Focus on the Franchise; INITIATING Coverage with a NEUTRAL
Rating and Target Price of $120
Initiating Coverage: We initiate coverage of EOG with a Neutral
rating and a target price of $120, assuming 6.5 times our 2012
EBIDA estimate and 95% of our net asset value (
) estimate. Given the capex shift to its liquids-rich plays, we
concentrate our analysis on these plays, including the Eagle Ford (
), which represents 35% of asset value.
Eagle Ford Is a Game Changer for EOG: With 535,000 net acres,
EOG has significant acreage in the EF oil window. While it's early
days in the play, analysis of horizontal and vertical wells drilled
30+ years ago strongly suggest the EF is a franchise asset that
will yield a large inventory of high-return development. This is a
game-changer for EOG relative to its peers.
Market Has Rewarded the Stock: The shares rerated in 2011 on the
back of outstanding EF results, which derisked EOG's acreage and
management's 900 MMBoe reserve estimate. Given the market's
enthusiasm for EOG, we believe notable increases in reserves per
well (EURs) and successful downspacing tests will be necessary to
support a further relative rerating in EOG. We are not ready to
make that call based on our analysis of well data and downspacing
tests. However, we caution our analysis is based on a limited
number of EF wells.
EUR Increase Is Not Yet Justified: Despite a step change
increase in reported initial production (
) rates, the average peak 30-day oil rate of last 33 wells has been
600 Bopd. This is only marginally above the rate used in our 470
MBoe type curve in the oil window. Recent results are impressive,
but considering its assets as a whole, we do not think an increase
in EURs is yet justified.
Downspacing Tests Are Positive, but Degradation at Tighter
Spacing: Initial results from downspacing less than 130 acres look
promising, but we observed meaningful degradation in second-month
production at wells spaced between 500-800 ft (down 46%) versus
1,100 ft+ (down 25%). While this is not a negative result (as tests
justify an increase in wells per section to at least seven from
five), more limited communication between wells at tighter spacing
would have been a more favorable outcome.