Review & Outlook

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Just Oil: EOG Resources, Inc.

28 May, 2015 by Paul Devine in Commentary

EOG Resources, Inc., is among the five stocks included in the Energy industry sector on our Most Favored Issues List (“MFIL”), the roster of stocks from which we form the portfolios of new clients. Most of the other Energy stocks on the MFIL are household names: everyone knows ExxonMobil and Chevron. And many investors know that “Schlumberger,” the French-founded, Houston-headquartered, international oil-field-services giant is pronounced with a long “a” sound and a silent “r” in the last syllable, rhyming with “Chevrolet.” While EOG Resources is not a household name, it is a large, well-established company pursuing a simpler business model than bigger and better-known energy companies.

EOG was founded in 1985, has been an independent public company since 1999, and is headquartered in Houston. The company explores for, drills for, pumps out, and then sells crude oil and natural gas. It is not–unlike most other energy companies–an operator of refineries, an owner of pipelines, a franchiser of service stations, or an umbrella for a collection chemical plants. EOG finds crude oil and natural gas underground, brings them above ground, and then sells them. The company has a simple business model, albeit with some inherent risks, including vulnerability to fluctuations in the prices of oil and gas.

EOG has a market capitalization of over $50 billion, and its size is one of the reasons it is never referred to as a “wildcatter.” The other reason is that it’s not wild. The company is well-managed by a long-term executive team; its bonds have an “A3 (stable)” rating from Moody’s; its stock has a Beta coefficient of 0.69, meaning that its share price is far less volatile than that of the average publicly traded stock; the stock is NASDAQ-traded and a member of the S&P 500. EOG is a technical innovator, having found a way to drill producing wells twice as close together as historical industry practice, and developing work practices that allow the company to drill a new well in five days instead of the industry standard of seven days.

EOG is also agile. The company moves out of operations that have diminished profitability: international operations have been trimmed down to half a dozen wells in central China, three off Trinidad, and a handful in the British half of the Irish Sea. EOG has material operations in Texas’ Eagle Ford formation (from the outskirts of Fort Worth southwest to Laredo) and in the west-Texas and eastern New Mexico parts of the Permian Basin. EOG started in 2009 drilling wells in the newly developed and technically challenging Bakken fields in western North Dakota, then stopped drilling late last year. Rather than complete new wells while energy prices remained low, EOG has left wells incomplete while taking advantage of the lower prices charged by now-underemployed oil-field-services companies to move forward with other parts of the projects. EOG’s management told investors in a May 5th conference call that the company can quickly complete the wells left incomplete when energy prices recover (which management expects will happen in late 2014) and add 23% to their production within three months.