One Player That’s Not Headed Off A Cliff

EOG Resources, despite their first miss in 8 quarters, has proven again it is best of breed of the shale players with its declared strategy for 2015. As prices for the stock get hit in the next days and weeks because of its miss and dropping crude prices, it would be a great opportunity to start a long-term position in the company. They are ultimately going to outpace virtually everyone else in the space.

At the North American Prospect Expo, a conference for oil and gas players, KeyBank Capital used a slide proclaiming “Keep calm and frack on” – a jokey way to reassure the E+P’s that the downturn in crude is temporary and ‘staying the course’ on production is the smart response.

Wrong, wrong, wrong. Virtually every E+P has cut capex to the bone, laid down all but the most efficient and productive rigs, turned the remaining rigs up to produce as fast as they can and guided for increased production for 2015.

That’s good business, right? If you are always and inexorably valued on the street by your production, by how many barrels of oil equivalent you’ve increased from last quarter, then only this breakneck plan of attack will ‘save’ you from this ‘temporary’ setback in crude prices.

Only that’s what everyone is depending on – and a collective hallucination has formed inside each E+P individually where ‘the other guy’ finally gets broken financially and stops pumping, but it’s never them. But here’s the hallucination: There IS no other guy – production targets continue to soar as do stockpiles as we saw again on Wednesday – and the glut will continue to worsen. Individually, it seems the only way, but collectively, this strategy is a group march to the gallows.

All except EOG – the one E+P who did NOT have to be smart, whose costs of recovery are the lowest and whose prime acreage in the Bakken, Eagle Ford Shale and Wolfcamp give them the kind of production optionality that other players can only dream of.

But what does EOG do? Instead of following the other lemmings over the cliff, they adjust. They drop Capex even further than the street expects, a drop of 40%, and announce a planned FLAT year of production at best, with a more likely drop in production to come for the next fiscal year. And - in a move that completely sets them apart, they are increasing their inventory of deferred development. That means that they are actually committing to spend some money on already contracted services to NOT drill, saying they will wait until markets make that drilling more profitable.

Smart – when every other E+P has burned through it’s best acreage on skinny margins with nothing on the horizon to take it’s place, EOG will be the lone player with ready production to ramp up, just as oil prices are recovering and other E+P’s are scrambling to find fresh financing and restart abandoned projects.

But EOG is hardly being congratulated by this strategy. In the premarket, shares are down more than 6%. That’s the expected reaction: Wall Street does not appreciate a revenue miss accompanied by a plan to reduce barrels.

Good. I hope they continue to miss the long-term point of EOG’s master plan. And give you and me a share price closer to $90.

For the long-term, that would be one of the best stock opportunities I’ve seen in quite some time.