The prospect of Iran and Libya flooding the world with crude has skittish investors oil shy as concerns rise that global crude capacity will tank West Texas Intermediate crude prices.

Libyan production rose to about 600,000 barrels per day in the second week in January, according to the National Oil Corp., including 300,000 barrels per day from the Sharara oil field that recently restarted. That compares to lows of about 200,000 barrels of oil per day a few weeks before.

Improving supply from Libya remains fragile given ongoing civil unrest, but it has contributed to oil price weakness year-to-date, says Bill Herbert, managing director and co-head of securities for Simmons Co. International.

Iran has also agreed to curtail its nuclear program and allow more intrusive inspections in exchange for sanctions relief, which may ultimately result in additional crude on the market.

But in the wake of supply glut fears, there could be opportunity, because gas prices continue to struggle in the low-$4 range, says Bob Brackett, senior analyst for Bernstein Research.

Brackett's view is that “oil supply in the US will not increase to the level baked into market projections. We believe upside potential remains with those companies that have core acreage in plays such as the Eagle Ford and Bakken,” he says in a mid-January report.

And he thinks the best of the bunch is EOG Resources Inc.

EOG has grown oil production 43% annually for the past three years and could become the top US crude oil producer by 2018. The company named Bill Thomas president and chief executive in July after serving as president since September 2011.

Yet it was trading down 15% from its 52-week high, prior to oil-price worries. With projected cash flow per share at 24% for 2014 and 2015, EOG stands to see a 35% upside. The company has deep inventory, low costs, advantaged execution and quality management, Brackett says.

While EOG holds 320,000 net acres in the Permian, including 113,000 in the Midland Basin and 207,000 in the Delaware, the company does not view it as the next Eagle Ford or Bakken.

Thomas, a geologist, says he has already “lived twice” in the Permian and this is his third time to work the basin, according to Brackett.

Thomas thinks the reservoir will not live up to the Eagle Ford and Bakken, pointing to lower horizontal production than those plays when they were at the same level of development.

Despite promising early oil results, he predicts that the reservoir will quickly become gassier as the pressure declines.

EOG's leader and Brackett share the view that the market is overestimating upcoming US oil production. The Bakken and Eagle Ford have been the two major drivers of horizontal crude growth from 2005-2013 and account for 79% of current horizontal crude production.

EOG, at the same time, has been a leader in both plays.

In the Bakken, EOG had a strong year, showing the highest initial production (IP) rates in the play. EOG's average IP nearly doubled that of peers.

In the Eagle Ford, EOG is far and away the leading oil producer.

The company plans to continue using rail assets to choose between WTI-based Cushing and LLS-based St. James in spite of narrowing spreads. EOG anticipates the spread between WTI and LLS at $3 to $4 per barrel for the long term.

As for natural gas, the company remains uninterested until at least 2018—the earliest that LNG exports could happen—and plans to drill “zero dry-gas wells in 2014.”

Thomas says that prices would need to be about $5.50 per thousand cubic feet to compete with oil for EOG's capital expenditures.

—Darren Barbee

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