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We maintain our Neutral recommendation on EOG Resources Inc. (EOG - Analyst Report) − a Houston, Texas-based major independent oil and gas exploration and production (E&P) company, with operations in the U.S., Canada, offshore Trinidad, and the U.K. North Sea.

The company’s liquids rich production growth profile as well as huge inventory of drilling opportunities remains somewhat tempered by its natural gas weighted production and reserves base.

The company is one of the best independents in the E&P sector with its attractive growth profile. It continues to execute well on its key growth assets, particularly in the Eagle Ford and Bakken plays. Its confidence in the Eagle Ford remains high. Even with the implementation of tighter well spacing earlier this year, individual well performance remains outstanding. EOG Resources’ second quarter registered solid earnings growth on the back of a striking improvement in productivity at the Eagle Ford and Bakken plays.

EOG Resources’ focus on an oil-weighted production profile is appreciable 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, besides Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp, Neuquen Basin and New Mexico Leonard.

The company hiked its total production growth target to 9% from 7%, while maintaining its capex guidance at $7.4–$7.6 billion for the year. Solid drilling results during the first half of the year encouraged EOG Resources to increase its full-year crude oil production growth target to 37% from the previous 33%.

Moreover, EOG Resources, like its peer Chesapeake Energy Corporation (CHK - Analyst Report), is keen on its asset divestiture program. This brings greater focus to the liquid-rich plays of both these companies. Through June 30, 2012 the company monetized approximately $1,112 million worth of assets. The company expects asset sales of approximately $1,200 million to $1,250 million for 2012.

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 and reserves base amid a weak commodity price environment. About 39% of 2011 net proved reserves were crude oil and condensate and natural gas liquids and 61% were natural gas. During the second quarter 2012, natural gas prices were down roughly 40% and natural gas liquids prices were down almost 35.0%, on a year-over-year basis.

Unless the outlook for natural gas prices improves, we expect the stock to perform in line with the market as well as the sector in the coming quarters. The company retains a Zacks #3 Rank, which is equivalent to a shot-term Hold rating.
 

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