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EOG Continues Shift to NGLs and Oil

EOG Resources Inc. has such faith in its shift from a natural gas-weighted producer to one more weighted to natural gas liquids (NGL) and oil that it sees the traditional production growth yardstick almost obsolete, according to CEO Mark Papa.

"At the current 22-to-1 crude oil/natural gas price ratio, I believe the production growth yardstick has become somewhat meaningless," Papa said during a conference call with analysts Friday. "In today's world the metrics of liquids production growth and product mix change should be the focus, since cash flow, returns and earnings will follow liquids growth -- and that's how we've defined EOG's strategy over the past few years."

Houston-based EOG expects almost 70% of its 2011 and 73% of its 2012 North American wellhead revenues to come from liquids, Papa said.

In November Papa said EOG expected its 2011 North American production to be 67% weighted to crude oil and NGLs, a huge reversal from 2007, when the company's oily output accounted for about 23% of total production (see Daily GPI, Nov. 4, 2010). EOG said it planned to finance the plan by selling $600 million to $1 billion of its gas-weighted North American producing and nonproducing assets. At the time, Moody's Investors Service changed its outlook for EOG to "negative" from "stable," reflecting "EOG's shift in financial policy and the challenges stemming from its aggressive growth into oil and natural gas liquids plays" (see Daily GPI, Nov. 18, 2010).

But, measured by production growth, the early returns may indicate that EOG's strategy is paying off.

"In 2010 we slightly overachieved regarding our revised production growth goal, ending the year with 9.5% year-over-year overall growth, compared to our 9% target articulated in November," Papa said. "Our 2011 growth projection of 9.5%...is identical to the goal that we presented in November. I'll also point out that this growth reflects all anticipated asset sales for 2011.

"Most importantly, the year-over-year liquids growth projection remains at 49%, although the mix between oil and NGLs is slightly more oil-dominated than presented in November. We expect 55% oil growth and 34% NGL growth in 2011. Our North American natural gas production is expected to decrease by 5%, reflecting property sales and only a limited amount of dry gas drilling."

EOG plans to limit its dry gas drilling program in 2011 to hold leases in the East Texas/North Louisiana Haynesville and Bossier, the Pennsylvania Marcellus and the British Columbia Horn River Basin Plays.

During 4Q2010 EOG drilled its first successful horizontal Eagle Ford well outside the crude oil window. The Tully C. Garner #100H, located southwest of EOG's established crude oil acreage in Webb County, TX, began production at a pipeline restricted rate of 2.8 MMcf/d of rich natural gas with 239 bbl/d of condensate. EOG has a 100% working interest in the well and 26,000 net acres in the liquids-rich natural gas window.

EOG expanded its inventory of organic horizontal liquids plays with first-mover drilling success in the West Texas Permian Basin Wolfcamp Shale, where its production mix is projected to be 78% crude oil, condensate and NGLs, with 22% natural gas. EOG continues to make operational improvements that are increasing per well reserves and lowering individual well costs in the Fort Worth Barnett Shale combo, where it drilled more than 230 net wells last year. A quartet of wells were recently completed in Montague County, TX, with initial production rates of 207-524 Mcf/d and 320-489 Bop/d, EOG said. In the Bakken Shale EOG completed two wells in McKenzie County, ND, in 4Q2010 with initial net production rates of 1,066 and 1,550 Bop/d plus associated liquids-rich natural gas.

In the Marcellus Shale, where it has approximately 210,000 net acres, EOG completed the Hoppaugh No. 3H using improved completion techniques. The well, in which EOG has a 96% working interest, tested at a rate of 14 MMcf/d of natural gas.

EOG said it and Kitimat LNG partner Apache Canada Ltd. continue to make progress on the liquefied natural gas (LNG) project in western Canada, with initial sales targeted for late 2015. EOG anticipates committing a percentage of its approximately 9 Tcf net after royalty of natural gas reserve potential in British Columbia for export through the terminal.

Plans are to sell the LNG to international markets, primarily in Asia. Apache senior executives on Thursday painted a bullish outlook for 2011 that includes moving ahead with Kitimat. Kitimat, in which Apache holds a 51% interest, is well under way with engineering and design work, and has the prospect for several Asia-Pacific buyers with whom the project's backers are now in discussions, Apache officials said.

EOG envisions the Horn River as being a natural gas play tied to oil prices, with the production being sold through Kitimat as LNG to the Pacific Rim countries and others who traditionally index their LNG prices to oil. Similarly, Nexen Inc. officials on Thursday said they are interested in connecting the Horn River Basin to the LNG trade, possibly through a future export facility at Kitimat (see related story).

EOG reported 4Q2010 net income of $53.7 million (21 cents/share) compared with $400.4 million ($1.58) in 4Q2004. Fourth quarter results included a $208.3 million, net of tax (48 cents/share) impairment of certain non-core North American onshore and offshore natural gas assets, gains on property dispositions of $98.8 million, net of tax (39 cents) and a previously disclosed non-cash net loss of $43.9 million ($28.0 million after tax, or 11 cents/share) on the mark-to-market of financial commodity contracts.

EOG's recent asset sales include the sale of 50,000 net acres in the Marcellus Shale to Houston-based independent New field Exploration Co. in a transaction valued at $405 million (see Shale Daily, Nov. 17, 2010). In January EOG sold Marcellus Shale acreage in Toga County, PA, to National Fuel Gas Co. for $23 million (see Shale Daily, Jan. 11).

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