A major independent oil and gas exploration and production company, EOG Resources Inc. ( “>EOG ) , signed a purchase and sale agreement for 50,000 acres of natural gas-rich land in Pennsylvania’s Marcellus Shale with Newfield Exploration Co. (NFX). The transaction is valued at $405 million  and constitutes a part of EOG’s divestiture program, which is expected to bring in about $1 billion for the company by the end of 2010.

The acreage represents less than 0.5% of EOG’s North American production and includes five producing natural gas wells with 7 million cubic feet per day of gross output.  The companies expect the deal to close by the end of this year.

With the closure of the divestiture, EOG will retain about 170,000 net acres in the Marcellus Shale in northwestern Pennsylvania. The company’s growing emphasis on liquids is reflected through its tactical plan to sell certain producing and non-producing natural gas assets in North America. Its third quarter volume growth, which increased 30% for the first time in the company’s history, also confirmed the fact.

The asset sale program will fetch money to partially fund EOG’s liquids-weighted capital expenditure program. Consequently, we believe that a liquids-rich production growth is likely to facilitate significant future cash flow for the company. Moreover, 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 has reduced its 2010 organic production growth forecast to 9% from 13% due to fracture equipment delays and lower cash flows resulting from weak natural gas prices. We also remain concerned about the company’s new limit for its debt-to-capitalization range of 30% to 35%, up from the previous target of 25%.

Hence, we retain our long-term Neutral recommendation for the EOG stock. The company holds a Zacks #4 Rank (short-term Sell rating).

 
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