EOG Resources (NYSE:EOG) has done an excellent job enriching its shareholders over the past two decades. Investors, for example, who bought $1,000 of the company's stock following its separation from Enron 20 years ago would have seen that grow into more than $25,000 over that time frame, which is much better than the $3,200 they'd have made by investing the same amount into the S&P 500.

That past success sets a high bar for the company. EOG's management team, however, raised the standard even higher as its aim is to be among the best-performing stocks in the S&P 500. CEO Bill Thomas detailed the company's game plan for achieving that lofty goal on the fourth-quarter conference call.

A barrel standing on a grey floor with money bursting out of it with a happy businessman in a celebrating next to it.

Image source: Getty Images.

We want to be one of the best

Thomas led off the call by saying:

Our long-term game plan is simple: be one of the best-performing companies across all sectors in the S&P 500. Our goal is to deliver double-digit returns and double-digit growth throughout commodity price cycles. In addition to high returns and disciplined organic growth, our goal is to generate free cash flow that supports a growing dividend, and an impeccable balance sheet that allows the company to take advantage of other opportunities such as bolt-on property additions that meet our strict premium reinvestment standard or potential opportunities to repurchase shares when value accretive.

While most companies would say that they want to deliver market-beating returns for their shareholders, EOG Resources is aiming even higher by targeting to achieve total returns that rivals the top stocks in the S&P 500. It has a threefold strategy to deliver on that goal.

First, EOG wants to generate double-digit returns on capital employed (ROCE). Last year, for example, the company accomplished that goal by producing a 15% ROCE, which is slightly better than its long-term average of 12% and well above where it has been in recent years because of lower oil prices. Meanwhile, the company made progress on its aim to generate at least a 10% ROCE at lower oil prices, reducing the oil price needed to achieve that baseline 32% since 2016 to just $55 a barrel. It's also targeting to get that level into the $40s in the coming years. 

Second, EOG wants to expand its oil production at a double-digit annual clip. The company also achieved that aim last year as its U.S. oil output jumped 19%. The oil producer sees that trend continuing in 2019 as it's targeting to grow its U.S. oil output by 12% to 16% this year. Meanwhile, the company has about 9,500 high-return drilling locations remaining, which is enough to last it another 13 years at its current drilling pace.

Finally, EOG Resources wants to live below its means so that it can generate free cash flow. It accomplished that goal last year by producing $1.7 billion in free cash, which allowed it to increase its dividend 31% while reducing its net debt to capitalization ratio from 25% to 19%. Meanwhile, the company is on track to do that again this year, since it can fund its returns-focused investment plan as well as its dividend on the cash flows it can produce at an oil price of less than $50 a barrel. EOG plans to use its excess cash to continue increasing the dividend at a more than 19% compound annual growth rate, pay off a total of $3 billion in debt as it comes due through 2021, acquire high-quality acreage to expand its inventory of high-return drilling locations, and repurchase stock if it makes sense to do so. The dividend growth alone has the potential to generate market-beating total returns, since companies that consistently raise their payouts have historically outperformed their stingier peers.

Check out the latest earnings call transcript for EOG Resources.

A formula for success

Thomas concluded his comments by stating that "our goal of double-digit returns, double-digit growth, and free cash flow puts EOG in line with the best companies across all sectors in the market." That's why the company believes it can generate total shareholder returns that rival those of the best-performing stocks, which could enrich investors who hold for the long term.

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