EOG Resources (NYSE:EOG) has an ambitious goal. It wants to be among the best-performing stocks in the S&P 500. It has a simple strategy to achieve that aim:

  1. Grow its oil production at a double-digit annual pace.
  2. Earn double-digit returns on the capital it employs.
  3. Generate free cash so that it can increase its dividend at a fast pace.

As the oil company's second-quarter results show, it's doing an excellent job executing against this plan.

Drilling down into the numbers

Metric

Q2 2019

Guidance or expectations at the midpoint

Difference

Oil production

455,700 barrels per day (BPD)

451,000 (BPD)

4,700 BPD

Adjusted earnings per share

$1.31

$1.32

($0.01 per share)

Data source: EOG Resources.

EOG Resources exceeded its objectives during the second quarter. The company's oil production came in above the high end of its guidance range even as capital expenses were below its budget. Overall, the company grew its oil output 18% compared with last year's second quarter. Meanwhile, well costs are down about 4% year over year. As a result, the company remains on track to earn a double-digit return on its $6.3 billion capital outlay.

The oil producer also did an excellent job generating cash in what was another volatile quarter for oil prices. The company produced $2.1 billion in cash flow during the quarter, which was 1% more than in the prior year even though crude prices were down by 12%. With capital expenses coming in below budget at $1.6 billion, the company generated about $500 million in free cash. It used $127 million of that money to pay its dividend, which it has increased 31% in the past year. That left it with $352 million in excess cash, which it used to further improve its balance sheet.

The company did that by paying off a $900 million bond when it matured in June. As a result, it ended the quarter with about $1.2 billion in cash against $5.2 billion of remaining debt. That put its net debt-to-capitalization ratio at 16%, which is down from 24% in the year-ago period and at the lowest level since 2008.

Image source: Getty Images.

A look at what's ahead

EOG Resources has now outperformed its expectations through the first half of the year and remains on track to achieve its full-year guidance. That forecast anticipates that the company will spend $6.3 billion to drill 740 new wells this year, which should grow its oil production by more than 14%. Meanwhile, the company believes that it will earn a more than 10% return on this capital while generating free cash flow as long as oil averages $50 a barrel. Though with crude oil above that level, it's on pace to produce substantial free cash flow.

The company continues to plan on using its excess cash to grow the dividend and pay down debt. It has now boosted its payout 72% over the past two years while retiring $1.25 billion in debt. It aims to pay off another $1.75 billion of debt by the end of 2021. With $1.2 billion of cash on hand and a business that's generating more every day, it's well on its way toward achieving that goal.

On track with its plan

EOG Resources continues to excel at drilling oil wells. That's enabling it to earn higher returns at lower oil prices while also growing its output and producing free cash. Because of that, EOG is delivering on its strategy to create value for its investors.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.