is in full operation. With the addition of this sand, EOG has the capacity to meet the requirements for the majority of its domestic well completions this year and beyond. Self-sourced sand saves the company about $500,000 per well, Papa told analysts.
EOG reported net income of $324 million ($1.20/share) compared to $134 million (52 cents) for the year-ago quarter. "To put it simply, the marked improvement in productivity from individual wells is flowing to EOG's bottom line," Papa said. "Our first quarter 2012 performance reflects both our prudent strategy of reinventing EOG as an oil company and underscores our early mover advantage in prolific new domestic crude oil shale plays..."
Analysts at Tudor, Pickering, Holt & Co. said EOG is "humming along" and that it's "hard not to like" the company's portfolio with its improving well results, downspacing and waterflood test and the company's continuing search for new oil plays.
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