EOG Resources 2Q Earnings: Eagle Ford Development In Focus

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EOG Resources (NYSE:EOG) is scheduled to announce its 2015 second-quarter earnings after markets close on August 6. [1] We expect lower crude oil prices to weigh significantly on the company’s financial results. Benchmark crude oil prices have fallen sharply over the past 12 months on rising supplies amid slower demand growth. The average Brent crude oil spot price declined by more than $48 per barrel, or almost 44% year-on-year, during the second quarter. This is expected to result in thinner operating margins on EOG Resources’ spot crude oil sales. However, higher production, primarily driven by the development of the Eagle Ford shale and other onshore assets in the U.S., coupled with a better volume-mix, is expected to partially offset the impact of lower oil prices on the company’s overall performance. During the earnings conference call, we will be looking for an update on EOG Resources’ ongoing development program in the Eagle Ford shale and the impact of the changed crude oil price environment on its capital spending and production growth outlook.

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 ones are spread across other international markets including Trinidad, U.K., Canada, Argentina, and China. We currently have a $96/share price estimate for EOG Resources, which is around 25% above its current market price.

See Our Complete Analysis For EOG Resources

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Eagle Ford Development In Focus

EOG Resources’ net crude oil production has grown sharply from just around 55 thousand barrels per day (MBD) in 2009 to almost 289 MBD last year, implying a CAGR of more than 39%. 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. EOG Resources derives more than 97.5% 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 more than 4 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 position. [2]

EOG Resources derives more than 61% of its total crude oil production from the Eagle Ford shale, the rock formation in South Texas that 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. By the latest EIA estimates, it is the second largest tight oil play in the U.S., and is estimated to hold proved crude oil reserves of almost 4.2 billion barrels, which makes up almost 41.6% of the total tight oil reserves in the U.S. [3] EOG Resources continues to be the biggest oil producer and acreage holder in the Eagle Ford shale. The company holds 624,000 net acres in the play, a majority of which, around 561,000 net acres, fall in the crude oil window of the formation. Therefore, EOG Resources’ activity level in the Eagle Ford shale is a good indication of the broader outlook for the play, and to a certain extent, the overall tight oil production in the U.S. We will therefore be looking closely for the impact of the changed crude oil price environment on EOG Resources’ development program, and its production growth outlook in the Eagle Ford shale.

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Notes:
  1. Press Release, eogresources.com []
  2. EOG Resources 2014 10-K SEC Filings, sec.gov []
  3. U.S. Crude Oil and Natural Gas Proved Reserves, eia.gov []