EOG Resources Inc.(NYSE: EOG) Is Looking to Lead U.S. Oil Production

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EOG Resources Inc. (NYSE: EOG) has undergone a massive change in its business model – and it's paying off astoundingly.

EOG Resources used to be known as a leader in natural gas exploration and production.
But low natural gas prices led to declining profits. In fact, the company lost $70.9 million in 2010's third quarter.

So it embraced a major production and technology change. EOG perfected horizontal drilling techniques to access shale rock formations trapping large reserves of oil – instead of reserves of gas, as many competitors were doing.

Now EOG has transformed from a leading gas drilling company to a major oil producer, increasing its liquid production last year by 49%.

With this new production model, EOG's profits are driven by high oil prices instead of depressed natural gas prices. The company just reported its third-quarter earnings and the results are astonishing – it turned a loss from the same quarter last year into a blowout earnings surprise this year. Net income hit $541 million.

The bottom-line growth helped the company's share price rally 20% since earnings were released Nov. 2.

By changing its focus to profitable oil production, EOG Resources is now a low-risk, high-reward energy stock, making it a "Buy" for investors looking to cash in on rising oil prices. (**)

EOG Resources Inc.: Unlocking Profits from Shale Oil

EOG Resources is one of the largest independent (non-integrated) U.S. oil and natural gas companies, with proven reserves in the United States, Canada, Trinidad, the United Kingdom, and China.

It's the largest oil producer in North Dakota's Bakken Shale, and the largest producer in the Eagle Ford Shale in South Texas. These two shale oil fields have played a key role in ramping up U.S. oil production over the past few years, with each having an estimated 4 billion barrels of recoverable reserves.

EOG's extensive operations in these fields have pushed its total liquid production to 130,000 barrels per day, and Chief Executive Officer Mark G. Papa said he expects to reach 200,000 barrels per day in 2012. That could make the company the second or third largest oil producer in the United States.

EOG has 500,000 acres of Eagle Ford property, which is on pace to be its most prolific oilfield by 2013, according to Wunderlich Securities oil analyst Irene Hass. EOG has started to bring online well after well in the Eagle Ford with production in the region averaging 1,000 barrels of oil equivalent per day (boepd). Some wells are starting to crack as much as 3,000 barrels of light sweet oil per day.

The high volume Eagle Ford wells will allow the company to fund growing exploration programs in new regions without taking on debt. EOG is now officially focused on growing its production organically and using its shale drilling technology in undeveloped basins.

EOG keeps a shrewd focus on savings. It raised $1.5 billion last year to fund new drilling instead of borrowing the money. Since the cost of accessing existing pipeline is so high, EOG moves oil by rail, saving an estimated $5 to $10 a barrel. Its balance sheet boasts about $1.4 billion in cash and cash equivalents.

Analysts from Goldman Sachs Group Inc. (NYSE: GS) last week raised their EOG share price target to $118, and RBC Capital Markets (NYSE: RY) analysts set theirs at $119. Those prices are a 13.5% to 14.5% premium from Friday's closing price of $104.01, which pushed EOG's year-to-date gain to 13.78%.

Action to Take: Buy EOG Resources Inc. (NYSE: EOG) (**)

Looking at how the share price soared after the company's earnings announcement Nov. 2, this stock is ready to break out again.

This makes it a little harder for us to build our position. The stock is liquid, but when you start reporting new oil wells producing over 2,000 or 3,000 barrels of oil each, and you know that the company is a prolific driller, you start to realize just how quickly they could ramp up production.

So buy 50% of your expected exposure now, with an eye toward buying 25% on a pullback in the near term. You might also want to consider buying some long-term
equity options on the stock for the January 2014 time window with a strike of $115. They currently are bid around $13 per contract. That price includes some near-term price appreciation from the blowout upside day Nov. 2. If you decide to look at the options, let's give the stock a few days or weeks to calm down before buying this exposure.

(**) Special Note of Disclosure: Jack Barnes has no interest in EOG Resources Inc. (NYSE: EOG).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his BSH column last week, Barnes analyzed Marathon Petroleum Corp. (NYSE: MPC).

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