What’s Fueling Crude Oil Production Growth For EOG Resources?

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EOG Resources’ (NYSE:EOG) net crude oil production has grown sharply from just around 55 thousand barrels per day (MBD) in 2009 to over 220 MBD last year, implying a CAGR of more than 41%. Almost all of this growth in the company’s crude oil production has come from its operations in the Eagle Ford and Bakken shale plays in the U.S. This year, EOG Resources plans to grow its net crude oil production by another 29% over last year. In this article, we take a closer look at what’s fueling this extraordinary growth in the company’s crude oil production. [1]

EOG Resources is an independent oil and gas exploration and production company that explores, develops, produces and markets crude oil, natural gas liquids and dry natural gas from major producing basins in the U.S., Trinidad, Canada and the U.K. A vast majority (around 94%) of the company’s total net proved reserves are located in the U.S., while the remaining are spread across other international markets including Trinidad, U.K., Canada, Argentina and China.

We recently launched coverage of EOG Resources with a $105/share price estimate, which values it at almost 18.3x our 2014 adjusted diluted EPS estimate of $5.75 for the company.

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Eagle Ford

EOG Resources derives more than 96% of its total crude oil production from the U.S., where the recent growth in tight oil production has been phenomenal to say the least. From almost nothing in 2005, the country’s crude oil production from horizontal drilling of relatively impervious rocks has grown to around 3 million barrels per day currently. A large proportion of this growth (almost 40%) has come from increased horizontal drilling in the Eagle Ford shale formation, where EOG Resources holds a very lucrative acreage.

The Eagle Ford shale formation in South Texas runs from the U.S.-Mexico border north of Laredo in a narrow band extending northeast for several hundred miles to just north of Houston. It is currently the largest tight oil play in the U.S. by EIA estimates. Its proved crude oil reserves of 3.4 billion barrels are greater than those of the Bakken Formation of North Dakota. [2] EOG Resources is the leading oil producer and acreage holder in the Eagle Ford shale. The company holds 632,000 net acres in the play, a majority of which, around 564,000 net acres fall in the crude oil window of the formation. EOG Resources derives more than 55% of its total crude oil production from the Eagle Ford shale. At the end of the first quarter of this year, the company’s average daily net crude oil production from the Eagle Ford shale stood at 207,000 barrels, compared to just over 30,000 barrels in 2011. During the most recently reported quarter, EOG Resources’ net crude oil production from the formation grew by over 45% year-on-year. [3]

Despite the recent run-up, there is still a significant growth opportunity for EOG Resources in the Eagle Ford shale. At the end of last year, the company’s net proved reserves in the play stood at 765 million barrels of oil equivalent. This means that if the proportion of crude oil in its total oil equivalent production and the average daily hydrocarbon production rate from the play remain constant at 2013 levels, the company can continue to tap the play for at least 13 more years. It should also be noted that proved reserves represent only a small fraction of the company’s total reserve potential in the Eagle Ford shale, which is around 3.2 billion barrels of oil equivalent or almost 4.2x its net proved reserves in the play at the end of last year. EOG Resources has currently identified 7,200 drilling locations in the Eagle Ford shale. This year, the company plans to drill around 520 wells in the area employing as many as 26 rigs. [3]

Permian

EOG Resources also holds some very lucrative acreage in the Permian Basin. The Permian region in western Texas and extending into southeastern New Mexico, has been one of North America’s major oil and natural gas producing regions for nearly a century. It accounts for about two-thirds of crude oil production in Texas and nearly 15% of EOG Resources’ entire U.S. acreage in both the Delaware and Midland basins in the Permian region. In the Delaware basin, the company holds 207,000 net acres spread over Leonard and Wolfcamp shale. In the Leonard shale, EOG Resources holds 73,000 net acres that hold net proved hydrocarbon reserves of around 63 million barrels of oil equivalent. The company has identified around 1,600 drilling locations in its acreage in the Leonard shale. This year, it plans to employ two rigs to drill around 40 net wells in the area with average after-tax rate of return (ATROR) of more than 100%. [3]

Bakken

In addition to the Eagle Ford and Permian, EOG Resources is also ramping up its operations in the Bakken shale play located in Eastern Montana and Western North Dakota, as well as parts of Saskatchewan and Manitoba in the Williston Basin. Oil was initially discovered in the Bakken play in 1951, but was not commercial on a large scale until the past 10 years. The advent of modern horizontal drilling and hydraulic fracturing helped make Bakken oil production economic. According to latest EIA estimates, the Bakken tight oil play holds 3.2 billion barrels of technically and economically recoverable crude oil. EOG Resources holds 110,000 net acres in the play. At the end of last year, the company held net proved hydrocarbon reserves of 221 million barrels of oil equivalent in the play. This year, EOG Resources plans to drill around 86 wells in the area employing 6-7 rigs in total. [3]

International

Outside the U.S., EOG Resources plans to bring a new project online in the U.K., which would further boost its crude oil production in the coming years. The company is the operator of the Conwy field situated on Block 110/12 in the East Irish Sea. It is expected to come online by the end of this year and have a net peak production rate of around 20,000 barrels of oil per day. [3]

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Notes:
  1. EOG Resources 2013 10-K SEC Filing, sec.gov []
  2. U.S. Crude Oil and Natural Gas Proved Reserves, eia.gov []
  3. EOG Resources Investor Presentation, eogresources.com [] [] [] [] []