EOG Resources Inc.'s 2Q2010 revenues generated from crude oil, condensate and natural gas liquids (NGL) production exceeded those from natural gas for the first time in the company's history, CEO Mark Papa said Friday.

The company reported that net income rose to $59.9 million (24 cents/share) in 2Q2010, well ahead of the net loss of $16.7 million (minus 7 cents) recorded in the year-ago period.

While oily prospects and the revenue they bring appear to be a sure thing, there's no doubt that the Houston-based independent is still a heavyweight gas producer. Quarterly volumes rose close to 7% from the year-ago level to 202 Bcfe, or 2,217 MMcfe/d, weighted 73% to natural gas and 27% to liquids.

However, gas volumes declined slightly from the year-ago quarter, while oily output was up 43%, primarily driven by "significant" growth in North American volumes, Papa said. NGL volumes jumped almost 23%.

North American oil exploration will drive EOG's growth as long as gas prices remain depressed, Papa told analysts. EOG increased its 2010 capital spending budget by $500 million to pursue more oily prospects, particularly in the Eagle Ford Shale. More noncore gas properties also will be sold in North America to fund the additional spending.

Papa explained that EOG had accumulated close to 1.7 billion acres of "first-mover horizontal shale acreage" over the past several years and "frankly, it's more acreage than we can say grace over."

Two packages of assets went up for sale in July. One contains some Canadian shallow gas acreage that is now producing around 170,000 Mcfe/d. The second package consists of 180,000 acres of shale gas property in the Marcellus and Haynesville shales, as well as a piece of its leasehold in the Eagle Ford Shale.

Most of the money from the asset sales will be directed to the Eagle Ford play, Papa said. He explained that the company considered a joint venture on the Eagle Ford acreage to be sold, but that would give another party EOG's technical expertise and some of its production for a small payoff, he said.

To date EOG has drilled and completed 31 wells in the South Texas shale play and it has 25 wells awaiting completion across its 505,000 net acre position. Toward the end of this year EOG plans to ramp up drilling activity to a 12-rig program and operate an average of 14 rigs in 2011.

Acreage also being tested in the emerging Leonard Shale -- also referred to as the Bone Spring play -- in southeastern New Mexico, where EOG has completed four vertical and seven horizontal wells. Based on its drilling results to date in the Leonard Shale, EOG estimated that the "likely" reserves on 31,000 of its 120,000 net acres are about 65 million boe net.

EOG is not abandoning its onshore gas prospects, but prices aren't cooperating to make them as worthwhile in the short term, said Papa. Asked for his view of gas prices in 2011, Papa said his views were "pretty similar" to the New York Mercantile Exchange, in the "$5.50 range...We're not counting on $7 gas prices next year. We take them as they come, but we don't have a particularly high gas price forecast."

The "two big drivers for the gas side volumes," he said, are the Haynesville Shale and the Horn River Shale. In South Texas EOG also expects to see "some significant growth, particularly from the Frio Vicksburg Formation." Production in the Haynesville Shale, especially the East Texas portion, is proving to be particularly strong.

EOG drilled two wells in the Haynesville play that "may be among the industry's most prolific to date in the entire play," said the CEO. The 30-day average restricted flow rates from the Crane No. 26-1H and Murray No. 1H wells (both 96% interest) were 27 MMcf/d and 25 MMcf/d at 7,800 psi and 8,100 psi flowing pressure, respectively. The wells had initial production rates of 32 MMcf/d and 30 MMcf/d at 9,700 psi and 9,200 psi flowing pressure, respectively.

"Extending the boundary of the sweet spot further east into San Augustine County, TX, the Walters No. 1H was completed with a restricted initial production rate of 21 MMcf/d of natural gas," Papa said. EOG also "confirmed success" from the Bossier Formation in DeSoto Parish, LA, with the Red River 5 No. 3H, "which began production at over 15 MMcf/d of natural gas."

Work also continues with partner Apache Corp. on the proposed liquefied natural gas (LNG) export terminal in Kitimat, BC (see NGI, May 24). The companies currently are negotiating oil-indexed contracts for the LNG, he said.

"It's still early days," he said, "but there are positive signs. But discussions are in the very early stages. The way I gauge this whole project is that it's a 10-step project. Right now we're at step two...and it's looking pretty good. All the elements are there to make the project come together, but this will be the first LNG project built by a nonmajor company and also the first LNG project in North America for export except for one in Alaska built 20 or so years ago.

"We realize what we're taking on is pretty big scope...the price is pretty big. I don't see a rapid time line and I do not want to set any expectations and say, 'eureka...the deal's done.' We're moving forward," but if it continues to move forward, construction wouldn't begin before 2014.

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