As it usually does, EOG Resources (EOG -0.85%) delivered strong results in the second quarter as both production and earnings beat expectations. Those were just some of the pleasant surprises the company announced in the quarter, which also featured another big dividend increase and the unveiling of a massive resource in the Powder River Basin. Given the strong quarter, CEO Bill Thomas was pleased with the company's performance as well as its direction, which was evident in his closing comments on the accompanying conference call, where he left investors with five key takeaways.
1. Our drilling machine is killing it this year
Thomas started off his closing remarks by saying, "EOG continues to solidly execute our 2018 premium drilling program. The company is delivering strong triple-digit direct well returns and strong double-digit U.S. oil growth." EOG has focused its attention on drilling wells that meet a strict criteria of generating a 30% direct after-tax rate of return (ATROR) at $40 oil. However, with oil recently in the $70s, the company has earned a stunning 140% ATROR so far this year by focusing on drilling premium wells. Because of that, it's growing production at a high rate and on pace to generate a gusher of free cash flow.
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2. We're finding new high-return locations faster than we can drill them
Thomas continued:
EOG's exploration effort continues to deliver by organically generating premium drilling potential much faster than we drill it. This quarter's addition of 1.9 billion barrels of oil equivalent in the Powder River Basin is a remarkable and significant resource addition to our portfolio. Since permanently shifting to premium in 2016, we've essentially tripled our premium location count and more than quadrupled our premium resource potential.
EOG Resources' exploration efforts have added 1,500 new premium drilling locations since February alone, which is more than double the number of wells it expects to complete this year. Because of that, the company has the resource base to continue growing production at a high rate for years to come.
3. We have lots of options, which gives us unparalleled flexibility
Next, Thomas pointed out that the company's flexbility: "EOG now has 11 premium options to efficiently deploy capital. Our multi-play options enhance our ability to deliver strong returns and growth, consistently and sustainably over the long haul." Overall, the company has high-return drillable inventory across six major oil-producing basins, which gives it the flexibility to adjust to changing market conditions. EOG Resources' versatility is proving to be an important strategic competitive advantage as capacity constraints affect rivals in key basins like the Permian. However, by having the flexibility to shift capital around to other regions, EOG Resources can continue to deliver high-return growth in the coming years.
Image source: Getty Images.
4. We're not deviating from our discipline
Thomas then stated: "We're committed to a disciplined growth strategy. For the remainder of the year, and as we look to start planning for 2019, you should expect EOG to remain disciplined about growth and capital allocation to maximize returns." EOG's focus is drilling for returns. Because of that, the company will not boost spending just because oil prices are on the rise. Instead, it will carefully allocate capital so that it can earn the highest returns possible, even if that means it's not growing production as fast as it could.
5. Our goal is to create wealth for investors
Thomas concluded his remarks by stating:
Executing our premium strategy will grow production and cash flow, produce double-digit ROCE (return on capital employed), and fund dividend growth. More importantly, we can consistently deliver this performance over the long term and through commodity price cycles. We believe that is unique, not just in the E&P industry, but in any industry. And it is perfectly aligned with our ultimate goal to create significant shareholder value.
The reason EOG Resources focuses on investing to earn high returns is that this is what creates shareholder value. Not only will it enable the company to grow earnings and cash flow at a high rate, but it will allow the company to increase its dividend. EOG believes that by putting a priority on earning high investment returns, it will be able to generate substantial value for shareholders, which is exactly what investors want.
A top stock for the long haul
EOG Resources isn't like most oil stocks. Instead of focusing on growing production as fast as it can, the company aims to earn the highest returns on its investments as possible. That approach has allowed it to consistently outperform the stock market over the years, and has it set up to thrive in those to come.
