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EOG's Papa Sees Bakken Growth Rate Slowing, Eagle Ford Surging Ahead

Shares of EOG Resources Inc. rose sharply on Tuesday after the company reported a nearly 53% increase in net income for the first quarter of 2013, gains due in large part to hefty growth in crude oil production from the Eagle Ford Shale.

And while overall U.S. crude oil production is growing, CEO Mark Papa believes the rate of growth has peaked. Crude oil production grew 36% from 1Q2012 to 1Q2013, but "we expect that the total growth in 2013 and 2014 to be less than that."

"We're already seeing a lesser rate of growth in the Bakken. The Eagle Ford, of course, is still steaming ahead at quite a high rate of growth. [But] we believe that we're not going to see stupendous overall U.S. growth rates as we go forward," Papa said.

"We think there are only two major driving forces of the U.S. oil growth: the Bakken and the Eagle Ford. The Eagle Ford is going to surpass the Bakken, likely this year, as the biggest oil growth rate. The Bakken is slowing down. The Permian [Basin] is really not on that faster track, and all of the other [plays] are not growing at a very fast pace at all. So we're not as concerned as others that U.S. oil growth is going to flood the total market and ruin global oil prices."

The Houston-based company reported 1Q2013 net income of $494.7 million ($1.82/share), a 52.7% increase from the $324 million ($1.20/share) in net income from the prior year's first quarter.

Also during 1Q2013, crude oil and condensate production in the United States averaged 178,300 b/d, which was 36.1% higher than the 131,000 b/d produced in 1Q2012. Natural gas liquids (NGL) production in the U.S. rose from 50,300 to 58,600 b/d, a 16.5% increase -- but natural gas production fell, from 1.06 Bcf/d to 934 MMcf/d, a decrease of 12.1%.

EOG was trading at $136.00/share (up $9.96/share, 7.9%) in Tuesday afternoon trading on the New York Stock Exchange.

In the Eagle Ford, EOG said it had 18 wells with an initial production (IP) rate of more than 2,500 b/d of crude oil. Nine wells had IP rates of more than 3,500 b/d for crude. The company was the largest oil producer in the Eagle Ford during the quarter, averaging net production of about 153,000 b/d as of March 31.

"I can't overestimate the quality of this Eagle Ford asset," Papa said during a conference call with financial analysts on Tuesday. "If you take any piece of our acreage [and ask] if we're making better wells today than we were one, two or three years ago, the answer is unequivocally yes. That's why you're seeing the fact that we continue to beat our production targets relating to the Eagle Ford."

Papa said many analysts had misinterpreted a slowdown in Eagle Ford production during the fourth quarter of 2012. He said the company intentionally curtailed spending in the play to keep in line with budget constraints (see Shale Daily, Nov. 7, 2012).

"A lot of people misread the production slowdown in our fourth quarter, and felt that the Eagle Ford rate of change had inflected downwards," Papa said. "That was clearly not the case. The 'coin operated machine' received less 'coins' in the fourth quarter. So we upped the 'coinage' in the first quarter and you see the results. That's why we're so optimistic, not only of what we can do this year, but what we can do in the period from 2014 to 2017."

EOG said it plans to spend between $7.0 and $7.2 billion on capital expenditures (capex) in 2013, with crude oil from the Eagle Ford and the Bakken Shale/Three Forks Formation being the primary targets. During the conference call Q&A session, Papa said the company plans to use its cash flow to fund capex through at least 2017.

"We believe that over the aggregate period of 2014 to 2017, we will generate some significant free cash flow during that period at a flat $85 WTI [West Texas Intermediate] oil price," Papa said. "During that entire period we'll be guided by the same maximum debt limit of no higher than 30% net debt to total cap. We think that we should be in a free cash flow mode during this period, certainly at current oil prices."

Asked if EOG would deploy additional rigs in the Eagle Ford if crude oil prices stayed the same (in the $94 to $95/bbl range) or went higher, Papa said probably not. He said the company had 76 rigs in the Eagle Ford during 1Q2012, but only 52 rigs in 1Q2013.

"Some of those rigs last year were drilling some gas wells, and this year we weren't drilling hardly any gas wells," Papa said. "[But] the rig count is probably not going to go up that much, even if we ramp up the number of wells we plan to drill, because we continue to drill at a faster pace in days per well.

"We will probably ramp up activity in the Bakken, the Eagle Ford and the Permian, from the activity level that expect to achieve in 2013. We expect we can do that and still have significant free cash flow in 2014."

Papa added that EOG is "generally assuming" that it would conduct no dry gas drilling through 2017.

EOG estimates that 86% of the revenue it generates in North America in 2013 will come from crude oil and natural gas liquids (NGL), while the remaining 14% will come from dry gas, figures that are unchanged from 2012. By comparison, in 2006 dry gas represented 79% of the company's North American revenue, while crude oil and NGL were 21%. EOG began transitioning from a gas to an oil company in 2008 (see Shale Daily, Feb. 21, 2012).

Papa plans to step down as CEO on July 1, replaced by William Thomas. Papa will continue to serve the company as its executive chairman until he retires on Dec. 31, at which point Thomas will assume that title as well.

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