EOG Resources Goes All In On Oil Unlike Cash Strapped Encana $EOG $ECA
The natural gas glut has pinned even the well positioned majors into a corner like Encana $ECA or Chesapeake Energy $CHK when they were over leveraged when prices tanked. While we have enjoyed a 50% gain on our natural gas plays this year it has not been enough to support continued drilling programs and cash flows for many.
Driven by the drop in realized prices for liquid natural gas due to overproduction, EOG Resources (EOG) is focusing its capital on the Eagle Ford and Bakken plays. The decrease in liquid natural gas prices is incremental but steady, and has more than a few echoes of the decrease in dry natural gas prices that started three years ago during the initial shale drilling boom. EOG was a frontrunner in transitioning to liquids after forecasting today’s disastrously low dry gas prices, and after CEO Mark Papa’s most recent remarks on price expectations, is now positioning itself as a frontrunner once more by transitioning more heavily to shale oil; Papa is hinting that a precipitous fall in U.S. liquid natural gas prices may be coming in 2013.
Far from a minor reposition, Papa’s indication of a new direction in drilling represents a major pivot for EOG, which grew its liquid natural gas production by 31% in the last year alone. I think this was a good strategy for EOG until others, like cash strapped Encana (ECA), followed the same strategy with similar success; it was only a matter of time before the market reacted. EOG now expects future liquids growth to derive from oil, with a plan to limit its debt to market cap to less than 30% through the remainder of this year.
With just $280,374 cash on hand at the close of the second quarter, this is a tough but critical sell for EOG. Since many of its closest competitors are struggling under monumental debt loads, investors are paying close attention to debt to equity and debt to market cap ratios; EOG is so far distinguishing itself by minimizing that burden. But, a second pivot in less than five years will be expensive, and if EOG is not financing through debt acquisition it will be financing at the expense of further growth by siphoning from continued operations on its high value plays. Given this catch 22, I think it is very likely sales of EOG assets will be forthcoming in the next two to three quarters.
Where this puts EOG’s expectations for the Kitimat LNG project is unclear, though projections are that Asian demand for the resource will keep export from Canada’s western coast economically viable for the foreseeable future. The Alaskan government is also bullish on export to Asia, recently pushing several oil and gas majors to submit plans for a $50 billion gathering, pipeline, and processing package that combined with current infrastructure would put Alaska in front of any export markets across the Pacific.
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