Be Cautious on the Fracking Boom: EOG Resources Inc (EOG), Continental Resources, Inc. (CLR), Range Resources Corp. (RRC)

EOG Resources Inc (NYSE:EOG)

EOG Resources Inc (NYSE:EOG) is focused primarily in major producing basins like the Eagle Ford Shale and Barnett Shale. EOG Resources Inc (NYSE:EOG) has estimated proved reserves of 1.8 billion boe, of which about 40% were crude oil.

EOG Resources Inc (NYSE:EOG) posted cash flow deficits of $1.7 billion in 2011 and $1.5 billion in 2012. Cash used for production in 2012 was around $6.7 billion and with an annualized estimate of producing 171 million boe, their cash burn looks to be around $39 per boe compared to revenues of around $51 per boe.

During 2012, EOG Resources Inc (NYSE:EOG) sold producing properties and acreage primarily in the Rocky Mountain area, the Upper Gulf Coast region and Canada. The company also divested properties in the Rocky Mountain area and Texas, and sold a portion of their interest in the planned Kitimat liquefied natural gas export terminal in 2011

EOG Resources Inc (NYSE:EOG)’s reasonable business value looks to be around $86 to $103 a share based on estimated cash earnings of $2.3 billion and a capitalization multiple of between 10x and 12x.

Range Resources Corp. (NYSE:RRC)

Range Resources Corp. (NYSE:RRC) is focused mostly in the Appalachian Marcellus Shale play and natural gas accounted for about 79% of production.

The company had cash flow deficits of $567.9 million in 2011 and $851.5 million in 2012. Range Resources Corp. (NYSE:RRC)’s producing cash burn per unit is about $4.80 per million cubic feet equivalent (Mmcfe) in relation to revenue of around $5.18 per Mmcfe. This is based on cash used for properties in 2012 of around $1.5 billion and an annualized estimate of 308 Mmcfe production.

In December 2012, the company announced plans to sell some of their Permian and Delaware Basin properties. In November 2012, Range Resources Corp. (NYSE:RRC) sold their Ardmore Woodford properties and they decided to sell substantially all of their Barnett Shale properties in 2011.

With estimated cash earnings of around $350 million and a premium 12x to 14x multiple, Range Resources Corp. (NYSE:RRC)’s fair intrinsic value calculates to around $26 to $31 per share.

Bottom line

Oil & gas fracking has clearly increased America’s energy supplies and there is undoubtedly money to be made in the sector. But in an industry known for many enthusiastic booms that never quite live up to their promise, a little caution toward the anticipation of great future gains might be warranted.

The article Be Cautious on the Fracking Boom originally appeared on Fool.com and is written by Bob Chandler.

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