EOG Resources has long cultivated an image of disciplined oil growth, prioritizing shareholder returns. This narrative is accurate, as demonstrated by their Q1 2024 earnings call. However, beneath the surface, a subtle shift is unfolding that could significantly reshape the company's profile and potentially unlock significant future value.

While analysts concentrated on the Utica Combo play, a potentially transformative oil asset, a quieter story of natural gas growth emerged. EOG's gas production guidance for Q2 2024 revealed a deliberate reduction in activity in their Dorado asset. Although understandable given the current weakness in the gas market, this move may mask a counterintuitive strategy: EOG seems to be strategically constructing a low-cost gas powerhouse alongside its premium oil portfolio.

This strategy is counterintuitive because it contradicts the prevailing industry narrative of capital discipline in the face of low gas prices. Many Exploration & Production (E&P) peers are actively divesting gas assets or dramatically cutting gas-focused capital expenditures. However, EOG is charting a different course.

The key lies in the distinction EOG makes between capital allocation at the asset level versus the corporate level. They recognize the current weakness in the gas market, hence the reduced Dorado completions. However, they remain highly optimistic about the long-term gas demand outlook, particularly for LNG feed gas. This conviction fuels their continued investment in Dorado, albeit at a measured pace designed to maximize learnings and reduce costs.

EOG's Strategic Infrastructure Investments

Here's where the numbers get interesting. EOG's 2024 capital plan allocates approximately $400 million to strategic infrastructure projects. These include the Janus gas processing plant in the Delaware Basin, a liquids-rich play, and the Verde pipeline, dedicated to Dorado. Both projects are projected to deliver significant margin expansion throughout the lifespan of these assets.

The Verde pipeline, particularly its Phase 2, scheduled for completion by year-end, is particularly revealing. It will position Dorado strategically on the Gulf Coast, providing access to multiple demand centers, including LNG. This suggests EOG views Dorado not just as a low-cost gas producer, but as a potential LNG powerhouse.

This hypothesis gains further credence from their recent announcement of a Brent-linked gas sales agreement commencing in 2027. This agreement, coupled with their existing JKM-linked agreement, clearly demonstrates EOG's strategy of aligning Dorado's output with growing global demand.

Dorado's Potential: A Sleeping Gas Giant

Consider this: EOG's three-year scenario, although not official guidance, projects a cumulative free cash flow of $17 billion at mid-cycle prices. This assumes low single-digit oil growth, similar to 2024. But what if gas demand, and consequently Dorado production, surpasses expectations?

"With a 21 TCF resource potential, Dorado possesses the capacity to become a significant production driver for EOG. If gas demand materializes as they anticipate, the upside to free cash flow could be substantial, potentially exceeding even their most optimistic scenario."

Hypothetical Production Growth Scenario

The chart below illustrates a hypothetical scenario for EOG's oil and gas production growth. While the company projects low single-digit oil growth, the potential for gas production from Dorado to outperform expectations is significant.

This potential upside is not currently factored into EOG's market valuation. Analysts, fixated on the Utica oil story, appear to be overlooking the gas giant quietly emerging in plain sight.

EOG's strategy of developing a low-cost gas business alongside its premium oil portfolio is a long-term play. It necessitates a strong belief in the long-term gas demand scenario and a willingness to invest counter-cyclically. But if their bet pays off, EOG could become not only a leader in oil but also a dominant force in natural gas, potentially transforming the company's profile and unlocking a wave of future value.

"Fun Fact: EOG Resources began its journey as Enron Oil & Gas Company before spinning off as an independent entity in 1999. Talk about a transformation!"