Photo credit: Flickr/Britt Reints.

Every time I write about the virtues of EOG Resources (EOG -0.54%) a commenter or two will say it's just too expensive to buy. They see EOG Resources as an oil company that is trading at more than 40 times earnings. What I'd like to do today is dispel the myth that EOG Resources is expensive. Instead, I want investors to see that this is a great oil stock to buy.

Oil accounting 101
Oil and gas accounting is a bit more complex than most investors realize. Because of this, it masks the true earnings power of an energy company. It can make a company like EOG Resources appear to be much more expensive than it really is.

For example, last quarter EOG Resources earned $1.69 per share on $462.5 million in net income. However, over the past four quarters the company has only earned $4.11 per share, or $1.1 billion. That's because last year's fourth quarter saw EOG report a loss of $1.88 per share, which included a one-time noncash impairment of its Canadian natural gas assets. This pulled down the earnings number critical to producing the price-to-earnings ratio that many investors use as a valuation tool.

However, that's just part of the story. What an oil company reports as earnings is an entirely different number than the cash flow it produces each quarter. For example, while EOG lost half a billion dollars in last year's fourth quarter, its discretionary cash flow was actually $1.4 billion. Furthermore, through the first nine months of this year EOG Resources has produced another $5.6 billion in discretionary cash flow. That's $7 billion over the past 12 months. At a market capitalization of $45 billion, EOG Resources is trading at just 6.5 times its discretionary cash flow. That's quite a different number than the 40 times earnings figure that scares investors off.

Unmatched growth
Not only is EOG Resources remarkably inexpensive, but the company is growing fast. EOG expects to deliver best-in-large-cap class double-digit oil and liquids growth through 2017. That means it sees its oil production exceeding the growth of peers like Devon Energy (DVN -0.19%) and Continental Resources (CLR).

Devon Energy recently supercharged its oil production growth by adding the Eagle Ford to its portfolio. Because of this, the new Devon Energy expects to grow oil production by 20% annually for the next few years. While that's great growth, Devon still remains in the shadow of EOG Resources.

The same can be said for Bakken king Continental Resources, even though it intends to triple production by 2017. Continental's newest growth platform in Oklahoma isn't as oil rich as EOG's top three plays. Continental is a great American oil company that is really concentrated within the Bakken, while EOG has a much broader position across three key plays. 

Investor takeaway
EOG Resources is among the best positioned oil companies in America. Because of this it offers unmatched oil production growth opportunities. Best of all, it's cheaper than most investors think, which makes it a great stock to buy right now.

Learn more about EOG Resources