EOG Resources, Inc. (EOG)

EOG, despite its origins as an Enron spin-off, has maintained a pragmatic philosophy towards growing the company with the drillbit. They have consistently increased reserves year after year and operate in politically stable areas such as North America, the North Sea, and Trinidad. Because EOG was early to recognize the potential of resource plays like the Barnett, they are on the ground floor of most of the growing natural gas plays in North America. They recently proved they could make an oil resource play with 1,000 bbl/day wells in the Bakken (Williston Basin), which most operators have failed to make work for decades. This can only be attributed to skill.

Natural gas is likely to be a large part of the future energy supply of the U.S., and while imports of LNG may create competition for U.S. production, the higher costs of LNG will provide a floor for natural gas prices as gas reaches a level where LNG can even compete. Higher consumption of natural gas as a substitute for oil is likely to increase considerably with current oil prices over $100. The decoupling of natural gas prices from oil prices has surprised many, but the trend in natural gas prices is likely to rise independently of oil unless oil drops drastically. Natural gas can easily be used as transportation fuel, and is already being adopted in major airports (DFW, LAX) and seaports (LA, Long Beach) as a clean-burning lower carbon substitute for diesel and gasoline. Increased production of ethanol also benefits natural gas as natural gas is used to make fertilizer and in many instances powers the ethanol plants. Carbon emissions standards in California are likely to increase usage of natural gas there, and the trend is likely to continue across much of the U.S., with natural gas replacing coal and oil in many uses. All that said, EIA statistics show that natural gas consumption in the U.S. has been remarkably stable over the past decade, so the first increases in demand for domestic production are likely to be from reduced imports of Canadian gas as Canadian demand increases. Mexican imports have all but ended. To summarize, I am not so bullish on natural gas prices, which I expect to rise only slowly, as I am for quality players in the natural gas production business, and I think EOG is a quality player.