ConocoPhillips (COP 0.02%) and EOG Resources, Inc. (EOG -0.07%) are among the few upstream companies that have adapted well in the new oil price environment. Though both are focused on increasing shareholder returns by growing dividends, their strategies to attain this objective differ. ConocoPhillips has trimmed higher-cost assets and achieved a much lower cost of supply while simultaneously reducing leverage. In comparison, EOG has achieved a much lower cost of supply while continuing to grow production. But which of the two is better?
In the first nine months of 2019, EOG Resources' production rose 15% year over year. The company has also been adding to its proved reserves. Lower costs and increased well productivity have enabled EOG Resources to grow production even when other players are slowing down. The company expects its oil production to grow by 15% in the U.S. in 2020 if oil prices remain around $55 per barrel.
In comparison, ConocoPhillips' oil equivalent production rose just 5% in 2019, after falling for consecutive three years. ConocoPhillips expects a 7% decline in its production in 2020, assuming no contribution from Libya. The company's reserve additions from exploration work was only enough to offset the sale of some U.K. assets. ConocoPhillips' lack of growth is in response to the current market supply and-demand dynamics.
While ConocoPhillips' production numbers look bad on the surface, they aren't that bad. The fall in production largely relates either to asset divestitures or to assets with higher production costs. For example, the company's production in the "big three" unconventional regions -- the Eagle Ford Shale, the Permian Basin, and the Bakken Basin -- grew 22% in 2019. ConocoPhillips expects low single-digit production growth at very low capital investment rates in this decade. The company expects all of the production growth to come from its unconventional plays, while it just aims to keep production relatively flat from its conventional plays.
A key positive for ConocoPhillips is that it has a lower base decline rate. As oil and gas are extracted, the production from wells fall. Over time, a stage comes when its is no longer profitable for the company to keep producing from that well. A lower base decline rate means less capital investments to keep a well profitable. Moreover, it means less exploration expenditures to look for newer resources.
Another point that distinguishes ConocoPhillips from EOG Resources is the leverage of each company. On a comparative basis, EOG looks better placed than ConocoPhillips in terms of leverage. EOG Resources' debt-to-capital ratio stands at around 20% whereas that of ConocoPhillips is around 30%.
However, ConocoPhillips has made considerable progress in reducing its debt levels since 2016, when the company was forced to slash its dividends. The company's long-term debt has come down from $26 billion at the end of 2016 to around $15 billion at the end of 2019. EOG Resources is also committed to continuing to reduce its debt.
It is ConocoPhillips' focus on shareholder returns that the investors find attractive. The stock has outperformed EOG Resources in the last three years, recovering losses from the fall after the dividend cut. Despite the dividend cut, ConocoPhillips' total returns exceed those of EOG Resources over most time frames. ConocoPhillips' focus on lower costs of supply has allowed it to generate high returns on capital employed. What's more, ConocoPhillips expects its ROCE to keep improving over the years due to low single-digit production growth at low capital investment rates.
ConocoPhillips currently offers roughly one percentage point higher yield than EOG Resources. It has a $25 billion share repurchase program in place. EOG Resources also understands the importance of returning value to its shareholders. The company intends to boost its payouts to raise its yield to around 2% as quickly as possible. Both the companies look to be on solid ground for longer-term performance. However, ConocoPhillips looks better positioned from a total returns perspective in the coming few years.