04
May

EOG 1Q09 – Guiding 2009 Volumes Back Up, Keeping Spending Flat

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EOG Resources (EOG) Reports 1Q09; Keeps Spending Plans Flat, Ups Production Guidance; Announces Another New Oil Shale Play.

The 1Q09 Numbers:

  • Production of 2.145 Bcfepd,
    • flat with last quarter (they've been curtailing Bakken oil production) and U.S. volumes fell off a touch,
    • up 13% from 1Q08 levels.
    • Still quite a gassy company but oil production was 14% of volumes up from 12% in 1Q08. Oil production will continue to become an increasing portion of their production profile.
  • Cost Control: Good.
    • LOE of $0.75 per Mcfe, in line with year ago cost of $0.73 per Mcfe. Last quarter
    • Total cash costs of $1.75 / Mcfe, down from $1.96 / Mcfe; primarily the result of lower production taxes which are themselves the result of lower natural gas and oil prices. 
  • CFPS of $2.75 vs $2.51 Street Consensus

Guidance:

  • 2009: Volume guidance goes from 3.0% to 5.5% YoY; 2009 to average 2.009 Bcfepd
    • Function of 2H09 increased oil sales from the Bakken and the north Barnett oil play
    • They see oil rising to 19% of production this month
  • 2010: they commented that they see a return to double digit growth here, commodity prices making that a workable idea of course.

Operations Update: For play relevance recall EOG had booked reserves of 8.7 Tcfe (1,450 MM BOE).

Haynesville:

  • No change to past comments,
    • still 14 well program for 2009,
    • still just the 2 wells tested to date (both IP'd in the 17 MMcfepd range)
  • 116,000 net acres
  • They continue to peg recoverable reserves at 3 to 4 Tcfe on their acreage
  • Look for questions on the call about recent drilling results and costs

Bakken Oil Shale:

  • 73 wells drilled to date ; 40% > 1,000 bopd
  • Avg IP in 2008 was 1,700 bopd
  • 500,000 net acres
  • They continue to point to the play as being over 80 MM BOE (over 480 Bcfe)
  • Extension area "Bakken Lite" drilling needs an update on the call.
  • Look for some questions about the Three Forks Sanish tests on the call

British Columbia - Horn River Basin Shale

  • 7 wells flowing to sales,up from 5 at last mention
  • Best one is still a 16 MMcfgpd IP,
  • 7 wells in 2009 program - No rush as this play is really set to begin meaningfully contribute around 2012 when takeaway infrastructure is in place.
  • 157,500 net acres (maybe up slightly)
  • Still saying they think they're acreage has recoverable gas potential of 6 Tcf

Marcellus Shale:

  • No update in the press release
  • They had planned to take it slow here with a 1 rig program for 2009
  • We've been seeing some impressive rates out of recent Marcellus wells so they should get a question or two about how its coming.
  • 240,000 net acres
  • They put reserve potential at 2 to 3 Tcfe

Barnett Shale and Barnett Combo: Little new in the press release or presentation.

  • Combo (oil): > 200 MMBoe (1.2 Tcfe) potential
  • Shale Gas: > 5 Tcfe potential (they've booked 1.8 Tcfe)
  • these numbers remain unchanged from the last update

New Canadian Oil Shale Play - Waskada Field, Manitoba

  • 25 mm barrels recoverable (conservatively, they still call their Bakken play a > 80 MM barrel play) so this is a good start and likely to be upgraded in future quarters. 
  • Booked on 2.2 mm barrels as of YE 08
  • Current production of 1,900 Bopd, targeting 9,500 Bopd by YE12
    • They peg after tax rate of return at 65% at current oil prices (that's better than the Bakken)
  • This is one of the plays they hinted at but didn't name last April-- at their analyst meeting.

Balance Sheet: Debt to total cap of 19%; one of the lowest in the group, big, medium or small.

Hedges:

  • 45% of '09 North American gas production hedged at $9.40
  • Oil: un-hedged.

Valuation:

  • Street is at $10.40 CFPS for 2009, that number should come up a little better than commensurate with the increase in volume guidance. This puts them at 6.9x '09 which is fairly cheap for this name; moreover, the out year is trading at 6.0x Consensus CFPS and there is little in this quarter's numbers to suggest those numbers would be coming down. 

Nutshell: Good quarter, CFPS beat on good operating cost control, but analysts and investors should really like the concept of more growth and therefore more cash flow from the same budget. This translates into better than expected debt reduction by year end and further increases to their dividend which though small is still better than most of the peers. During the time when the financial markets were more frozen, EOG lacked the sense of panic in the face of low prices due to its strong balance sheet, conservative management and strong set of assets set up to provide repeatable success.They have no shortage of drilling locations (12,000 ready to go with at least as many that should probably work) so it boils down to a matter of spending.  

Holdings Watch: The $10KP holds 5 June $70 calls and 5 June $80 calls.

Conference Call: Tuesday, 9 am EST

 

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