All's well at the other Enron
EOG, spun off by the parent company from hell in 1999, has soaring earnings and a rocketing stock price.
(FORTUNE Magazine) -- Ask folks in the Texas/Oklahoma oil patch how Enron is doing, and you might get a surprising answer. "They're a very highly regarded company," one longtime oilman told me recently.
Huh? Is this guy huffing fumes off a wellhead? Not at all. The Enron he has in mind isn't the one generating courtroom drama. It's an outfit called EOG Resources - the EOG once stood for Enron Oil & Gas - which split with its parent company in 1999 and has since emerged as a clean-living, independent exploration and production (E&P) company.
Did I mention that EOG is highly profitable and has become a stock market star? The company just reported that its first-quarter adjusted net income soared 81 percent over last year's Q1, to $375 million. EOG's stock, meanwhile, has climbed from around $10 a share to over $60 this decade. (Before this spring's stock market swoon, shares traded as high as $85.)
Noted investor Chris Davis of Davis Selected Advisors has sunk 2 percent, or $720 million, of his highly rated Davis New York Venture fund into the driller. "EOG has done an outstanding job both absolutely and relative to their peers," says Ken Feinberg, Davis's co-portfolio manager.
Based in Houston just as its namesake was, EOG is primarily a domestic natural gas driller and as such has benefited mightily from the rise in natural gas prices - from as low as $2 per MCF (or 1,000 cubic feet) ten years ago to a spike of over $15 per MCF in 2005. EOG's shares have fallen as the sector's frothiness has ebbed in the past few months: The price of nat gas recently fell below $6 per MCF.
EOG watchers, however, say the company is still sitting pretty. That's because it has apparently hit upon a trove of economically viable gas deep in the heart of Texas. The score is in a huge area known as the Barnett Shale, with a sweet spot south of Fort Worth in Johnson County.
This area has been explored for decades, of course. But EOG decided to poke around using a technique known as horizontal drilling, which entails going down some 7,000 feet, then taking a left or right turn and drilling for thousands of feet more. Going sideways instead of just down allows a driller to explore over a much wider area, which has paid off with a big score.
"We believe we have proven beyond a shadow of a doubt that this area is highly productive," says EOG CEO Mark Papa, who's reputed to be conservative in these matters. "We've projected potential reserves there of three to 4.7 TCF [trillion cubic feet of gas], and there could be more."
Papa, who's been at the company and its precursors for 25 years, will tell you that his old boss Jeff Skilling had absolutely zero interest in the real, dirt-beneath-your-fingernails business. "Enron wanted to get 'asset light' back then, and EOG was all about tangible assets," says Papa.
He says that he and his fellow execs went through what he calls a "fractious divorce" to buy out the parent company's 53.5 percent stake. "This was two years before they imploded," he says, "and we traded assets we had in India and China plus $600 million for our freedom."
The total value of the transactions was in the range of $1.46 billion, according to company insiders. Today EOG has a market value of some $15 billion. Another brilliant move by Messrs. Skilling and Lay.
"We had no idea that the Enron name would become so vilified," says Papa. "But I think our performance on Wall Street shows there is no name association problem. I guess we are something good that came out of Enron."
As for the future, Papa sees the price of natural gas climbing again - especially since he predicts production in the Gulf of Mexico will continue to decline - and says his business is in a sustained boom. "At EOG we're going to continue our blocking and tackling," says Papa. "Nothing flashy." How very un-Enron-like that is.