EOG Resources Inc Offers a Steady, Secular Growth Investment

When retail investors think of secular growth, they may think of tech companies, regional retail chains ready to go national, or nascent biotechs with strong pipelines. With the reality of increasing domestic oil production, however, investors must not overlook shale oil producers.

Apr 21, 2014 at 11:56AM

When investors think of "secular growth," the pictures that comes to mind often include tech companies, big biotechs, and new, regional chain restaurants ready to go national. Rarely do we view oil and gas producers as secular growers, primarily because the oil and gas business tends to be so darn cyclical.

However, to think so narrowly, in this time period at least, means missing out on one of the greatest growth stories of our time: the growth of shale oil production right here in the U.S.

Here is how I define a good 'secular growth' name: First and foremost, a secular growth name must have double-digit top-line growth and a long 'runway' for that growth. In other words, the growth trend must last for multiple years, ideally for a decade or more. However, it's more than just growth per se. Profitability is just as important as raw growth. 

Today's blue-chip companies often started out with incredible growth, but they put all of the capital they earned right back into their companies in order to fuel continued growth. At some point, I like to see cash flow rapidly overcome capital spending needs. This way, companies can reward their shareholders in a variety of ways. 

One oil producer that clearly meets all these criteria is EOG Resources (NYSE:EOG). EOG was a very early mover in America's two biggest shale plays; the Eagle Ford and the Bakken. EOG now has a massive, 632,000-acre position in the Eagle Ford. Thanks to shale oil, EOG is now the biggest crude oil producer in Texas, surpassing traditional West Texas heavyweights Chevron and Occidental (NYSE:OXY). EOG is now also the biggest crude producer in the U.S. 

Eog Crude Cagr

Courtesy of Investor Relations

EOG exclusively focuses on crude oil. Condensate and gas, both wet and dry, are all secondary at EOG. Since 2009, EOG has grown its crude oil production at a compound annual rate of 38%. To be sure, that rate is slowing, but it remains very impressive. For example, in 2014, management expects to grow production by another 27%. Best of all, this growth has quite a runway: Management sees at least fifteen years' worth of drilling inventory on its acreage. 

Eog Improving Returns

Courtesy of investor relations

This chart shows us EOG's steadily improving return on capital employed and return on equity. As it refines its operations and improves upon best practices, EOG continues to increase its return on capital here in the shale. 

Eog Fcf

Data by Morningstar

As EOG produces more oil and its drilling expenditures level off, its operational cash flow has, for the first time in five years, exceeded its capital expenditure. As this trend continues, EOG's cash flow should at least grow in tandem with its oil production. 

Eog Divs Debt

Courtesy of investor relations

This chart gives us a 'bigger picture' view. As production has grown profitably, EOG has strengthened its balance sheet. After free cash flow finally sprouted positive, EOG boosted its dividend by 33%. Expect more dividend growth from EOG. After all, the company can only discover and develop so much new acreage. In fact, many believe there are but a couple of shale plays left to discover in North America, if any. If that is true, where will EOG spend all of its future cash flow? The answer is, apparently, dividends. EOG is a dividend growth play.

Bottom line
If you're looking for a solid, secular growth play, EOG Resources qualifies. The company has fifteen years worth of drilling potential. This year, EOG will grow its oil production by 27%. The company has a proven track record of constant process improvements and as a result its returns have consistently improved. Finally, and perhaps most importantly, its operational cash flow has continued to grow along with its production while its exploration and development have already hit an inflection point. Its management seems committed to converting free cash flow into dividends. 

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 


Casey Hoerth has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers