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We maintained our recommendation on EOG Resources, Inc. (EOG - Analyst Report) at Neutral on May 30, 2013. The company’s large portfolio of high-return projects and strong technical competence are the key factors that would lead to its success over the long term.
 
Why Maintained?
 
EOG – major independent oil and gas exploration and production (E&P) company – continues to demonstrate solid execution in its key growth assets, particularly in the Eagle Ford and Bakken plays. An attractive growth profile, huge inventory of drilling opportunities, upper quartile returns and a disciplined management team remain the company’s key positives.
 
Notably, EOG’s key skills lie in early identification of prospective areas through its engineering technical expertise at low acreage prices, thus driving organic growth and delivering attractive returns on capital employed. Further, redirecting capital from non-operated assets to its premier play appears logical to us.
 
EOG Resources’ increasing interest in oil is appreciable in a favorable price environment. It will be augmented by its deep focus on major oil and liquids rich plays, while holding core natural gas and combo acreage in the Barnett, Leonard and Wolfcamp plays for the long term. 
 
The company made a meaningful increase by 600 MMBoe to 2.2 billion barrels of oil equivalent (BBOE) in its Eagle Ford resource potential based on downspacing success. Owing to downspacing, EOG estimates having 4,900 Eagle Ford drilling locations. This reflects enough drilling inventory for more than a decade.
 
EOG set its full-year 2013 crude oil production growth target at 28%, indicating that this will be the third successive year of double-digit volume growth. On the strength of its high-margin domestic crude oil production, the company also expects total production to grow 4% on a year-over-year basis.
 
However, EOG’s results are particularly exposed to fluctuations in the U.S. natural gas markets, since natural gas accounts for almost half of the company’s reserves. Though EOG has made some progress in expanding internationally, it is still largely a North American producer, lacking substantial international diversification. 
 
Other Stocks to Consider
 
While we prefer to remain on the sidelines for EOG, there are other stocks in the sector that appear rewarding. Among these Enerplus Corporation (ERF - Snapshot Report), CNOOC Ltd. (CEO - Analyst Report) and Gulfmark Offshore, Inc. (GLF - Snapshot Report) are expected to outperform the broader market over the next few months and carry a Zacks Rank #1 (Strong Buy).

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