EOG Reports Solid 2Q09; Increasingly Oily

 

EOG Reported Good Numbers, Good Well Results, Maintains Guidance But Is Getting Oilier Quicker Than Expected.

The 2Q09 Numbers:

• Production: 189 Bcfe, down 2% sequentially, up 8% vs the year ago quarter
  • Guidance for the second quarter was 181 to 194 Bcfe so volues were above the mid point.
• • The  sequential decline in U.S. gas volumes was a little bigger than guidance and this may pressure the stock but it should have been baked into analyst thinking since the last conference call. The decline was foreshadowed by management on the last call but there may have been some curtailments in play here.
  • "Our North American gas production profile is such that our production nadir will occur at the beginning of the fourth quarter and begin inflecting upward at the end of the year in anticipation of stronger 2010 gas prices. Because of the current low gas prices, we are projecting our North American natural gas production to follow by 1% this year."
    • Additionally, we knew that they were delaying completions in the Bakken until July due to high transportation costs and low oil prices. 
    • Importantly, they kept the 5.5% organic 2009 production forecast (raised from 3% last quarter) intact.

• Cash Costs: (includes LOE, transportation, gathering, production taxes and G&A):
  • Cash costs came in at a low $1.57 / Mcfe vs $1.75 last quarter and $2.05 a year ago. Much of the drop was attributable to to lower production taxes which is in turn due to lower commodity prices but they did manage to modestly improve lease operating expenses.
  • Every item was either at the low of the guidance range or below it. 

 Bottom Line Was Much Stronger Than Expected:

• EPS of $0.73 vs $0.42 expected
• CFPS of $2.67 vs $2.42 expected

 

Guidance:

• 3Q Guidance
  • Volumes: 182 to 195 Bcfe
• 2009: Volume guidance stays at 5.5% YoY; cost guidance moved down slightly
  
• The 2009 total company liquids production growth target was upped from 22 to 25%, which means that CFPS numbers will be moving up modestly as analysts take into account that the production profile is getting oiler more quickly than previously thought. 
  • This adds about 2,000 bopd to their 2009 target (bringing it to 77,000 bopd)
    
  • Note that they kept their 2010 liquids target at 20% growth. This equates to more bopd in 2010 than before as well so 2010 numbers will be moving up slightly as well.

 

• Managment had one caveat. Their guidance is "contingent on storage limitations in the North American natural gas market and the impact on natural gas prices." They mentioned this last time around and other operators including CHK have conceded that there may be forced production curtails in the Fall as we bump up against storage limits.

 

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

Gas Projects:

Haynesville Shale:

• 4 rigs running
• They announced 5 wells from DeSoto Parish:
  • Average IP: 14.8 mm/d - run of the mill these days (very consistent range of 14.3 to 15.7 MM/d)
  • High working interest wells: average WI of 72%
• 116,000 net acres
  
• At last commentary, they pegged recoverable reserves at 3 to 4 Tcfe on their acreage.
  

British Columbia - Horn River Basin Shale: No New Comments Here

• No big impact here until 2011 or 2012 expected
• 157,500 net acres
• Still saying they think they’re acreage has recoverable gas potential of 6 Tcf

 

Marcellus Shale: No New Comments Here

• They had planned to take it slow here with a 1 rig program for 2009
  
• 240,000 net acres
  
• They put reserve potential at 2 to 3 Tcfe

 

Oil Projects:

Bakken Oil Shale:

• Announced two Core Area wells (1,600 and 1,700 BOEpd IPs, consistent with past wells
• Announced two Bakken Lite wells with IPs of 500 and 700 Bopd, which is higher than what we've been seeing from them.
• Avg IP in 2008 was 1,700 bopd
• 500,000 net acres (unchanged from last check)
  
• They continue to point to the play as being "over" 80 MM BOE (over 480 Bcfe). This number is tired and needs to be revised in light of the mounting evidence showing the underlying Three Forks Sanish well as a distinct reservoir.
  
  
  

Barnett Combo:

• During the quarter they completed 7 high working interest wells ranging from 350 to 900 BOE pd. These are bigger numbers than people are used to seeing from this play.
  
• Acquired 25,000 acres and 2,000 BOEpd in Montage and Cooke counties in a rare for EOG acquisition for $134 mm.
• They now have 194,000 in these two northeastern Texas counties and are running a four rig program here. 

• Reserves: (no change in the press release)
  • Combo (oil): > 200 MMBoe (1.2 Tcfe) potential
    
  • Shale Gas: > 5 Tcfe potential (they’ve booked 1.8 Tcfe)
    
    

New Canadian Oil Shale Play - Waskada Field, Manitoba

• They completed 13 wells in the quarter with average peak month produciton of 200 bopd.
• They reiterated their belief they have 25 mm barrels recoverable barrels here (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. 

Balance Sheet: Net debt to total cap of 18%; one of the lowest in the group, big, medium or small.

Nutshell: More consistently strong results from the Bakken, stronger results from the Barnett oil play. Last quarter at this time the Street was at $10.40 CFPS. Since then natural gas prices have deteriorated while crude has strengthened. Estimate came as they revised their production numbers higher adjusting for prices. Currently, 2009 estimated CFPS is $11.10 and the stock is where it was (about $78) at the time of the last conference call despite the $0.70 increase (7%) increase in estimates since then. Estimates will going up again based on the higher liquids guidance and falling operating costs. At 7x this year's estimates, EOG is cheap for EOG where long reserve life, a large, repeatable-success-oriented drilling inventory, clean and relatively unlevered balance sheet and conservative management have historically resulted in a premium multiple. 2010's CFPS Street estimate of $12.53 will move higher as well on the oil volumes as well. 

Conference Call: Friday, 9 am EST