EOG Remains Evenly Poised

We maintain our long-term Neutral recommendation on EOG Resources Inc. (EOG - Analyst Report), a major independent oil and gas exploration and production company.

EOG Resources has an attractive growth profile, a huge inventory of drilling opportunities, upper quartile returns and a disciplined management team. It continues to demonstrate solid execution in its key growth assets, particularly in the Eagle Ford and Bakken plays.

EOG Resources has hiked its total production growth target to 10.6% from 9% for the current year. The growth goal was raised after the completion of each quarter, implying three increments so far this year.

The company is increasing its interest in 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. This will aid EOG Resources in reaching its new volume target.

Again, its growing emphasis on liquids is reflected in the growth of its liquid production volume. During the third quarter, crude oil and condensate production was up approximately 42.4% from the year-ago level. This was primarily driven by significant contributions from the company’s South Texas Eagle Ford; North Dakota Bakken and Three Forks; and Permian Basin Wolfcamp and Leonard plays.

Stellar drilling results and continued alteration of completion techniques across its liquids plays encouraged EOG to increase its full-year crude oil production growth target to 40% from 37% and liquids production growth target to 38% from 35%. A liquids-rich production growth is likely to facilitate significant future cash flow for the company.

Moreover, EOG Resources, not unlike its peer Chesapeake Energy Corporation (CHK - Analyst Report), is keen on its asset divestiture program. This reflects greater focus on liquid-rich plays by both these companies. Through September 30, the company monetized approximately $1,200 million worth of assets, which it expects will climb to approximately $1,300 million for 2012.

Although we view EOG Resources 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, as well as cost overruns.

As of year-end 2011, about 39% of the company’s net proved reserves were crude oil and condensate and natural gas liquids and the remaining 61% was natural gas.

Hence, we expect EOG Resources to perform in line with the broader market. The company carries a Zacks #2 Rank, which is equivalent to a short-term Buy rating.