EOG Resources Inc (EOG), ConocoPhillips (COP): This Oil Company is Printing Money

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What’s the quickest way to double an investment these days? Well, according to EOG Resources Inc (NYSE:EOG) it would be to drill for oil. The company is enjoying a direct after tax rate of return averaging 100% pretty much every single time it puts a drill bit into the ground.

Over the next four years the company sees this high margin oil production delivering a big growth in earnings and free cash flow. Those funds will be used for healthy annual dividend increases as well as an acceleration in its high rate-of-return drilling program. Let’s take a closer look at why EOG Resources Inc (NYSE:EOG) is just printing money these days.

Profits Are Soaring Like An Eagle
EOG Resources Inc (NYSE:EOG) has a prime position in the Eagle Ford shale. It’s what has fueled the company’s rise to the top oil producer in the play. However, thanks to advances in completion techniques, a reduction in the average number of drilling days as well as the fact that EOG Resources Inc (NYSE:EOG) has its own source of proppant sand, it’s able to simply print money from the play. The following slide shows that these advances are increasing the average initial production rate of each well, while at the same time well costs are falling, which are the key ingredients to improved returns.

Source: EOG Resources Investor Presentation (link opens a PDF)

Because of its position and these returns, the Eagle Ford has really become its crown jewel. However, It’s not the only company that is benefiting from having a gem of a position in the play. For example, ConocoPhillips (NYSE:COP), also has a high rate of return position in the play. The company was able to get in early and acquired a lot of its acreage for just $300 per acre. Today it just costs the company about $20 per barrel of incremental finding and developing costs. While that is yielding high-margin growth for ConocoPhillips (NYSE:COP), the play has really been needle-moving for the smaller EOG Resources Inc (NYSE:EOG). 

Bringing it from the Bakken
EOG Resources Inc (NYSE:EOG) isn’t the top producer in the Bakken, but it is enjoying 100% returns here as well. New frac technology is helping to improve recovery and returns. In addition to that it’s using its innovative crude-by-rail system to get top prices for its oil by shipping it to St. James, Louisiana. The slide below shows that by sending its oil to St. James it’s able to get upwards of $11 per barrel more of its oil.

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