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Cabot Oil & Gas Corporation (COG), EOG Resources Inc (EOG): What Real Investors Are Playing

On a recent trip to South Texas the recent impact of the Eagle Ford shale oil play was obvious on every road.

Brand-new pick-ups and SUVs, many with dealer tags, filled the roads, darting in and out of traffic, their drivers seemingly heedless of the risk of a wreck. It’s something you tend to see in an economic boom, this crazy driving of new Detroit iron, and it’s on display in San Antonio right now.

Landowners who can prove mineral rights to their land can get $1,200/acre for a three-year drilling lease, plus a 20% royalty on production. So money goes out long before drilling begins, and the expense of drilling goes in long before production.

Cabot Oil and Gas (COG)It takes careful management for an exploration company to profit in this environment, and not all Eagle Ford players have profited. In this article I will discuss two that have, and one to avoid.

Cabot Oil & Gas Corporation (NYSE:COG)

Most of the best oil exploration companies play in more than one field, and this is true of the best performer in Eagle Ford, Cabot Oil & Gas Corporation (NYSE:COG). The shares have just about doubled in value over the last year as natural gas prices have recovered.

In addition to exploiting Eagle Ford, which winds in an arc from the western portion of South Texas up toward Dallas, including many areas that were formerly considered played-out, Cabot has holdings in Oklahoma and Appalachia.

Like many other players, Cabot has been moving assets toward Eagle Ford and away from other productive areas. In 2011, for instance, it drilled 161 new wells, while selling assets in the Rocky Mountains. While producing about 187 billion cubic feet of gas in 2011, it had proven reserves of over 3 trillion cubic feet.

In addition to its work in oil exploration, Cabot Oil & Gas Corporation (NYSE:COG) also owns over 3,000 miles of pipelines. This is important, because without a way to sell what you produce you’re at the mercy of downstream companies. Cabot isn’t.

Given Cabot’s presence in the gas market, its stock had been under pressure over the last few years, as gas prices cratered. Their recent rise has also benefited Cabot Oil & Gas Corporation (NYSE:COG) shareholders.

Cabot is run conservatively, and in the March quarter it brought more than 10% of revenue to the bottom line, while paying out a minimum two cent dividend to common shareholders and maintaining a reasonable debt-to-equity ratio of 25%.

EOG Resources Inc (NYSE:EOG)

EOG Resources Inc (NYSE:EOG) is the largest producer of oil and gas in the Eagle Ford area, according to the San Antonio Business Journal, having produced 29.5 million barrels of oil and 38.3 million cubic feet of gas in the first 11 months of last year from the area.

Over the last year the stock is up “only” 36% but that’s somewhat misleading, as falling natural gas prices had it on a downslope for the first half of 2012. Since July it’s up 49%.

In addition to Eagle Ford, EOG Resources Inc (NYSE:EOG) has producing assets spread around the world, from China to Argentina. Within the U.S., it has assets in the North Dakota Bakken Shale play as well as the Marcellus Shale in Pennsylvania.

The big excitement, however, might be from a deal it signed with the King Ranch last year, which sits at the southern end of the Eagle Ford play. The ranch is currently producing 1.1 million barrels of oil a day, or its equivalent, but it still retains shale oil potential.

EOG Resources Inc (NYSE:EOG) is more of a producer than a driller, in that it looks for projects that require management and then manages them. The stock may be undervalued because it took $849 million in “impairment charges,” mainly on Canadian natural gas assets, during last year’s fourth quarter, swinging those results to a loss. Things were back to normal in the first quarter, when it delivered earnings of about $500 million on revenues of $3.3 billion. Most quarters between 12% and 15% of revenues fall to the bottom line, and like Cabot it keeps its debt-to-equity ratio at a reasonable 25%.

You can expect better results for the next several quarters as EOG emphasizes production of oil from South Texas.

Chesapeake Energy Corporation (NYSE:CHK)

Chesapeake Energy Corporation (NYSE:CHK) practically invented fracking under former CEO Aubrey McClendon, but it got hit hard by the downturn in gas prices and, after a scandal involving his own investments with the company, McClendon retired earlier this year.

A lot of big investors have been bottom-fishing in Chesapeake Energy Corporation (NYSE:CHK) during the scandal period, including Carl Icahn, and the board is now trying to unravel his many deals to extract maximum value from his work.

Chesapeake was the third-largest player in Eagle Ford during 2012, according to the San Antonio Business Journal, producing 15.3 million barrels of oil and 35.5 million cubic feet of gas from 261 leases.

The problem is that the books are still a mess. The company is barely profitable, it has been stripped of cash, and even its cash flow has flat-lined. McClendon still holds substantial assets around Chesapeake Energy Corporation (NYSE:CHK) wells, and untangling him will take both time and legal help. The company has been selling assets to stay afloat.

It’s very possible that, with patience and legal help, Icahn and the other large investors will eventually strike a gusher of profit here. It’s in hopes of this that investors remain in the company, with shares up 24% year-to-date, but since McClendon’s retirement became official on April 1 the stock has gone nowhere.

My Foolish Perspective

Oil drillers are born speculators. But investors should not be.

Among the big players in Eagle Shale, both Cabot and EOG look like good bets. Both are diversified in terms of assets and well-run. Chesapeake, which started the fracking boom in 2009, is more speculative, on many levels.

If you want to pretend you’re an oil speculator, go with Chesapeake. If you’re more concerned about investing, go with guys who know their business.

The article Best Places to Play Eagle Ford originally appeared on Fool.com and is written by Dana Blankenhorn.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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