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3 Ways EOG Resources Inc. Plans to Become a Premium Oil Company

Eog Resources Eagle Ford Longer Laterals
Eog Resources Eagle Ford Longer Laterals

Image source: EOG Resources investor presentation.

Drilling longer laterals is proving to be a game changer for the industry. For example, Chesapeake Energy 's(NYSE: CHK) decision to increase its lateral length in the Haynesville Shale from 5,000 feet to 7,500 feet alone boosted drilling returns from 3% to 18%. That improved to 47% once Chesapeake Energy increased the lateral length to 10,000 feet and started using enhanced completion techniques.

As Thomas said:

Furthermore, we have much more inventory on the verge of conversion. By improving well productivity or lowering cost, in most cases both, we expect much of our current non-premium inventory in the top basins to be converted to premium over time. Improvements to well productivity and cost savings are ongoing and never ending.

As the next slide shows, a 10% decrease in costs, or a 10% improvement, in the estimated ultimate recovery (EUR) would add 2,200 premium Eagle Ford locations, more than doubling the current inventory:

Eog Resources Eagle Ford Upside

Image source: EOG Resources investor presentation.

Similar conversion upside continues across much of the company's remaining inventory.

2. Exploration

Next, Thomas noted:

The second way we add premium inventory is through exploration. EOG is a leader in organic exploration growth because at our core we are an exploration-driven company. In this lower commodity price environment, we have not stopped looking. With EOG's decentralized structure, we have six experienced exploration teams in the U.S. generating new ideas, acquiring leases, and developing new plays. EOG is a prospect generating machine, and our shift to premium has not slowed that effort down. In fact, it has enhanced the return hurdle by which new plays are evaluated.

EOG Resources has a long history of being one of the early leaders in uncovering shale plays. In late 2014, for example, the company announced that it moved four horizontal plays in the DJ Basin and Powder River Basin from the evaluation phase to its drilling portfolio. Today, those two plays have about 280 premium drilling locations, and it is on the lookout for the next great shale play, which would extend its drilling inventory even further. As rival Apache (NYSE: APA) recently proved , there's still plenty of exploration potential in the U.S. for companies that know where to look.

3. Bolt-on acquisitions

Finally, Thomas concluded that:

The third way we expect to add premium inventory is through targeted bolt-on acquisitions. Due to the current low commodity cost environment, we are actively pursuing opportunities to capture top-tier acreage. We were successful on four such transactions in the Delaware Basin last year, and are optimistic we can execute on more through this down cycle. I am confident that we can replace premium-level drilling every year through conversions, exploration, and acquisitions. And as I said last quarter, this shift to premium drilling is permanent and it's a game-changing event for EOG.

For the most part, EOG Resources avoids acquisitions because they are costly. That said, the company recently demonstrated that it would not hesitate to pull the trigger if it found a deal that would add a meaningful amount of premium wells. However, the more likely acquisition targets of the future will be smaller strategic bolt-on acreage that could convert more of its existing inventory to premium. For example, as Thomas alluded to, the company acquired acreage in the Delaware Basin last year, completing three deals in the third quarter picking up 26,000 acres for $368 million. Most of this acreage was adjacent to its existing operating areas, which increases its ability to drill longer laterals for example.

Investor takeaway

EOG Resources knows that there are a limited number of wells that meet its elevated hurdle rate to qualify as a premium drilling location. That is why it plans to work hard to boost that number by converting, exploring, and acquiring additional locations. It firmly believes that it will be able to replenish its inventory so that it can continue to drill wells with high rates of return for decades no matter what oil prices do.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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