U.S. oil giant EOG Resources (EOG -3.75%) has significantly outperformed the S&P 500 since it declared its independence from Enron in 1999, with shares gaining roughly 4,000% over that time frame versus about a 650% return by the broader market.
While oil price volatility has caused its stock to underperform in recent years, EOG believes it has the right resources and business model to create long-term value for its shareholders. On the company's third-quarter conference call, CEO Bill Thomas said, "EOG [is] a unique and compelling investment, not only in the [exploration and production] industry, but in the broader market."
Thomas laid out his case on the call, identifying six reasons the company believes it can outperform in the future.
1. It's cracking the code to maximize value
Thomas started by saying:
We are making significant progress on optimizing well spacing in the Delaware Basin and other plays. We're breaking the code on how to increase well productivity and lower finding and development costs while optimizing [net present value]. We feel next year, our capital efficiency will be much improved.
One of the keys to increasing the value of the company has been EOG's ability to maximize the recovery of the oil and gas underneath its acreage. The company has spent years testing how close it can space wells together and how long it should drill them horizontally to optimize recovery. Those efforts have enabled the company to boost its estimated resource recovery per well from 625,000 barrels of oil equivalent (BOE) in 2016 up to 970,000 BOE this year, while more than tripling the number of high-return wells it can drill on its land.
2. It continues to reduce costs
Then Thomas stated that "we are on track to reduce well costs 5% by year-end 2018, and we believe we can continue to reduce costs further in 2019." While rivals have been fighting cost inflation, EOG has worked hard to drive down expenses by becoming more efficient and leveraging its large-scale operation to lock in lower prices with contractors. Because of that, it can produce more oil with less money than most peers.
3. It continues to discover more oil
Thomas also said:
As we demonstrated last quarter, with the addition of the Powder River Niobrara and Mowry plays, the company continues to organically add significant new high-return, premium drilling inventory much faster than we're drilling it. More importantly, EOG's inventory is growing in quality, not just quantity. Better rocks make better wells and enhance the company's ability to deliver higher returns in the future. And we are encouraged with the new ideas we're generating through our exploration efforts.
EOG continues to be an industry leader in uncovering new low-cost shale resources. Because of that, the company earns higher drilling returns than rivals, which typically wait until others make a discovery and then pay a premium for that drillable land.
4. It's always striving to improve
Next, Thomas noted that: "EOG's unique innovative culture, real-time data gathering, advanced analytics, and quick deployment of new ideas to the field are delivering sustainable cost and productivity improvements across the company. The combination of our pleased-but-not-satisfied culture and industry-leading information technology is delivering sustainable results and provides a significant competitive advantage for the company."
While oil production is a commodity business, EOG Resources is always on the lookout for things that give it an edge over rivals. That's pushed it to become a leader in using new technology in the oil field to boost its results. Those investments continue to pay big dividends for the company and have helped it capture an average of $2.72 per barrel more than its peers over the past few years.
5. It's one of the lowest-cost producers in the world
Thomas then said: "We're systematically resetting the company's performance to be one of the lowest-cost producers in the global oil market. Step by step, we believe we're continuously improving the company to produce strong returns through the commodity price cycles."
EOG's efforts to focus on organic growth, while using technology and other means to drive down costs, have turned it into one of the lowest-cost oil producers in the world. Currently, it costs the company around $9.25 per barrel to produce oil, which is down 28% since 2014. Because of that, and its low finding costs, the company can generate a 30% return on new wells on only $40 oil.
6. It's a high-return, high-growth cash flow machine
Thomas concluded by saying "our third-quarter results demonstrate EOG's ability to deliver strong double-digit return on capital employed, strong double-digit production growth, and generate free cash flow." Overall, the company is on pace to earn a more than 10% return on capital employed this year, which will enable it to grow its oil production by 19% while generating more than $500 million in free cash flow. The company is using that excess cash to retire more debt while also growing its dividend at a fast pace.
An oil stock you won't want to overlook
Thomas believes that "this combination is rare in the energy sector and places EOG in line with the top performers in any sector of the market." That's why he believes the company has the potential to create significant long-term shareholder value.