Despite the recent bump up in oil prices, the energy sector isn’t what it used to be. “Lower for longer” continues to be the mantra of the sector.
And under that scenario, not every energy stock is going to make it — just look at the rise in the number of bankruptcies. No, it takes very special energy stock to get through the mess.
An EOG Resources Inc (EOG) is that stock.
The former remnant of Enron has become a shale superstar — diving headfirst in some of North America’s most prolific fields during the very beginning of the boom. More importantly, it has continued to cut costs, execute on targeting strategies and continues to not only survive, but thrive in the current downturn.
For investors looking to play the next leg-up in oil and natural gas prices, EOG could very well be the best buy in energy.
First Mover Status For EOG
The key for EOG has been the fact that it was very early in the shale revolution.
The company saw the writing on the wall and began to accumulate acreage in places like the Eagle Ford and Bakken — long before they were part of the oil & gas lexicon. Since those early moves into these key regions, it has expanded and has added acreage in other major shale plays such as Marcellus, Delaware Basin, Powder River Basin, DJ Basin and Midland Basin.
With all of these land holdings, EOG reserves have ballooned to more than 2,118 million barrels of oil equivalent (MMBoe) as of the end of last year. Those reserves are also oil and liquids rich, with nearly 70% of them comprising crude oil, condensate, and natural gas liquids (NGLs).
And naturally, with such huge reserves, EOG has one heck of a production profile. In fact, when it comes to the lower 48, EOG actually produces more energy onshore than even Exxon Mobil Corporation (XOM).
That first mover status is what made EOG a great energy in the past. What’s great about EOG for the future is what it’s doing with those reserves today. Namely, not tapping them.
A Shift in Strategies at EOG
I know that may sound crazy for an energy company to do, but it’s actually a big win for EOG. The firm continues its strategy of drilling but uncompleting wells (DUCs). Basically, it’s tapping a deposit of crude oil, but not actually turning on the spigot.
With oil prices cratering, costs to drill well have plunged also. The various services companies like Halliburton Company (HAL) have basically given away the store in order to maintain market share and keep revenues flowing. As a result, oil service costs have sunk about 30% since the bust.
By drilling today, EOG can take advantage of those low service costs and reduce its CAPEX per well. By not completing the well and actually hooking it up, EOG can keep the oil in the ground. That allows it to wait until prices rise.
EOG has about 220 drilled wells that it hasn’t brought into production yet. However, when prices rise, it could significantly boost its production by completing only around 40% of its DUCs. And that’s without renting a single piece of additional oil field equipment.
What’s more is that EOG has been doing more of these DUCs in what it calls premium areas. These areas offer the lowest costs, economies of scale and multiple pay zones. By drilling in the real top-shelf locations in places like the Eagle Ford, EOG is able to hit multiple pockets/layers of crude oil from one well pad. That translates into some pretty hefty returns.
At $40 per barrel oil, EOG is able to score a 30% return per premium well. At $60 per barrel, these wells produce returns in the triple digits.
That’s right. In its most premium acreage, it is still able to make money with oil in the $40s. This about $15 to $20 per barrel lower than the average E&P firm.
As if that wasn’t enough, EOG has found a way to make the oil last longer out of its wells. The problem with extracting oil from shale is that the wells have a high initial rate of production. After about a year of gushing, they start to drop off. In some cases, they completely sputter out as soon as three years.
The company has figured out a way to use waste natural gas in order to coax more oil out of the shale. For certain wells, EOG can pump that gas back into the well and help re-pressurize the reservoir. This helps pushes out more oil — about 30% to 70% more oil in the most locations.
The Best Energy Stock
All energy firms will likely benefit from oil rising. But EOG — thanks to its focus on premium plays, huge backlog of DUCs and low costs — should benefit the most. The firm was one of the first movers into shale and now, it could be setting the stage for the next trend in oil production — prudent resource management.
Ultimately, investors will win.
Shares of EOG are still about 6.7% below their 52-week high and around 30% below their all-time high of roughly $120 per share. That’s enough of a discount given that oil has already begun to rise. Adding in all the potential long-term profits from its backlog of DUCs, EOG stock could easily return to those levels.
At the end of the day, EOG could very be the best energy stock around.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.