EOG refuses to dilute its crown jewels

As US independents invite foreign and major oil and gas companies to invest in their shale assets to fund development, EOG Resources is refusing to follow the trend.

The Houston-based independent is transitioning from producing mostly natural gas to the more expensive business of producing mostly oil, but Mark Papa, EOG’s chairman and chief executive (pictured), told the FT he is not seeking partners for its shale oil assets:

We want to emerge from this transition without diluting these crown jewels and retain 100 percent of our best assets.

It is a stratetgy that comes with drawbacks; at the end of the third quarter, EOG’s total debt was $3.8bn, and it had $28m cash on the balance sheet. It issued about $1.5bn of fixed and floating rate notes later in November.

Raoul LeBlanc, senior director at PFC Energy, the consultancy, warns that if a lack of capital causes unnecessary delays, then the crown jewels will be diminished anyway. He says that is a real trade-off to consider.

To further raise funds, EOG has been selling natural gas properties; it expects to close approximately $1bn in sales by year-end 2010 and is targeting sales of at least $1bn of additional natural gas acreage and/or production during 2011. But Mr Papa insists the company is not getting completely out of gas:

We are preserving most of our natural gas assets to economically develop in the future. If natural gas prices are strong in five years and oil is weak, we could switch back.

He began moving into oil even before natural gas prices fell to $3-$4 per million British thermal units range, from the 2008 record high of $13.69 per MMBtu. EOG was among the first independents to see the potential of shale oil and in 2008 began buying acreage in the liquids-rich portions of the Bakken shale of North Dakota and Eagle Ford shale in Texas ahead of its competitors.

The company forecasts it will have gone from deriving 23 per cent of its north America revenue from liquids and 77 per cent dry gas in 2007 to 67 per cent liquids and 33 per cent dry gas by 2011. More from Mr Papa:

We saw, with the huge success of shale gas in North America, the market for natural gas in North America was likely to be oversupplied for the next few years. Global oil demand is going to continue to grow every year.

EOG set out, four or five years ago, to capture 1bn barrels of crude oil, net. It now has 1.8bn barrels equivalents, net. It is still acquiring acreage. In 2009, EOG reported annual production growth of 6.5 per cent. It forecast 13 per cent growth in 2010, which it revised in November to 9 per cent. It is targeting 10 per cent growth in 2011 and 12 per cent in 2012.

Mr Papa blames a shortage of oil services equipment, given the high level of gas drilling this year coupled with the rush to develop onshore oil resources. He adds:

We also found that we have to factor in a higher downtime in oil production than gas production; about 6 per cent downtime for oil versus 2 per cent in gas production because you have to artificially lift the oil out – it won’t flow on its own like gas.

EOG reported a third quarter 2010 net loss of $70.9m, or $0.28 per share, swinging from third quarter 2009 net income of $4.2m, or $0.02 per share. Mr Papa notes:

Transitions like this don’t always go smoothly, but we will, in a few years, be one of the biggest onshore oil producers in the lower 48 states.

Given the rush into the US onshore oil assets, that will be a strong position to hold.

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