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We reaffirmed our Neutral recommendation on EOG Resources Incorporated (EOG - Analyst Report) on Sep 13, 2013. The company’s large portfolio of high-return projects and strong technical competence are its key long-term drivers. 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.

Why Maintained?

EOG is one of the best independent companies in the E&P sector with its attractive growth profile, huge inventory of drilling opportunities, upper quartile returns and disciplined management team. EOG continues to demonstrate solid execution in its key growth assets, in particular the Eagle Ford and Bakken plays.

EOG’s 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 revised its full-year 2013 crude oil production growth target at 35% (up from 28% earlier), which stands as the third successive year of significant double-digit increase in volumes. On the strength of its high margin, domestic crude oil production, the company also expects total production of 208.0 MBbls/d to 219.6 MBbls/d, up from the prior range of 193.0 MBbls/d to 211.2 MBbls/d.

EOG is keen on its asset divestiture program as it brings greater focus to the liquid-rich plays. For 2013, the company had targeted to sell approximately $550 million worth of assets, including crude oil, liquids-rich and natural gas producing properties. EOG has, however, already achieved closure of $580 million, exceeding its target in the second quarter. We view redirecting capital from non-operated assets to its premier play as logical.

Although we view EOG as a favorable pick, the risk-reward pay-off for the company is still uncertain in the near future due to its natural gas weighted production, as well as cost overruns. Other risks faced by EOG are its dependence on individual well performance, unsuccessful drilling, and cost overruns on projects with a long gestation period.

Other Stocks to Consider

EOG carries a Zacks Rank #3 (Hold). However, Zacks Ranked #1 (Strong Buy) stocks – China Petroleum & Chemical Corp. (SNP - Analyst Report), Stone Energy Corp. (SGY - Analyst Report) and Dril-Quip Inc. (DRQ - Analyst Report) – are good buying options for the short term.
 

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