Is It Time to Buy EOG Resources Inc Stock?

There is a case to be made that EOG Resources Inc (EOG 0.25%) is the best oil stock in America. It has the best horizontal crude oil assets in America. It leads its peers in organic crude oil production growth. Because of this its returns are some of the best in the oil business as it handedly beats its independent oil and gas peers. Still, just the fact that the company is a great operator doesn't mean its stock is automatically a buy. For that we need to drill down a bit deeper and consider if the current stock price is compelling or not.

Revisiting the bull case

It's so easy to get caught up in the story of EOG Resources. In just a few short years it surged past the likes of Chevron (CVX 0.37%) and Occidental Petroleum (OXY -0.15%) to become the top oil producer in the lower 48 states as we see in the following chart.

Source: EOG Resources Inc Investor Presentation 

It achieved this feat by growing its oil production by a compound annual rate of 40% over the past few years. However, its best days might still be ahead of it as the company expects to continue delivering peer-leading oil production growth through at least 2017. Moreover, the company's drilling inventory has ballooned from 12 years to 15 years in just the past few months as it has announced five new horizontal oil discoveries this year alone.

What's even more compelling is the fact that EOG Resources isn't focused on growth for the sake of empire building. Instead, its growth drives increasing value to investors. As this next slide shows the company's cash margins have more than doubled even as the company has continued to grow.

Source: EOG Resources Inc Investor Presentation.

The company's margins continue to improve because EOG Resources is focused on growing oil production, where it achieves its highest returns. However, it's also focused on driving its costs per well down to improve those already high rates of return. Because of this the company's return on capital employed and return on equity outpace nearly every other energy company operating in America, as the following slide shows.

Source: EOG Resources Inc Investor Presentation

Clearly, EOG Resources offers investors a compelling reason to invest. However, before we can buy its stock we still need to get it at a solid price. For that we need to drill down into its valuation.

Drilling down into the value of EOG Resources' stock

There are a lot of ways to value an oil and gas company. Personally, I prefer to look at a stock's relative valuation compared to its closest peers. In this case I'm going to use Devon Energy (DVN 0.19%), ConocoPhillips (COP 0.10%), Chesapeake Energy (CHKA.Q) and Pioneer Natural Resources (PXD -2.28%), as these are four of the largest independent oil and gas companies that are focused on horizontal oil production in America.

I'm going to compare these five oil and gas companies using a basket of common valuation metrics that go beyond the simple price to earnings ratio. Here's where EOG Resources ranks compared to its peers.

 Source: S&P Capital IQ.

Here we see that EOG Resources is a bit more expensive than most of its peers. While it's not as overvalued as Pioneer Natural Resources appears to be, it's nowhere near as cheap as ConocoPhillips. So, the stock certainly isn't a screaming value at the moment.

Next, let's see how EOG Resources stacks up to its own historical valuation over the past decade just to get a reference point to see if its current stock price is also expensive on a historical basis.

 Source: S&P Capital IQ.

Here again we see that relative to its own history EOG Resources is again neither cheap nor wildly overvalued. If anything the company is valued about where we'd expect it to be considering its growth trajectory. 

Investor takeaway

What we can conclude here is that at today's stock price EOG Resources is neither wildly expensive nor enticingly cheap. As such it leaves investors with a choice. Investors looking for value might want to watch this one from the sidelines and hope that the stock takes a hit if oil prices plunge at some point in the future giving value investors a buying opportunity. Meanwhile, growth focused investors that aren't afraid of a little volatility might view today as a fine time to buy one of the best oil stocks in America, as it's a great company at a pretty fair price.