EOG Resources Inc. Absolutely Crushed It This Quarter

By Matthew DiLallo Markets Fool.com

EOG Resources (NYSE: EOG) reported its first-quarter results after the closing bell on Monday, and they were a thing of beauty. While the shale king's earnings were merely in line with expectations, its operational prowess delivered stunning results. Not only did it produce some of the best wells ever drilled in the Permian, but it continues to boost its expectations for future oil recovery.

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Drilling down into the numbers

EOG Resources produced a record 315,000 barrels of oil per day during the first quarter, up 18% versus the year-ago period and above the high end of its guidance range. Fueling that result was the company's strong well results, driven by recent technical advances. That was most evident in the Permian Basin where its four-well Whirling Wind pad "shattered industry records" after each well produced at an average initial 30-day rate of 5,060 barrels per oil equivalent per day (BOE/d). The company chalked up that result to its "advanced technology and proprietary techniques," which are leading to "break-through well performance" across the Permian and its other resources plays.

Image source: Getty Images.

In addition to the guidance-beating production, EOG Resources also continues to push down costs. During the quarter, the company's total well costs were down 6% versus the prior year thanks to continued advances in completion tools and techniques, the benefits of drilling longer wells, and new lower-priced contracts. Those factors helped more than offset service and equipment price inflection in some regions due to rising drilling activities from EOG and its rivals.

This is only the beginning

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The other remarkable number for EOG Resources during the quarter was the impressive organic expansion of its low-cost oil resources. These additions are important because the company's focus going forward will be to drill wells that meet its premium return hurdle, which is to earn a minimum 30% after-tax rate of return at $40 oil and $2.50 natural gas. For comparison's sake, that's a higher return hurdle than most rivals. Encana (NYSE: ECA), for example, defines premium return wells as those that can earn a 35% after-tax rate of return at $50 oil and $3 natural gas. At that oil price, EOG Resources, premium wells would achieve a 60% return. Meanwhile, Encana's lower hurdle rate would cause it to earn weakreturns when oil is below $50, which is the case at the moment.

Heading into the quarter, 6,000 of EOG Resources' 16,000 total drilling locations met the premium return hurdle. However, thanks to continued advances in technology and the company's focus on drilling longer wells, it converted 1,200 more locations to premium during the quarter. The bulk of those additions came from the Permian Basin, where the company added 700 more premium sites, boosting its inventory up to 4,150 wells. Meanwhile, the rest of the additions were in the Eagle Ford shale, where it added 500 more sites to increase its premium inventory up to 2,400. As a result of these adds, EOG Resources now estimates that it has access to 6.5 billion barrels of oil equivalent recoverable resources from its premium locations alone. That's up 1.4 billion BOE, or 27%, since its last update.

It's an incredibly valuable addition that the company didn't pay much to put together since most came from organic leasing. To put the value into perspective, oil giant ExxonMobil (NYSE: XOM) recently paid a $5.6 billion up-front payment to add 3.4 billion BOE of resource potential in the Permian Basin. That price point implies that ExxonMobil paid about $1.65 per BOE of resource potential, which if applied to EOG's organic add, suggests it created $2.3 billion of resource value just through technology and innovation.

Another thing worth noting about the number of premium wells that EOG converted out of its existing inventory is that the company has organically replaced its entire 2017 drilling inventory by 2.5 times. Because of that, the company has extended its low-cost drilling capacity father out into the future and now expects to drill high-return premium wells for more than a decade at its current pace.

Investor takeaway

EOG Resources once again proved that it's the best shale driller in the country. Thanks to a combination of technology and techniques, the company is drilling some of the best wells in the country while at the same time continuing to expand its low-cost oil position. That's quite a feat considering that its return hurdles for these wells are so far below those of its competitors.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources and ExxonMobil. The Motley Fool has a disclosure policy.