While most of the oil industry has struggled over the past few years with low oil prices, EOG Resources (NYSE:EOG) has gone about its business. While the company did tap the brakes and slowed its growth rate early on during the downturn, it quickly re-accelerated last year and expects to continue growing at a rapid pace over the next several years, even if oil prices take another dive. That sets it apart from many of its peers, which would need to slow their pace considerably if crude starts slumping.
EOG's CEO Bill Thomas outlined what makes his company different on its recent fourth-quarter conference call. Here are four things he believes set EOG apart.
We're all about returns
Thomas led off his prepared remarks by saying:
EOG is driven by returns. Our goal is to earn a return on capital employed (ROCE) that is not only the best among our peers in the E&P industry, but also competitive with the best companies outside our industry. Premium returns and capital discipline are how we reach that goal.
As Thomas points out, what defines EOG Resources is its focus on reinvesting cash flow to earn a high return on that capital as opposed to using it to grow the size of the company. That's in stark contrast with many of its peers, which tend to focus entirely on increasing production at any cost. For example, at one point, 54% of the wells drilled by Chesapeake Energy (OTC:CHKA.Q) weren't even profitable because the company's aim at the time was just to grow.
We're investing to earn premium returns
EOG Resources, on the other hand, won't drill unprofitable wells. In fact, it will only pursue those that meet its premium return hurdle, which Thomas reminded listeners "requires a 30% direct after-tax rate of return at a flat $40.00 oil price." By investing the bulk of its money into wells that can achieve that hurdle rate, EOG can ensure they remain profitable even if oil plunges. Meanwhile, it can earn much higher returns at better oil prices, with premium wells on pace to achieve a more than 100% return at $60 oil this year. Because of that, Thomas said EOG is "in a position to generate healthy financial returns, even at a moderate oil price environment. When you couple this with increasing oil prices, like those we are seeing today, the potential for generating higher ROCE accelerates."
We're highly disciplined
Next, Thomas said:
EOG's capital discipline governs our growth. Disciplined growth means not adding overpriced or poor performing services and equipment in order to grow. Disciplined growth means not growing so fast that we outrun the technical learning curve and leave significant reserve value in the ground. Disciplined growth means operating at a pace that allows EOG to sustainably lower costs and improve well productivity instead of growing so fast that costs go up and well productivity goes down. EOG's disciplined growth is driven and incentivized by returns and not growth for growth's sake. Our strong growth is an expression of generating strong returns first.
Because of that discipline, EOG only plans on investing $5.4 billion to $5.8 billion this year, which is enough money to complete 690 new wells that should boost its oil output 18%. While that's a healthy growth rate, the company could grow faster since its plan puts it on pace to produce $1.5 billion in free cash flow this year. However, plowing that additional money into more wells could negatively affect returns, which is something the company refuses to do.
We'll only grow within our means
Thomas noted one other thing that sets EOG Resources apart:
EOG's disciplined growth maintains a strong balance sheet. We will not issue new equity or debt to fund capital expenditures or the dividend. In 2017, we grew high return U.S. oil production 20%, paid the dividend, reduced our debt, and generated over $200 million in free cash flow. Remarkably, we delivered those results while oil prices averaged a modest $50.00 ... We believe this sets EOG apart as one of the most capital efficient and disciplined growth companies in the U.S.
For comparison's sake, many of EOG's peers went on wild spending binges before the market downturn to expand both their asset base and production. Chesapeake Energy, for example, outspent cash flow by a jaw-dropping $30 billion from 2010 through 2012. That decision nearly drove the company into bankruptcy, while its legacy debt of roughly $10 billion continues holding it back. Others, likewise, made poor choices to keep growing at all costs, which hampered them during the downturn.
Devon Energy (NYSE:DVN), for example, made a bold land acquisition in late 2015, which came at a bad time since crude continued crashing. As a result, the company had to sell nearly $1.5 billion in stock and slash its dividend 75% in early 2016 to quickly shore up its financial situation. Those moves are one reason Devon Energy's stock has fallen nearly 50% in the past three years, while EOG's shares, on the other hand, have risen almost 12% over that timeframe because of it never compromised its strong financial position.
An oil stock with a bright future
Thomas closed his comments on the call by saying:
2017 results were outstanding, and we believe 2018 will be even better. The company is driven by strong returns and is poised to deliver in 2018 and beyond. We have a sustainable business model and we're excited about EOG's ability to create long-term shareholder value.
That focus on drilling for returns to create value for shareholders is what makes EOG one of the top oil stocks around.