By now, many investors know about EOG Resources (NYSE:EOG). EOG is the country's largest shale oil producer, with large, core positions in the best shale plays: The Bakken, the Permian and the Eagle Ford. While the company has enviable positions in both the Bakken and the Permian, it is the 560,000+ net acre position in the Eagle Ford that is EOG's flagship. In any case, as an early mover in several shale plays, EOG's assets are the envy of the industry.

One of the going themes in the domestic oil industry today is, "Big fields get bigger." In other words, if ever there is a new technology with which to explore for oil, the best places to look are often in the place where oil has already been found. As horizontal drilling technology continues to improve and ultimate recovery rates continue to increase, it is the established players that will benefit the most. On an absolute basis, EOG will be the biggest beneficiary of these advances. EOG has a lead that will be very hard, if not impossible, for other companies to close. 

Tilden Oil Well

A four-well zipper in Tilden, TX, in the Eagle Ford. Source: Scott Towery.

Still-high growth

Over the last four years, EOG has delivered 40% compound annual oil production growth. As the company's Eagle Ford and Bakken operations mature, however, that number is sure to slow. This year, management still estimates that production will grow by 29%. This might not be quite as fast as some of the smaller players in newer shales, but this growth rate is still very good. Better yet, management sees continued double-digit oil production growth though 2017. In today's slow-growth reality, such secular growth is not easy to find.

Industry-leading profitability

Eog Roce

Source: EOG

EOG leads its large-cap peers in terms of profitability. One of the most important metrics here is return on capital employed, and we can see that EOG is not only above its peer average but that it also leads the next highest performer by a full 2.5 percentage points. This data point is underpinned by a few factors: The highest well productivity in the industry, the lowest completed well costs, and a very successful crude-by-rail distribution system.

Falling debt

Eog Debt To Cap

Source: EOG

EOG is one of the few shale oil producing companies currently working to reduce its debt. The above chart shows that management is serious about reducing debt as the company's assets mature and become more cash-flow positive. In fact, one of management's priorities for 2014 is to actively pay down debt with the company's growing free cash flow. While other operators are struggling to fund negative free cash flow through debt and equity, EOG is not only able to fund its own expansion into places like the Permian and the Niobrara, but it is also has money left over to work on its debt.

Bottom line
In the shale oil and horizontal drilling industry, EOG remains one of a kind. But an investor in EOG must understand that while the stock has roughly doubled since 2012, this kind of performance will not be repeatable. EOG is now a very large company. With a market cap of $56 billion, EOG can be classed with well-known independents such as ConocoPhillips (NYSE:COP), which has a market cap of around $75 billion. Due to the law of large numbers, one would not expect ConocoPhillips to double in value overnight, and the same line of thinking now applies to EOG. The quick money has all been made.

However, EOG has all the markings of a classic secular growth stock: Decreasing leverage, double-digit production growth for multiple years at least, improving profitability metrics, a business that is very difficult to replicate and finally an increasing dividend. 


Casey Hoerth owns shares of ConocoPhillips. 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.