EOG Resources Inc.(NYSE: EOG) Is Looking to Lead U.S. Oil Production
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.
The Narrowing Spread Means Higher Crude
I just left Baltimore, where I met with the Oil & Energy Investor and Money Morning editorial teams to discuss some interesting new developments.
This was followed rather quickly by a flight to Frankfurt, Germany, for meetings on a potentially major push in the European approach to a rapidly changing energy landscape.
I will fill you in on both later, because today we need to talk a bit about an important matter unfolding in oil…
The Crude Spread is at a Four-Month Low
On Friday, the spread between the Brent price in London and the quote for West Texas Intermediate (WTI) in New York declined to below 20% of the WTI price.
The straight nominal difference of $17.27 is now the lowest it's been since July 6.
And at 18.46%, the spread as a percentage of the closing WTI price (the better way to gauge its actual impact on prices in the United States) is narrower than at any time since June 29.
These changes have been rather dramatic – and quick.
On Oct. 20, the same figures were $25.57 and 30%.
Recall that what has transpired for the past 306 consecutive daily trading sessions, continuously since Aug. 13, 2010, is itself unusual. For that entire period, the market has priced Brent higher, despite it being an inferior grade of crude relative to WTI.
I have discussed the reasons before, but this time around, we need to consider what the shrinking spread actually reveals.
A part of the explanation lies in where the market is going.
However, another part – perhaps even the primary explanation – reflects how traders have been maintaining the spread as other pressures were building in that same market.
Energy Investors Pocket Profit on Oil Price Rally – And It's Just the Beginning
Investors in energy stocks are enjoying an oil price rally that continued for a fifth trading session yesterday (Tuesday), pulling many oil-related investments up with it.
U.S. oil futures rose 40 cents to $85.81 a barrel on the New York Mercantile Exchange (NYMEX). Black gold has climbed 12% since hitting a 52-week low of $76 a barrel last week – a 37% fall from its April high near $120 a barrel.
Brent crude oil futures rose 1.6% to $110.73 a barrel for a five-day gain of 11% — the biggest since August 2009.
This week's gains follow on the heels of a recent slump – but subscribers to our Private Briefing service knew this would be the case.
We forecast the oil markets short-term pullback in our early Private Briefing columns and told investors to take advantage of the crude oil sell-off while energy stock prices were low.
Sure enough, these recommended stocks are climbing as oil prices are once again on the rise:
- The oil-related stock we highlighted it Aug. 12 in "How to Profit From $120-a-Barrel Oil …" is up 2.7% from that day's closing price.
- The high-return energy play our Global Macro Trends Specialist Jack Barnes detailed on Aug. 19 in "The Energy Stock to Buy Now…", is up 14% this week.
- And the favorite low-risk natural gas stock that resources specialist Peter Krauth shared Sept. 15 in "A "Dream Pick' in the U.S. Energy Sector", has gained 4.2% during the oil futures five-day price rally.
Executive Editor William Patalon III checked in this week with global energy expert Dr. Kent Moors, who gave an update on the latest profit opportunities and oil price outlook – as well as a juicy new stock pick.
The Polish Energy Revolution Begins
Poland has formally embarked on a new energy course – one whose impact will be felt throughout Europe and beyond.
Visiting the first advanced drilling site in eastern Poland, Prime Minister Donald Tusk last week committed the country to extracting shale gas beginning in 2014. This will fundamentally transform the nation's energy prospects.
Now, Tusk and his government are in the run-up to a parliamentary general election (the voting takes place on Oct. 9), and the country's energy situation has been a visible campaign issue.
Back in Krakow, the prime minister's press conference was broadcast live at our shale gas conference. (Funny – it actually interrupted a panel I was on devoted to how the shale gas revolution will affect localities and regions.)
Turns out, the Polish shale picture is more significant than even I was anticipating.
The Impact Will Be Felt Around the World
For one thing, the projections of how much unconventional gas Poland possesses keep increasing.
The government is now convinced the country will become self-sufficient in energy and begin exporting gas to the rest of Europe.
Yet the implications hardly stop there.
Several of the ministers at our meetings are talking openly about using a new liquefied natural gas (LNG) terminal under construction on the Baltic to move product into the broader global market.
Moreover, the rapid development of shale gas will require the creation of an entirely new technical sector to service the fields, process the gas, and apply the newfound largess. This means a significant upgrading of the national gas network, and the laying of major new stretches of pipelines and pumping stations, along with a concerted move to employ the gas as feeder stock for the petrochemical industry.
It is, therefore, hardly surprising that among the audience in Krakow were representatives from such field service powerhouses as Halliburton Co. (NYSE: HAL) and Schlumberger Ltd. (NYSE: SLB), European offices of international drilling companies, consulting agencies, research centers, and law firms.
And there will be plenty of work for all of them.
Rising Opportunities (and a Message for Moscow)
Despite the refrain I heard repeatedly over the past several days – that Polish companies should provide the bulk of the services – this energy revolution will require outside assistance for years to come.
Goldman Sachs Says Oil Prices Will Soar to $130 in 12 Months … We Told You That Weeks Ago
Wall Street heavyweight Goldman Sachs Group Inc. (NYSE: GS) is now predicting that oil prices will soar in the next 12 months, with London-traded Brent crude reaching $130 a barrel and U.S.-traded West Texas Intermediate (WTI) crude reaching $126.50.
The fact that oil prices will soar wasn't a surprise to readers of Private Briefing – we made a similar prediction to the charter subscribers of our new premium investment-advisory service six weeks ago.
Furthermore, we showed subscribers how to profit.
Goldman analysts really believe that oil prices will soar: From Monday's closing prices ($110.30 for Brent and $86.92 for WTI), the heavyweight investment bank's 12-month target prices for oil would represent an 18% gain for the London-traded crude and a 46% gain for its U.S.-traded counterpart.
Worries that the U.S. malaise and Eurozone debt crises would sap global demand have caused oil prices to fall from higher levels back in the spring. In its forecast, Goldman echoed some of the same points that we have made repeatedly to Private Briefing readers since it debuted back on Aug. 11 – namely that demand in China, India and other emerging markets would compensate for weak growth in the developed economies.
The bottom line: There's little doubt oil prices will soar. That makes oil-related stocks – and energy investments in general – "must have" portfolio holdings.
The only question is: How do you play it?
Here at Money Morning, and also in Private Briefing, our experts have said this time and again: The time to make energy-related investments is when energy prices are low. Although Private Briefing has been around for just a bit more than a month, subscribers who have followed our energy-related recommendations have already logged some nice returns of as much as 18%.
And there's plenty of upside to come.
Some of the energy-related columns that we've already published include:
The Mortgage Meltdown Was Big… The Coming Oil Crisis – EVEN BIGGER!
We are on the verge of another financial crisis even bigger than the real estate collapse.
This time, it's in oil. It's not a supply/demand problem, or a geopolitical one. Rather, the crisis stems from the rising inability to determine crude oil's genuine value.
A new round of speculation is growing, manipulating the energy markets. When no one can figure out how much oil should really cost, prices rise artificially… leading to catastrophic fallout.
Russian Arctic Oil to Give Exxon Mobil Leg Up on Rivals
With fresh sources of oil becoming increasingly scarce, Exxon Mobil Corp. (NYSE: XOM) scored a major coup on Tuesday by making a deal for access to the vast reserves of Russian Arctic oil.
Many companies were in the hunt for the Russian Arctic oil, including BP PLC (NYSE ADR: BP), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Chevron Corp. (NYSE: CVX), Total SA (NYSE ADR: TOT) and Statoil ASA (NYSE ADR: STO), but it was Exxon that walked away with the prize.
The arrangement with state-controlled Rosneft (PINK: RNFTF) gives Exxon a significant advantage over its major rivals — all of which have struggled in recent years to replace the oil they're extracting with new sources.
Rosneft, in which the Russian government has a 75% stake, estimates the three Kara Sea blocks where Exxon will be exploring contain about 36 billion barrels of recoverable oil.
"If that figure is correct and Exxon is able to produce the fields, we are talking about one of the world's largest oil discoveries in the last 50 years," Fadel Gheit, an energy analyst at Oppenheimer & Co., told MarketWatch. "But it remains to be seen how much of that oil is economically recoverable."
Rosneft estimates total reserves in the area at about 110 billion barrels of oil equivalent – an amount four times the size of Exxon's proven global reserves.
Quid Pro Quo
Having access to reserves of that size will help Exxon rectify its replacement ratio for oil. Earlier this year Exxon reported that for every 100 barrels of oil it produced, it found just 95 barrels of new oil.
Exxon has been more successful in replacing natural gas resources – it finds 158 cubic feet of gas for every 100 it extracts. But with natural gas prices slumping, the company would much rather find more oil.
Western Oil Majors Will Get the First Crack at Libyan Oil Production
Countries that supported the overthrow of dictator Moammar Gadhafi's regime are likely to get first crack at post-war Libyan oil production, while those that sat on the sidelines are at risk of losing out.
"We don't have a problem with Western countries like the Italians, French and U.K. companies. But we may have some political issues with Russia, China andBrazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.
Talk like that has many Western oil companies licking their chops. Meanwhile, officials from China and Russia are foundering for ways to deal with the emerging Libyan government, the National Transitional Council (NTC).
Although Libyan oil production before the uprising comprised just 2% of global output, it is prized because it is of the light sweet crude variety – it contains less sulfur than most other oil and is thus cheaper to refine.
The deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang, tried to stay positive when asked about Mayouf's statement last week.
"We hope that after a return to stability in Libya, Libya will continue to protect the interests and rights of Chinese investors and we hope to continue investment and economic cooperation with Libya," Wen told a news conference.
But other Chinese observers were indignant.
"I can say in four words: They would not dare; they would not dare change any contracts," Yin Gang, an expert on the Arab world at the Chinese Academy of Social Sciences in Beijing, told Reuters.
Although China was getting only about 3% of its oil from Libya, the Asian giant's rapidly growing economy has given it a ravenous appetite for energy – including oil.
China abstained from the United Nations vote that authorized force to protect civilians during the uprising, and along with Russia and Brazil opposed sanctions against the Gadhafi regime.
The Libyan Factor
Now that Moammar Gadhafi is about to be toppled from power in Tripoli, international oil majors are poised to stream back into Libya. Italian leader Eni S.p.A. (NYSE ADR: E) already rushed back field specialists Monday morning to assess damage even before the smoke (or the politics) cleared in the capital.
The great unknown is how long it will take to ramp up production to pre-crisis levels. Anecdotal evidence is pointing in all kinds of directions. Some European analysts have already concluded it could take one or two years at some of the primary fields, while others are saying the brunt of production could be back on line within a month.
This is going to be a field-by-field approach. More to the point, the condition of pipelines, gathering and processing facilities, terminals and port facilities will be just as important as the oil fields themselves. We know that some of these were heavily damaged. And that means full export volume is not something we can expect to see resume anytime in the near-term.
Why Oil Prices Won't Stay Down For Long
Oil prices, like stocks, took a few big hits last week.
West Texas Intermediate crude last week dropped below $80 a barrel before bouncing back up to $87 a barrel this week. Meanwhile, Brent crude fell to a six-month low below $100 a barrel before climbing back to $110 a barrel this week.
To hear the mainstream media tell it, much of the drop is based on the assumption that global growth is waning and oil demand is soon to follow.
But that couldn't be more wrong.
Energy is one of the most highly leveraged and most liquid trading vehicles on the planet. A good portion of the decline we've experienced in recent weeks can be explained by nothing more than trading houses raising cash to meet margin calls or redemption requests from hedge funds, pension funds, and other investors.
That's all there is to it. Firms simply need cash and are selling the most easily sellable assets they've got. In the past that's been gold, but lately it's been oil.
Longer-term, demand is still going up and $120 a barrel oil is our next stop, followed by prices of $150 or more in the years ahead.
What's happening now with the markets and energy prices is like being in the eye of a hurricane.
That is, it won't be long before we're once again caught up in the whirlwind growth of emerging markets and energy demand shoots sharply higher.
The Looming Demand Downpour
Global demand is still rising – and it's not going to slow down any time soon. There are huge swaths of the world now adopting gasoline engines.
Let me give you two examples.
Take the farmers in Cambodia. Many put up sheets in their fields at sunset. They then mount small incandescent light bulbs on sticks behind the sheets. The bulbs are powered by small gasoline generators to ensure they stay on all night.
In the morning, those farmers go back and harvest the thousands of crickets that have collided with the sheet after having been drawn to the lights. They wrap up the fallen bugs and head to the markets where they are sold as food.
It's much the same situation in Africa, where small villages require simple engines to pump water.
You may think bugs and small farm pumps are no big deal, but there's an even greater energy revolution going on in the transportation industry.