EOG Resources (EOG -1.48%) switched gears a few years ago from focusing on growing as fast as possible to drilling the highest returning wells it could. This strategy shift has paid dividends by enabling the company to produce more cash at lower oil prices. That was evident in its fourth-quarter results.

A closer look at EOG Resources' fourth-quarter results

Metric Q4 2019 Guidance or Expectations at the Midpoint
Oil production 455,000 barrels per day 459,500 to 469,500 barrels per day (BPD)
Adjusted earnings per share $1.35 $1.19

Data source: EOG Resources. 

EOG Resources once again produced better-than-expected quarterly results. Not only was its U.S. oil production toward the top end of its guidance range, but it also easily beat the analysts' consensus earnings estimate.

Overall, its oil production rose 8% year over year during the quarter thanks to solid drilling results across all its operations because of continued improvement in well productivity. EOG also keeps driving down operating costs, which helped it earn more money. For the full year, EOG's oil production rose 15% while its cash operating costs declined by 6%. 

The energy company generated $2.1 billion of cash flow during the quarter. It invested $1.4 billion of that money into drilling more high-return wells and building out related infrastructure, enabling it to generate more than $700 million in free cash. For the year, EOG produced $1.9 billion of free cash flow. It used some of that money to pay a growing dividend and retire $900 million of debt when it matured last year. The rest piled up on its balance sheet, allowing it to end the year with slightly more than $2 billion of cash against $5.2 billion of debt.

An oil pump at sunset.

Image source: Getty Images.

A look at EOG Resources' outlook

Given the slump in oil prices this year, EOG Resources plans to shift how it allocates its capital expense budget. The company plans to invest between $6.3 billion and $6.7 billion on drilling new wells and building more infrastructure, which is a bit higher than last year's capital spending level of $6.2 billion. However, it intends to allocate less money on drilling and completing wells and more toward infrastructure and exploration projects.

This spending shift will result in a lower U.S. oil production growth rate of 12% this year. However, it will help boost its overall returns by delivering sustainable cost reductions and operational efficiencies.

EOG Resources can finance its capital spending budget and its dividend, -- which it will increase by another 30% for 2020 -- on the cash flows it can produce if oil averages $50 a barrel. While that's below its recent level of around $45 a barrel, crude oil started the year above $60 a barrel before plunging over concerns that the coronavirus outbreak would affect oil demand this year. If crude remains below $50 a barrel, EOG Resources has the financial flexibility to cover a sizable shortfall thanks to its cash-rich balance sheet. It has such a big cushion that it plans to use $1 billion of those funds to retire debt that's maturing this year, leaving it with about $1 billion to help cover its capital budget before it would need to reduce spending.

Meanwhile, if oil prices bounce back, EOG Resources' capital program would produce excess cash above that $50 a barrel baseline level. At an average oil price of $55 a barrel, the company would generate $800 million in free cash this year. It could use that money to acquire more high-return drillable acreage, repurchase shares, or retire additional debt beyond its current plan. That debt reduction strategy has the company on pace to pay off $1 billion in debt when it matures this year and another $750 million debt maturity in 2021 so that it can achieve its targeted debt level of $3.4 billion, which would be $3 billion below 2017's level.

Ready for whatever may come this year

EOG's focus on investing to generate high returns continues to pay dividends. The company was able to produce lots of free cash last year, which gave it the funds to grow its production, pay off debt, and significantly increase its dividend, with plenty of money leftover. Now it has a nice cushion heading into 2020, which gives it the flexibility to continue investing in a lower oil price environment. Meanwhile, if oil prices rebound, EOG's cash flow machine will kick into high gear. That ability to thrive in the current oil market makes EOG one of the better oil stocks out there.