Texas-based major independent oil and gas exploration company EOG Resources Inc. (EOG) is planning to issue debt worth $1.5 billion in a three-part sale, IFR reported. The issue includes $750 million of 10-year notes, $400 million worth 5-year bonds and $350 million of 3-year bonds.
The news came a day after Moody’s Investors Service cut its rating outlook for EOG to “negative” from “stable.” However, Moody’s affirmed investment-grade “A3” long-term debt and “Prime-2” commercial paper ratings for EOG Resources.
EOG Resources has historically concentrated on natural gas rather than oil and is active in most of the major onshore producing regions, including the key Texas and Oklahoma basins and the Rocky Mountains in the U.S. and Canada.
Moody’s lowered its rating outlook citing risks from the natural gas company’s current strategic shift into crude oil and natural gas liquids.
EOG’s growing emphasis on liquids is reflected in its growth in third quarter production volume, which increased 30% for the first time in the company’s history. The company expects liquids production to grow at the rate of 53% and 30% in 2011 and 2012, respectively.
EOG’s increasing interest in oil is appreciable in a favorable price environment. Management said that about two-thirds of the North American revenue in 2011 will be derived from liquids. However, the company’s effort to shift gears from its core natural gas business is capital intensive, which could affect its leverage metrics.
Besides this debt issuance, EOG has also been actively engaged in divestiture of natural gas properties to partially fund its liquids-weighted capital expenditure program. Recently, the company sold 50,000 acres of natural gas-rich land in Pennsylvania’s Marcellus Shale to Newfield Exploration Co. (NFX).
Despite an increase in production volumes, higher commodity prices and increased liquid focus, EOG’s third quarter earnings missed estimates. While we believe that the company’s strategic shift into oil is a welcome development, it remains to be seen how it works going forward.
Until further clarity, our short-term Underperform rating with a Zacks #4 Rank (Sell) remains unchanged. However, our long-term recommendation is Neutral, reflecting favorable oil economics.
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