Analyst Debate: Is EOG Resources America's Top Oil Stock?

Two Fools debate which top oil stock is better, EOG Resources or Devon Energy.

Jan 7, 2014 at 5:00PM

America's oil boom is changing the game for our country. According to the International Energy Agency, the U.S. will surpass Russia and Saudi Arabia next year to become the world's top oil producer. Further, we're on pace to become energy self-sufficient. We have shale revolutionaries like EOG Resources Inc (NYSE:EOG) and Devon Energy Corp. (NYSE:DVN) to thank for that dramatic change of events.

As America's energy industry shifts into high gear, the question investors need to know is which of these top oil stocks will yield the best returns. Two Fools take a closer look at the bull and bear case for EOG Resources.

EOG Resources by the numbers
Here's a quick snapshot of EOG Resources' most important numbers:

Statistic

Result (TTM or Most Recent Available)

Market Cap

$45 billion

Long-Term Debt

$5.9 billion

Forward P/E Ratio

17.9

Dividend Yield

0.50%

Daily Oil Production

235,000 barrels per day

Daily NGL Production

69,100 barrels per day

Daily Natural Gas Production

1,334 MMcf/d

Key Resources Basins

Eagle Ford, Bakken, and Permian

Matt's bull case
EOG Resources is one of the fastest-growing oil companies in America. Over the past six years, it has grown oil production by a compound annual rate of 38%. It's not done growing. It expects best-in-class crude oil growth through at least 2017. That puts it on pace to be America's top oil producer by 2018 as it should eclipse half a million barrels of oil per day. That's enough oil to put it past current top dog Chevron Corporation (NYSE:CVX), which really isn't investing all that much in America these days. 

What's even more important about EOG Resources' growing oil production is that it earns top dollar for its oil. Company-owned crude-by-rail infrastructure enables EOG Resources to get the best prices for its oil. Last year, it was able to earn $8.19 per barrel more for its oil than U.S. benchmarked WTI oil. That all falls to the bottom line for EOG Resources.

That's just part of EOG's profit machine. EOG Resources self-sources its frac sand, which reduces well costs and increases efficiencies. It's also getting better at getting more oil out of its wells. This past year alone, it has increased its initial production rate in the Eagle Ford by 20%, while the cumulative oil production rate has increased by 30%. Meanwhile, in the Bakken its initial production rate is up by 50% while cumulative oil production is up 58%.

With some of the top positions in America's top oil plays, EOG Resources has the assets needed to fuel top-tier growth in the years ahead. Add to that the company's access to premium oil prices, its low costs, and continually improving operations, and EOG Resources has all the pieces in place to really fuel returns for its investors.

Tyler's bear case
It's extremely hard to find disagreement with anything that Matt says about EOG. In fact, I completely agree with everything and I am very optimistic about the performance of EOG Resources. So instead of trying to convince you that EOG Resources is not a great company and not a well-placed investment, the case I can make against buying EOG stock is that when you stack EOG up against many of its peers, it doesn't stand out as much as many would think and there are potentially greater values out there.

EOG has a reputation as a cash-generating profit machine that has been cranking out incredible results for its investors. If you compare EOG to many of its peers, though, it doesn't stand out as much as many would think.

Company

Cash Margin From Operations

Net Income Margin

Net Income Growth (Last 12 Months)

EOG Resources

47.6%

8.08%

(7.03%)

Devon Energy

50%

(6.08)

0%

ConocoPhillips (NYSE:COP)

27.1%

13.66%

(22.1%)

Continental Resources (NYSE:CLR)

72.3%

25.03%

109.47%

Pioneer Natural Resources (NYSE:PXD)

64.6%

17.20%

966.6%

Source: S&P Capital IQ.

Another aspect that so many people like about EOG Resources is that it has assets in what many consider the three best shale plays in the United States: The Eagle Ford, the Permian, and the Bakken. While this sounds great, the reserve numbers go to show that the very long-term potential of EOG is not as certain as some of its peers.

Company

Current Production (Thousand Barrels Oil Equivalent Per Day)

Proved Reserves (Thousand Barrels Oil Equivalent)

Estimated Production Life (Years)

EOG Resources

526.4

1,800,000

9.37

Devon Energy

593

3,200,000

14.7

ConocoPhillips

1,470

8,600,000

16.03

Continental Resources

141.8

784,677

15.16

Pioneer Natural Resources

173.2

1,080,000

17.08

Source: Company 10-Ks, 10-Qs, and investor presentations.

This estimate assumes that these companies will not grow production or reserves, so it is a little bit crude, but the important takeaway here is that EOG has a drilling program that is rather short in comparison to its peers and the options it has today beyond the Eagle Ford, Permian, and Bakken are rather limited. Investors should keep a sharp eye out for any indications as to where EOG decides to go next.

Finally, you have to buy the stock itself. Over the past year or so, EOG's shares have performed spectacularly. In 2013 alone, shares in the company were up 36% on a total return basis. If you were to make a decision to buy a stock in the energy space today, it may not be the best bang for your buck.

Company

Estimated Forward 12 months Price-to-Earnings Ratio

Price-to-Tangible Book Value

EOG Resources

17.9

3.0

Devon Energy

10.99

1.7

ConocoPhillips

11.23

1.7

Continental Resources

15.56

5.1

Pioneer Natural Resources

35.21

3.3

Source: S&P Capital IQ.

I'm not making this case for people to sell their shares in EOG Resources or to not consider them for your portfolio. But if you are looking for some energy stocks, be sure to do some shopping because EOG may not be the best value for an investor today.

Investor takeaway
Tyler is right: Based on many metrics, EOG Resources isn't the cheapest oil stock out there. However, there is an important reason for that. EOG Resources is delivering best-in-class oil production growth and the market places a premium on growth. That said, before we jump to any conclusions, Tyler would like to present his case for Devon Energy. Stay tuned.

Learn more about EOG Resources
EOG Resources is one of the companies fueling record oil production that is revolutionizing the United States' energy position. You can learn more about EOG Resources by check out our special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 

Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool recommends Chevron and owns shares of Devon Energy and EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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