EOG Reported Strong 2Q Results; New Play; Spending Up; Guidance Unchanged

The 2Q10 Numbers:

• Production of 2.217 Bcfepd:
  • vs guidance of 2.18 to 2.313 Bcfepd.
  • up 7% YoY
  • 73% natural gas
• Revenue of $1.357 B vs $1.24 B expected
• EPS of $0.24 vs $0.25 expected
• CFPS of $2.84 vs $2.76 expected

Highlights

Bakken:

• 12 rig program
• Couple of nice wells in the core but notably absent was talk of their Montana Bakken effort. They will have to address the Carat well on the call today.

Leonard Shale - Southeastern New Mexico

• New play for EOG, the Leonard Shale of SE New Mexico.
• Announced results of  two of their first seven wells, with IPs of 990 and 1,050 BOEpd.
• Thinking EURs here of 400 MBOE/well.
• EOG puts reserve potential at 65 mm BOE which is a pretty big opening salvo for these guys on a new play reserve estimate.
• This makes it their fourth largest oil play in terms of estimated, risked, net potential reserves behind the Eagle Ford at 900 MMBOE, the Bakken / Three Forks at 420 MMBOE, and the Barnett Combo at 370 MMBOE.
• These reserves are for about 1/4 of their 120,000 net acres in the play.

Eagle Ford Shale:

• 5 rig program growing to 12 rigs by year end.
• Announced 3 completed wells that are oily
• To date they have drilled and completed 31, IPs ranging from 622 to 1,000+ of late
• Sees major growth contribution kicking in in 2011.

Niobrara Shale:

• 4 rig program
• Two more IPs (730 and 1,100 Bopd) which are down from their initial Jake well which IP'd at 1,558 bopd
• Completed 2 wells in the quarter, restricted rate production of 570 and 600 Bopd, no commentary on IPs.
• 400,000 net acres but focusing on 100,000 of it for now.
• EOG continues to say it is "too soon" to attempt to quantify the reserve potential of the Niobrara.

Barnett:

• Combo Play -
  • 14 rig program just in the combo
  • more strong, oily wells to report here, not above previous results but strong nonetheless.

East Texas Haynesville / Bossier:

• Announced 2 large Hayensville IPs, 32 and 30 MM/d which had outstanding first 30 day average production of 27 and 25 MMcfepd respectively.  These are some of the best wells completed on the Texas side of the play.
• Also had a Bossier test come in north of 15 mm/d.
• They commented that the 2010 to 2012 time frame will be "intensive" due to lease expirations. No kidding. I'm looking for a slowdown on the Louisiana side mid 2011 but the comment should give one pause regarding the next two years of gas pricing. Look for Mark Papa to expound upon the gas markets on this call, especially since the EIA revisions of last Spring were insignificant.

Budget:

• Increased by $500 mm but to be offset by asset sales of producing non core gas assets in the U.S. and non core acreage.  Spending is for liquids infrastructure so that as volumes increase over the next few years, the pipes and treating equipment is in place to handle the growth.

Guidance:

• 3Q of 2.32 to 2.591 Bcfepd
• 2010 0f 2.281 to 2.501 Bcfepd, or about 13% growth; in line with last guidance.
• Cost guidance is essentially unchanged for the year.
• Growth for 2011 and 2012 are 19% and 21% respectively, estimates unchanged.
• Note, the liquids portion of their production profile looks like this:
  • 2008: 29%
  • 2009: 41%
  • 2010: 50%
  • 2011: 63%
  • 2012: 68%
  • By the way, 2Q10 was the first quarter in EOG's history to see more revenue derived from liquids than from natural gas.

Balance Sheet:

• Net debt to cap of 23% vs 22% last quarter.
• Target remains < 25%.
• Still best in class in the large cap E&Ps.

Nutshell: In line quarter, stout operations update with one notable omission already referenced. On the one hand, people like to see new plays unveiled, especially oily ones so Leonard is a welcome addition. On the other hand, investors and analysts have abhorred boosted capital spending of late. Especially without a commensurate boost in production guidance. But on the third hand, it's the right move and will make it possible for them to go from low double digit to high double digit growth, oilier growth at that, over the next two years and to lockup their leasehold in the process.  The stock may come off initially but my sense is that that is short sighted given the radical shift in production profile here (something that began four years ago for them and not with the popular "get oily" crowd of recent months) and the large, repeatable success type drilling inventory they now hold.

Conference Call: Today,9 am EST