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We maintain our Neutral recommendation on EOG Resources Inc. ( EOG - Analyst Report ) . The company’s better-than-expected fourth quarter 2011 results and attractive growth profile were partially tempered by its natural gas weighted production and reserves base.
EOG reported stellar fourth-quarter 2011 results on the back of an almost 54% growth in crude oil production, which was aided by significant contributions from the South Texas Eagle Ford play followed by the Fort Worth Barnett Shale Combo. EOG Resources’ growing emphasis on liquids is reflected through the growth in its liquid production volume.
We believe liquids rich production growth is likely to facilitate significant future cash flow for EOG and will be further augmented by its deep focus on major oil and liquids rich plays, such as the South Texas Eagle Ford play and the Fort Worth Barnett Shale Combo, as well as Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp, Neuquen Basin and New Mexico Leonard.
The company boosted its capex guidance by 9.5% to $7.5 billion for this year. As much as 90% of its drilling capital is directed toward liquids plays, while 10% is allocated for dry gas drilling. Total organic liquids production growth is expected at 30%, versus the company’s prior expectation of 27% for 2012. The primary driver will likely be production in Eagle Ford, Barnett and Permian.
Again, EOG appears on track to meet its $1.2 billion divestiture target and below 30% net debt to capitalization ratio at year-end 2012. The company has already sold natural gas related properties and now anticipates selling up to $800 million in non-operated liquids assets during 2012, reflecting the weak natural gas price environment. In the current scenario of declining natural gas prices, most of the independent exploration and production companies are tilting their portfolio toward oil-based assets and divesting gas-based assets. Notably, we view redirecting capital from non-operated assets to its premier play as logical, given the company’s estimation of its after-tax return on investment in the Eagle Ford at 80%.
However, the company’s results are particularly exposed to fluctuations in the U.S. natural gas markets, since natural gas accounts for more than three quarters of the company’s reserves. Moreover, though EOG has made some progress in expanding internationally, it is still largely a North American producer, lacking substantial international diversification.
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