Year-end 2010, EOG’s Eagle Ford production stood at 17.3 MBbld (thousand barrels of oil per day). At the close of the third quarter of 2012, production was up to 96 MBbld. The oil shale move paid off handsomely, providing rapid oil growth in a weakening gas price environment. Thanks to its quick movement, EOG’s now the #1 driller in the region with its #1 acreage position.
To its credit, Chesapeake also took notice of the Eagle Ford, building the #2 Eagle Ford position in the industry. Its drilling program is aggressive and Chesapeake’s financial position more precarious. With weaker cash flow due to its lower liquids mix and higher debt, Chesapeake needs cash to cover its intense drilling program. To defray those costs, Chesapeake’s historically looked to joint ventures. This time’s no different, with Chesapeake signing on Chinese partner CNOOC Limited (NYSE:CEO), to help pay the bills in the Eagle Ford and Niobrara oil shales.
Chesapeake chose to crash the Eagle Ford party. Devon is also reloading and crafting a path to oil like EOG. Unlike Chesapeake, Devon will concentrate on still emergent plays, avoiding premium land and its high cost. It divested non-core natural gas assets to raise cash, using proceeds to build a very large portfolio of new acreage. In the meantime, it’s ratcheting up Permian drilling and expanding its Canadian oil sand capacity to increase its liquids-mix.
Drilling costs will be paid from Devon’s industry leading pile of cash and some Chesapeake-style JVs. Devon’s enlisting Asian partners anxious to learn to exploit their own shale energy back home. Chinese driller Sinopec Shanghai Petrochemical Co. (NYSE:SHI) signed on as a partner in four emergent plays, while Japanese driller Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) ponied up cash for a slice of Devon’s unconventional Permian efforts. In both cases, the Asian partners bring the wallets, while Devon provides the rigs and expertise.
While JVs reduce risk, they also reduce reward. Devon and Chesapeake defer some costs, but they also sell some upside. With its stronger oil production and better cash flow, EOG can better afford to keep its equity stake in its Eagle Ford and Bakken acres intact. EOG’s secure enough to dance alone.
Being able to see around the bend is an important quality for management. EOG took a substantial risk when it redirected its efforts toward unproven new trends in the Bakken and Eagle Ford. It now reaps the reward. Devon and Chesapeake are now scrambling to catch up and realign production toward a higher liquids mix; albeit with slightly different strategies. I like Chesapeake’s acreage portfolio better, but its debt level is a concern. Devon’s on much more solid financial ground. At the moment, neither can match EOG’s impressive momentum.
The article Clever Management Kept This Oil Independent One Step Ahead originally appeared on Fool.com and is written by Peter Horn.
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