At this point, it’s no secret that prices for crude oil are in the toilet, and it doesn’t look like they are going to rise exponentially over the next year or so. We still have way too much supply and not enough global demand. That strong dollar isn’t helping, either. Prices of $40 to $60 per barrel are likely going to be the new norm.
But investors shouldn’t give up hope of striking it rich in the oil patch. The key is finding firms that can operate effectively in this low-priced, range-bound market. And you can’t do any better than EOG Resources (EOG).
Already one of the lowest-cost operators in America, EOG Resources has plowed some big bucks into new technology in order to reduce its costs even further. Add in some smart resource management, rising production and you have recipe for continued gains in the years ahead.
For investors, if there’s only shale stock to buy, it has to be EOG.
EOG Focuses on What It Can Control
When it comes to onshore oil production, the Bakken and Eagle Ford are the top names in shale. EOG Resources was early into both of these regions and controls some of the largest continuous-acreage positions around. That acreage also contains some first-rate reserves, the vast bulk of which is comprised of high-margin light sweet crude oil and natural gas liquids (NGLs).
EOG actually estimates that it has about two decades’ worth of drilling left to do on its current acreage positions in these legendary shales. Adding in acreage positions in the Marcellus, Delaware Basin, Powder River Basin, DJ Basin and Midland Basin, you can see how dominant a force EOG Resources is.
To that end, the firm is now the largest onshore oil producer in the lower 48 states. And it’s also already one of the lowest-cost producers thanks to its economies of scale, integrated nature and drilling programs.
But EOG Resources hasn’t rested on its laurels during this downturn. It continues to manage its costs more and more effectively. All in all, EOG will save an additional $200 million in spending because of reduced costs this year.
Much of those savings will come from new drilling technologies. EOG recently unveiled a new in-house completion technology in addition to improved well spacing capabilities. These efforts have driven efficiencies at newly drilled wells, meaning EOG pumps more oil at faster rates than before.
Since 2014, the technology has helped EOG reduce its completion costs by about 19% to just $7.1 million for an 8,400-foot well. Additionally, the new technology has allowed EOG Resources to improve turnaround times. Instead of getting through four or five completion stages per day like it did last year, the firm has bumped up its production to about 10 per day.
EOG Still (Wisely) Cutting Back on Production
That quickness will come in handy with regards to its new strategy of resource management. EOG is actually going to continue to reduce its production in third and fourth quarters of this year. Already, EOG saw its production sink about 5.2% year over year when looking at the second quarter. Management estimates that production should decline another 7% in the third quarter.
Yes, you read that right. But this is really prudent on EOG’s part.
Unlike many other energy firms who are trying to boost production to keep revenues high — or in many cases, just trying to keep the lights on — EOG is actually waiting around for better prices. It has a backlog of more than 320 wells that have been drilled, but not completed. On this front, EOG has been able to use the current oil services price war to save on the hard part of physical drilling. When oil rebounds, it can step in with its new completion technology and add these wells into production.
And with the firm now making more money per well with oil at $50 this year than it was when oil sat at $95 last year, it will be a huge winner if prices rebound. Even if it doesn’t, EOG is still cash-flow positive and is making money at today’s oil price. The continued efficiencies and cost controls should help drive margins throughout the next few quarters, as well.
Time to Buy EOG Resources
EOG’s focus on resource management in the time of low oil prices is actually quite refreshing compared to the constant mantra of “drill, baby, drill.” Ultimately, it should benefit shareholders of EOG stock when the rebound finally happens.
The beauty is that EOG Resources is strong enough to wait while that rebound happens. The E&P player doesn’t need to worry about keeping the lights on.
The beauty for investors is that the recent oil rout has taken away much of EOG’s premium. As the kingpin of shale, EOG has often traded at higher multiples relative to its peers. However, shares of the shale driller are down about 27% from their 52 week highs — which it hit when oil began collapsing last summer.
EOG stock is still going for a P/E of 31. However, that’s still below its 188 peak P/E during the boom years and its long-term average of 45.
That means investors have a chance to snag shares of the innovative driller relatively cheap and wait for oil to rebound courtesy of its newfound strategy. Ultimately, EOG is prepping itself to survive the downturn, and thrive in it. And that’s exactly what you want to see in an energy stock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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