Over the past few months, the following three phrases have been drawing me to EOG Resources (NYSE: EOG ) like a moth to a flame: "best in class," "deep inventory," and "healthy annual dividend growth rate." These phrases, along with multiple variations, can be found littered throughout EOG's corporate presentations, forward guidance, earnings call transcripts, etc. As an investor, finding a company that has supported headlines like this with years of proven success is a welcome experience.
Company and CEO growth happening in tandem
Chairman and CEO Mark Papa has been providing investors access to this type of company since he took the reins in 1998. Prior to that, he spent 17 years rising through the ranks of an EOG predecessor, Belco Petroleum. These 32 years of experience have made him one of the most respected minds in the oil and gas space. In a recent interview I participated in with Halcon Resources (NYSE: HK ) founder and CEO Floyd Wilson, Mark Papa was named as one of the four executives in the space that he believed help truly alter the energy landscape in United States.
So what exactly is he doing at EOG Resources to continue his game-changing ways in a fashion that will continue to deliver "best-in-class" growth while maintaining a "deep inventory" to support a "healthy annual dividend growth rate"? That's what I'm here to tell you, and it's also why I will be adding EOG Resources to the Real Money Portfolio that I manage for The Motley Fool.
Lead dog in a hungry pack
The oil and natural gas boom in the United States has benefited more companies than investors could possibly focus on. Thankfully, there are a few that have separated themselves in terms of past success and future potential. Clearly, I believe that EOG Resources fits this bill. This is where the "best-in-class" phrase comes in to play. Not only has EOG's pole position been established by a fairly wide margin, but its crew appears capable of maintaining, or even expanding, the company's annual lap-time advantage.
From January 2011 to April 2013, EOG has blown away the field when it comes to operating success in the two most prolific areas of growth in the country: the Bakken shale and the combination of Texas' Eagle Ford and Permian basins. Cumulative oil production here has been more than double that of the company's peers, including but not limited to: Anadarko Petroleum, Chesapeake Energy, and ConocoPhillips. EOG in large part has its best-in-class horizontal crude oil assets to thank for its position, but it has been doing many other things to make this expanded production more profitable than others.
While growing organic crude oil production by an average of 40% the past four years, infrastructure played a critical role in helping achieve advantageous pricing. Realizing that the Bakken and Texas regions might not be able to keep pace, EOG has secured wholly owned rail infrastructure to move crude throughout the midcontinent. Its five years of experience here allow the company to sell its oil at two of the best distribution hubs in the country: Cushing, Okla., and St. James, La. While some may argue that pipelines will eventually catch up to production, I tend to side with EOG in believing that continued growth will necessitate rail transport for years to come.
Deep pockets and even deeper wells
Given oil's finite nature, investors must keep an eye on inventory levels and reserve replacement. Thankfully, EOG continues to extend its operating horizon with an ever-deepening inventory. In fact, in its latest presentation, the company expanded its Bakken/Three Forks drilling inventory from seven to 12 years. A safety blanket like this leads me to believe that, as new technology comes online, expectations should continue to expand.
Margins in this region should also remain healthy given that EOG sources its own frack sand for many of its wells. With companies like Continental Resources (NYSE: CLR ) experiencing completed well costs of about $8 million, EOG's year-to-date cost of $9.5 million per well is highly likely to continue its current downward momentum. These improved well economics are also likely to contribute toward helping the company maintain its sub-30% net-debt-to-capital ratio target. Maintaining this low level of leverage gives management great flexibility, leading to greater confidence in future capital expenditures and dividend payments.
Oil production isn't the only thing growing
Including 2013, dividends to investors have grown at a 5.3% compound annual growth rate for the past five years. While this growth clearly hasn't kept pace with overall production growth, it is a satisfying reminder that this company can sustain the ability to provide investors with promising total returns. Granted, the dividend yields less than 1%, but it shows management isn't afraid to allocate capital in a variety of beneficial ways.
The oil business can be sour at times
When discussing oil and natural gas companies, business isn't always sweet. Fortunately for EOG investors, I feel that the majority of the risks faced by the company are macroeconomic in nature. While an inordinate number of dry holes -- those that fail to produce -- could affect the company's margins, it has done a great job historically of avoiding a burdensome load in this regard.
The biggest fear for EOG and its investors should be a domestic mishap that impacts our environment or public safety to a degree that amplifies regulations. While issues such has these have remained light on land, findings that negatively impact hydraulic fracturing would drive revenue downward with a force greater than gravity. It is my opinion that fracking is unlikely to come under this pressure, but we all know what happened to the offshore market after the Deepwater Horizon spill in 2010.
To this end, I believe that management's proven track record of production and reserve replacement removes a lot of the company-specific risk that various peers might be forced to deal with. With all of this in mind, I believe EOG Resources will continue along on its market-beating tracks, which is why I'm hopping on the next available sleeper car for the long haul.
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