EOG Resources, Inc. (NYSE:EOG) cultivates its image as an oil company first and foremost. That’s no wonder, given its success in two of the hottest oil shale plays in North America. Management wants investors to focus on the rich promise of those Eagle Ford and Bakken acres. Shares have run far though, and EOG’s valuation is high. Investors have a hard decision to make. Is EOG overvalued, or does its potential outweigh the cost?

Valuations among the independent oil producers strikingly reflect the state of the industry. Those with gas-rich portfolios are begging on street corners. Those with oil-rich portfolios, particularly those in the higher profile oil ‘plays,’ ride remarkably high valuations. The gulf between the haves and the have-nots is remarkably wide.

EOG Resources, Inc. (NYSE:EOG) and Continental Resources, Inc. (NYSE:CLR) cost a pretty penny

Shares of EOG have outpaced their peer group so strongly that it’s hard to envision that they’re not overpriced (see Figure 1). EOG is up 20% on a 1 year timeframe, while shares of gas-rich competitors Chesapeake Energy Corporation (NYSE:CHK) and Devon Energy Corporation (NYSE:DVN) are down. Even high-flying Continental Resources, Inc. (NYSE:CLR) is up less.

A quick look at reserve valuations for a handful of the larger independents paints a similar picture. Table 1 presents reserves and Enterprise Value for a set of similarly sized peers. EOG’s above average here, but not ridiculously so. A ‘proved barrel’ runs you about $19 in Enterprise Value, just above the $16 average. Still, that’s more than twice some peers. Devon and Chesapeake shares trading at less than $9 per barrel provide the strongest contrast, while Continental at almost $28 a proven barrel leads the pack.

It’s about potential

EOG and Continental stand out because of their heavy liquids production, justifying these prices in the eyes of buyers. The key is their domination of the two high profile oil shale plays in North America.

After leading the way into unconventional oil shales, EOG is now the #1 unconventional oil producer in its peer group, with substantial positions in both the Eagle Ford and Bakken. Its first mover status allowed EOG to build an impressive acreage position. That’s translated into a lot of oil-rich drilling opportunities and strong production growth. Production growth is the key to EOG’s high valuation.

EOG now sits as the Eagle Ford’s leading producer. Production from this single area hit 42% of EOG’s total liquids in the third quarter of 2012, allowing liquids to climb to half of EOG’s total production.

The driver for Continental’s sky-high valuation is similar. Perched atop the red-hot Bakken, Continental is the #1 producer and landholder in the Williston Basin. Having de-risked a large portion of their Bakken holdings, it’s also leading the way deeper into the Three Forks Williston trend.

That contrasts sharply with cheaper names like Devon and Chesapeake. Both are ramping liquids production with some success, but their acreage positions just don’t match the portfolios of first-movers like EOG and Continental.

Priced for perfection?

It’s the oil-rich production that best justifies EOG’s price. Flowing barrel cost (also shown in Table 1) is simply the dollar cost of one barrel of daily production. Here again, EOG falls middle of the pack. A barrel of EOG’s daily production runs you about $81,000, slightly below the $84,000 average. Contrast that with Continental’s remarkably high $184,000 flowing barrel price tag for perspective.