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EOG Resources Sharpens Focus on Eagle Ford Oil and Liquids

Natural gas production is continuing to take a back seat to crude oil and natural gas liquids (NGL) production from the Eagle Ford Shale at Houston-based EOG Resources Inc.

The Eagle Ford "continues to be the hottest and highest rate of return play in the U.S., and EOG has the largest and best situated net position in the oil window," CEO Mark Papa said during a conference call with analysts Wednesday. EOG reported net after royalty production of 53,000 boe/d in 3Q2011, 78% of which was crude oil and 11% NGLs. "We expect to be the largest net Eagle Ford oil producer for at least the next decade," Papa said.

EOG's Eagle Ford position "is the highest rate of return large scale hydrocarbon play in all of North America, onshore or offshore," he said. "I also continue to believe this is the largest oil discovery net to any one company in the last 40 years in the U.S."

Led by output from the Eagle Ford and, to a lesser extent, the Fort Worth Barnett Shale combo, EOG reported a 64% increase in domestic crude oil and condensate production in 3Q2011 compared with 3Q2010.

Improved completion techniques and cost optimization practices continue to drive operational gains and enhanced well production results in the Eagle Ford, EOG said.

"As we apply what we've learned about the Eagle Ford across our extensive operations, EOG's production results just get better and better," Papa said. "We are also seeing early positive results from each of our seven downspacing pilot programs. Drilling wells more tightly spaced than our original 130-acre patterns provides even more development opportunities for EOG."

Activity in the Eagle Ford Shale is up 64% from a year ago, according to NGI's Shale Daily Unconventional Rig Count. As of Oct. 28 there were 216 rigs running in the Eagle Ford, up 3% from 209 a week prior and up from 132 rigs a year ago.

Analysts at Wood Mackenzie recently predicted that oil output from the Eagle Ford will rival the Bakken Shale by 2015 as North America's leading tight-oil producer (see Shale Daily, Oct. 12). The sweetest spot to target oil in the Eagle Ford has emerged as DeWitt, northern Live Oak and Karnes counties, according to Wood Mackenzie. "Operators in these counties, including EOG and Petrohawk (now BHP Petroleum), are well positioned to outperform their peers," the firm said.

In terms of optimization maturity, the West Texas Permian Basin Wolfcamp Shale "is about a year behind the Eagle Ford," Papa said. EOG has been operating a two-rig program and plans to ramp up drilling activity early next year, he said.

EOG is "indifferent" to growing natural gas volumes in North America as long as prices hover around $4, Papa said. The company's North American natural gas production decreased 9% in 3Q2011 compared to the year-ago period.

"Our business plan continues to be simple and consistent. We've completed the organic conversion to a liquids-based company by exploiting our world-class domestic onshore horizontal oil positions, while preserving all of our core North American natural gas resource play assets and maintaining a low net debt-to-cap ratio. This is manifested in very high year-over-year crude oil production growth rates...we continue to have zero interest in growing North American natural gas volumes in a $4 environment."

As it did in 2011, EOG will devote the overwhelming majority of its 2012 capital expenditures (capex) to oil and liquids projects, "with a minimum amount allocated to dry gas drilling, primarily to old acreage," Papa said. "In 2011 the capex spread was roughly 80% to liquids and 20% to dry gas; next year that spread will likely be 90-10%."

EOG reported net income of $540.9 million ($2.01/share) in 3Q2011, compared with a net loss of $70.9 million (minus 28 cents/share) in 3Q2010. The 3Q2010 earnings included a $208.3 million write-down of Canadian natural gas assets.

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