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EOG's Papa: We're an Oil Company

February 21, 2012
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While 10% of its 2012 capital program will be spent to maintain dry natural gas activities -- in anticipation of better days -- EOG Resources Inc.'s focus is on oil and liquids, as it has been for about the last four years, CEO Mark G. Papa told financial analysts Friday during an earnings conference call when he waxed ecstatic about the Eagle Ford Shale in South Texas.

Drilling to date in the Eagle Ford has taught the Houston-based producer that 130-acre well spacing is too loose. Going forward, the order is for spacing of 65-90 acres, depending upon geology and other factors. With the new spacing plan, EOG figures it has about 3,200 Eagle Ford wells yet to drill, which Papa said will be to great effect.

Papa said EOG's Eagle Ford acreage now holds 1.6 billion boe net after royalties, a 700 million boe, or 78%, increase from the company's previous estimate. He was high on the Eagle Ford three months ago, too (see Shale Daily, Nov. 3, 2011).

"Just this net increase of 700 million boe is larger, we believe, than any net domestic discovery by any company in recent history," Papa said Friday. "The total size of 1.6 billion recoverable barrels is the biggest U.S. discovery net to any one company since Prudhoe Bay [AK] in the late 1960s, in our opinion, including the deepwater Gulf of Mexico."

Last year was "significant" for the development of the Eagle Ford, EOG's single largest asset. Production at year-end was 66,000 boe/d, net, 78% of which was crude oil. Starting 2011 with a 12-rig drilling program that ramped up to 26 rigs in December, EOG drilled and completed 244 net wells during the year with a focus on optimizing completion techniques, in addition to reducing drilling days and overall well costs.

"With tremendous resource potential still remaining on our acreage, we continue to test and apply techniques that will increase the oil recovery and potential of the Eagle Ford, our crown jewel," Papa said. "This strategy takes us into the next inning of development. By concentrating our efforts on getting more oil out of the ground early in the development phase, we are taking a good asset and making it great.

"Looking across the industry, we believe EOG's Eagle Ford position represents the largest domestic net oil discovery in 40 years and the highest rate of return play in North America today."

In the Fort Worth Barnett Shale Combo, EOG's second largest driver of liquids growth during 2011, total liquids production increased 107% compared to 2010, driven by a 124% increase in crude oil and condensate production. Last year EOG expanded its core holdings in the Barnett Combo by 25,000 acres to 200,000 net acres. Papa said EOG expects the Barnett Combo to be its second largest liquids production growth contributor again in 2012.

In the West Texas Permian Basin, EOG increased drilling activity in the Wolfcamp formation during the second half of 2011 in preparation for a more active year in 2012.

Papa said EOG is continuing to de-emphasize dry gas drilling on its Haynesville, Marcellus and Horn River acreage to pursue higher rate of return opportunities in its crude oil and liquids-rich unconventional resource plays. Since 2008, EOG's North American gas production has declined annually, with a 7% reduction from 2010 to 2011.

"Because EOG's outlook for natural gas prices is weak for the next several years, EOG plans to invest the minimum amount of capital expenditures necessary to hold its core acreage positions," the company said. "During 2012, approximately 10% of EOG's exploration and development capital expenditures is expected to be allocated to dry natural gas drilling activity, a significant decrease from 2011."

EOG is targeting total company production growth of 5.5% in 2012 and has increased its organic liquids production growth forecast from 27% to 30%. Total liquids growth is expected to be composed of a 30% increase in crude oil and condensate production and a 30% increase in natural gas liquids (NGL) production. In North America, natural gas production is expected to decrease 11% from 2011.

The company reported fourth quarter net income of $120.7 million (45 cents/share), compared with $53.7 million (21 cents) for the year-ago period. "EOG had an exceptional year in 2011 with a 551% increase in earnings per share versus 2010. This solidifies the completion of our goal of becoming an oil company. These strong returns are one of the traditional hallmarks of EOG," said Papa.

For the full year 2011 production increased 9.4% compared to 2010, driven by 52% organic growth in North American crude oil, condensate and natural gas liquids (NGL), and a 48% increase in total company liquids production. During the fourth quarter, U.S. crude oil and condensate production rose 68% compared to 2010, contributing to a 61% increase for 2011.

EOG's net proved reserves for 2011 increased 5.3% over the prior year from 1,950 to 2,054 MMBoe, all organic. Total liquids proved reserves increased 39% year over year. Excluding the impact of property dispositions, total company and total North American net proved developed reserves increased 8.8% and 8.2%, respectively. Total liquids proved reserves, as a percentage of total company proved reserves, increased from 28% to 36%.

"EOG had an exceptional year in 2011 with a 551% increase in earnings per share versus 2010. This solidifies the completion of our goal of becoming an oil company," Papa said.

Analyst David Tameron of Wells Fargo Securities said in a note that EOG has grown entirely through internally generated projects over the last five years rather than relying on acquisitions. "This has resulted in a much lower overall cost structure for the company, which showed up in industry-leading returns. However, while we like the management and the company, we feel shares today are trading near fair value."

EOG shares closed down nearly 3% Friday at $114.35 in heavy trading. Shares had traded as high as $119.97, not far from their 52-week high of $121.44.

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