EOG Resources Inc.’s (NYSE: EOG) 2015 game plan: hunt for “tactical acquisitions” and keep oil production flat.
After years of red hot growth, EOG executives said during a conference call Feb. 19 that they will maintain production at current levels while the company cuts back on spending. Many E&Ps have announced cuts to capex but indicated production will increase anyway.
EOG plans to keep production on an even keel.
“We halted production growth deliberately,” said William R. “Bill” Thomas, chairman and CEO. “We’re not interested in growing oil in a low price environment.”
Thomas said he wants to take advantage of opportunities to add drilling inventory through leaseholds, farm-ins and acquisitions. The company disclosed that in the fourth quarter of 2014 it added 11,000 “top-quality acres” in the Eagle Ford oil window for less than $2,000 per acre.
Thomas said he is open to any kind of acquisition that would be highly beneficial to the company.
EOG will go after acreage in its best plays: the Eagle Ford, Delaware Basin and Bakken while deferring well completions.
However, the company is more likely to look for bolt-on deals rather than a multi-billion dollar purchase.
“We’re focused on opportunities where we see very sweet spot acreage,” he said.
The company has $4.1 billion in available liquidity, including $2.1 billion in cash and a $2 billion undrawn credit facility at the end of 2014.
Over the past five years, EOG has grown entirely through internally generated projects, rather than with the help of acquisitions, said David Tameron, senior analyst, Wells Fargo Securities.
EOG will complete 45% less wells in 2015 compared to 2014, setting up for a possible large scale ramp up in 2016. EOG will also cut 2015 capex by 40% and keep oil production at 2014’s level—which increased year-over-year by 31%.
“For the last few years market has been concerned about EOG’s capital efficiency, and for the bears, this provides fodder,” Tameron said. “Combine that with lower 2015 estimated EPS and the fact stock has held up better than most, and we expect shares to be pressured.”
That said, the 2015 plan makes sense, he said.
Other companies in the industry should take note, said Bob Brackett, senior analyst, Bernstein, in a Feb. 18 report.
“EOG’s lack of desire to grow oil supply demonstrates why the shale oil revolution should behave as a thermostat and help the market regain equilibrium,” Brackett said.
“If the most successful shale oil player doesn’t grow in 2015, what does that imply about the average and marginal operators? In a sense, the elasticity of oil price with supply may overwhelm the lack of volume growth as oil price recovers.”
The company says it will see higher rates of return at $65 WTI than it did at $95 WTI in 2012 due to efficiencies and service cost reductions.
What won’t change is EOG’s relentless focus on advancing completion technology and driving down unit costs through efficiency gains, the company said.
"EOG delivered high returns and strong growth in 2014, a unique accomplishment in the energy sector," Thomas said. “We are confident we will continue to earn healthy returns on our capital program during this commodity down cycle and, more importantly, emerge stronger and poised for significant long-term growth."
In the fourth quarter, the company began ramping down its completion spread. Thomas said EOG production would fall to its lowest point in the second quarter of 2014 and then start to climb again in the fourth quarter.
“It will ramp back up significantly heading into 2016,” Thomas said.
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