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EOG's Papa: Natural Gas Still a 'Money Loser'

EOG Resources Inc. CEO Mark Papa said the company has no plans to sell its estimable onshore natural gas leaseholds. But he also doesn't expect management to spend much time or money on the plays in 2013, he told analysts last week.

The Houston-based independent had been gas-long until four years ago, Papa noted. However, "very minimal" gas drilling activity is planned in the coming year. "We've shrunk North American gas production for four straight years because it's a money loser...it's unprofitable...We expect natural gas prices in 2013 will be better than 2012, but not good enough to provide a full-cycle return on gas well drilling."

This year EOG spent about $700 million in gassy onshore plays, which include the Haynesville, Barnett and Marcellus shales, to convert some of its leasehold to held by production. In 2013, only $100 million is budgeted for dry gas drilling.

The shift in capital spending from dry gas plays "will also lift our total rate of return," Papa said. "These trends are similar to the past several years...because we are becoming a bigger oil company." Natural gas liquids (NGL) production also is forecast to be lower in 2013 based on pricing forecasts.

There will be funding for "greenfield oil ideas and concepts" in North America's onshore, he said. And for good reason. EOG reported better-than-expected profits for the third quarter, propelled by its U.S. onshore crude oil and liquids output.

The explorer generated continued momentum from wells drilled in the Eagle Ford and Bakken/Three Forks formations, which combined with success in a few other plays led the company to increase the 2012 production growth target to 10.6% from 9%.

"EOG's best plays have become even better" on "especially strong, consistent well results," Papa told analysts. "We are setting the bar higher."

Compared with 3Q2011, EOG achieved a 42% increase in crude oil and condensate production, as well as a 40% jump in total liquids output. Total crude oil production through 3Q2012, which grew 45% from a year ago, now is expected to be up 40% in 2012, 3% more than an earlier forecast. Total liquids growth was raised to 38%, compared with a previous forecast of 35%.

Net income in 3Q2012 was $356 million ($1.31/share) versus $541 million ($2.01) in the year-ago period. Excluding one-time items, profits totaled $468 million ($1.73/share), ahead of Wall Street's expectations of $1.12.

EOG's overall financial metrics were enhanced by "successfully linking a significant portion" of Eagle Ford and Bakken crude oil and condensate production to markets that provide premium pricing, Papa said. The company also exceeded its crude oil and condensate production targets by continuing to modify completion techniques in the Eagle Ford, Bakken and the Permian Basin's Wolfcamp and Leonard plays.

"Simply put, EOG's excellent third quarter performance reflects the success of our groundwork," said Papa. "Over the last few years, we captured the best crude oil acreage in the United States. Now we are executing a development program that has exceeded our initial expectations. In addition, we implemented innovative marketing logistics such as our crude-by-rail transportation system...

In the South Texas Eagle Ford Shale several "monster" well results stood out, and it again was the "biggest driver of oil outperformance as it has been all year, said Papa. "In August I may have caused a flurry of comments because I said we had completed 15 monster wells as I defined them at 2,500-4,800 b/d of oil and rich-gas NGLs. In the third quarter we had 12 additional monster wells." EOG has "drilled and flow-tested multi-well targets, and we expect to have some spacing conclusions in the first half of 2013."

Across the United States EOG's rig count has fallen to 52 rigs from 70 in the first six months of this year. "The primary reason is we expect liquids production to be down," said Papa. "Our year/year growth is plenty strong for a company of our size."

The company today is running 20 rigs in the Eagle Ford, but it is slowly ramping down on rigs and completion crews in part to keep capital expenditures "within budget," said Papa.

According to SmithBits data and NGI's Shale Daily calculations, there were 242 rigs in operation in the Eagle Ford Shale as of Nov. 2. La Salle, Karnes and McMullen counties in Texas were the busiest with 37 rigs, 35 rigs and 28 rigs, respectively.

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