Clever Management Kept EOG Resources, Inc. (EOG) One Step Ahead

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Long before the competition, EOG Resources, Inc. (EOG) bet that unconventional, horizontal drilling would be equally useful for oil production and set about realigning its acreage. With natural gas prices now crumbled, that prescience pays dividends. Management’s willingness to buck the trend proved a strength.

If you look back to 2009, the wisdom of EOG’s all-in decision on the future of oil shale looks less than certain, yet it’s been a difference maker for the company. While the competition scrambled to solidify competitive positions in North America’s crowded gas plays, EOG built its industry leading Bakken and Eagle Ford holdings.

EOG Resources Inc (NYSE:EOG)The catalyst was obvious in retrospect. Natural gas pricing fell into the $7 to $8 range in 2009, but the prolific North American shale gas plays were still plenty profitable in that range and few signs of the severity of the impending price crash were evident. (See Figure 1 for a price chart of Henry hub gas pricing.) Back then, Devon Energy Corporation (NYSE:DVN) was busy exploiting its massive Barnett reserves and the bulk of its drilling remained in gas-rich plays.

Similarly, Chesapeake Energy Corporation (NYSE:CHK)’s 2009 drilling shows mainly natural gas activity as it competed to hold acreage through production in four of the big shale gas plays. The Barnett, Haynesville, Fayetteville, and Marcellus accounted for 78% of Chesapeake’s 2009 drilling, with other smaller gas plays accounting for most of the additional drilling.

With gas prices now collapsed, it’s little wonder that everyone’s found religion. Most producers have shifted drilling programs to liquids-rich acreage. For Devon, that’s meant more drilling in the Permian, Cana-Woodford, and Barnett combo plays. For others, the shift’s been more radical.

Count EOG among that second group. The glaring distinction with EOG is the degree to which the company bought into emergent oil shales as a long term strategy, and how early that occurred. Long before the competition, EOG’s management grew concerned that overproduction from North America’s unconventional gas revolution would rupture pricing, and made a move to acquire a strong position in emerging oil shale plays.

Even with gas strongly priced between $8 and $11 in 2008, EOG was already building and de-risking its Bakken holdings in the Williston basin. It spent 2009 and 2010 making additional land grabs and ramping that de-risking program. EOG was essentially two years ahead of the industry-wide move that eventually began in 2010.

Bear in mind that in 2009 the Bakken was still relatively emergent. EOG was one of the few large independents participating in that land grab and infrastructure was sparse and needed to be built out. Even today, limited midstream infrastructure makes getting crude out of North Dakota a challenge.

Despite plenty in the Bakken to keep the company busy, EOG still took notice of an October 2008 find made by little Petrohawk Energy (now part of BHP Billiton Limited (NYSE:BHP)). Petrohawk was drilling in South Texas within the Eagle Ford shale, looking for a new shale gas opportunity.

The find was promising, but both EOG and Chesapeake saw an opportunity for liquids that Petrohawk did not, and began quietly buying drilling rights on acreage to the north and east. The Eagle Ford shale is shallower in these locations, increasing the opportunity to find liquids because the source rock should be cooler.

In April of 2010, EOG announced that it had built the largest acreage position in the Eagle Ford and completed 16 delineation wells spread over the entire trend. In just 18 months, EOG built and partially de-risked its industry leading acreage position on the cheap, essentially doubling down on its oil shale program.

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