We are maintaining our long-term Neutral recommendation for EOG Resources Inc. (EOG) – a major independent oil and gas exploration and production company.

EOG’s stellar first quarter performance and its large portfolio of high-return projects are partially tempered by its natural gas-weighted production and reserves base.

EOG Resources’ solid first-quarter 2012 results were backed by a striking improvement in productivity from individual wells. Quarterly adjusted earnings met the Zacks Consensus Estimate, while showing a substantial jump of 72% from the year-earlier quarter. Total volume expanded 11.1% from the year-earlier level, with crude oil and condensate production improving more than 49%.

Significant contribution from EOG’s four big crude oil and liquids plays (the South Texas Eagle Ford, the North Dakota Bakken, the Fort Worth Barnett Combo and the Permian Basin Wolfcamp and Leonard) led to the growth.

The company is also giving more emphasis in oil, which is expected to be further augmented by its deep focus on major liquids-rich plays. About 85% of its North American wellhead revenue came from liquids in the first quarter. Impressive first quarter performances by its big four plays encouraged EOG Resources to boost its full-year total liquids production growth target to 33% from 30%. The primary driver will likely be production in Eagle Ford, Barnett and Permian.

EOG Resources’ deep focus on major oil and liquids rich plays, such as the South Texas Eagle Ford play and the Fort Worth Barnett Shale Combo, as well as Colorado Niobrara, Oklahoma Marmaton, West Texas Wolfcamp, Neuquen Basin and New Mexico Leonard will support its increased total production growth target to 7% from the earlier expectation of 5.5%. However, the company reaffirmed its capex guidance of $7.4-$7.6 billion for the year.

On the flip side, the company’s risk-reward pay-off remains uncertain in the near future due to its natural gas-weighted production and reserves base. In view of the lackluster gas price environment, we believe EOG’s results are particularly exposed to fluctuations in the U.S. natural gas markets, since natural gas accounts for 61% of the company’s 2011 reserves. Again, the company remains largely a North American producer, lacking substantial international diversification.

Unless the outlook for natural gas prices improves, we believe the stock will perform in line with the market and the sector in the coming quarters. EOG Resources, which competes with Chesapeake Energy Corporation (CHK), retains a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.

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