EOG Resources Uncovers Over 1,000 Additional Premium Locations

Summary

The market applauds EOG Resources Inc's Q2 2016 results.

An improving financial position combined with a huge increase in its premium well inventory is bullish.

Continued cost reductions, well productivity increases, operational efficiency gains, and Austin Chalk delineation efforts could unearth several thousand additional premium well locations.

By 2018, 98% of EOG Resources Inc's completions will be premium, up from 60% this year and 14% in 2014.

EOG Resources Inc (NYSE:EOG), with its liquids heavily output streams in the Lower 48, was very pleased with the recovery in oil prices as its discretionary cash flow streams increased from just under $400 million in Q1 to just over $580 million in Q2 2016. Discretionary cash flow streams as defined by EOG Resources factors in additional effects such as working capital changes, exploration expenses, and tax implications from stock-based compensation. When looking at EOG's net cash provided by operating activities, that grew from $292 million to $503 million over that time period.

Stack that up to the $573 million and $615 million EOG spent on capex in Q1 and Q2, respectively, and it becomes clear the upstream firm's financial position is rapidly improving. Keep in mind EOG had $92 million and $70 in quarterly dividend and interest payments, respectively. EOG aims to spend ~$2.5 billion on capital expenditures this year, on top of ~$650 million in dividend & interest payments, and generating an annualized $2.3 billion on a discretionary cash flow basis will do far less damage to its balance sheet than $1.6 billion.

To cover part of its outspend, EOG Resources sold off $425 million in non-core assets YTD. As of June 30, $252.5 million of that had been received, leaving another $172.5 million to be realized over the coming quarters before factoring in closing adjustments and taxes. Two divestitures closed in the third quarter. EOG Resources is monetizing assets that don't meet its premium threshold, a decision that makes sense considering its large top tier asset base.

On the balance sheet front, EOG exited Q2 with $2.45 billion in current assets (includes $780 million in cash) versus $1.71 billion in current liabilities and just under $7 billion in debt. EOG's $2 billion revolving credit line remains undrawn and the company's improving cash flow situation combined with its fiscal discipline makes its probable outspend manageable.

EOG Resources Inc's stock price did very well after its earnings release. It is nearly impossible to truly tell what influences stock prices in the short term, but I would speculate that the markets bullishness was based on EOG's update concerning its premium well portfolio. Premium well locations are defined by EOG as being able to sport a 30% after-tax rate of return on an incremental well...