EOG Resources (EOG 0.02%) is one of the lowest-cost oil producers in the country. Because of that, it's cashing in on high oil prices these days. That's giving it a growing windfall of excess cash.

Instead of continuing its piecemeal plan of paying out an occasional special dividend, EOG Resources has firmed up its capital-return framework to provide investors with more transparency. Under this new plan, it could send them $4.8 billion this year if current oil and gas pricing holds.

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Another cash flow gusher

EOG Resources recently reported strong first-quarter results. The oil company produced an average of 883,000 barrels of oil equivalent per day (BOE/d) during the first quarter. That was above the midpoint of its 874,000 BOE/D guidance range. It was also 2.3% higher than its fourth-quarter output and 13.4% above the year-ago level.

That rising production enabled EOG Resources to cash in on higher oil prices. Crude prices averaged $94.38 per barrel in the quarter, up more than 20% from the fourth quarter. Because of that, it was able to generate $3.4 billion of cash flow from operations. That was enough money to fund its $1 billion capital program with $2.4 billion to spare.

The company returned $1 billion of that money to shareholders via dividends. It paid a regular quarterly dividend of $0.75 per share and a special dividend of $1.80 per share. Meanwhile, it ended the quarter with over $4 billion in cash against $5.1 billion in debt.

Firming up the capital-return strategy

Given its strong cash flows and cash position, EOG Resources wants to put more structure around its capital-return program. While the company has consistently paid a quarterly dividend, it started supplementing that payment with special dividends last year. It paid out $1.8 billion in special dividends in 2021, enhancing its $900 million in quarterly dividend payments.

The company now plans to return a minimum of 60% of its free cash flow to shareholders each year. Given where oil prices are these days, it would need to pay out more than $4.8 billion to hit that target this year. The company can use the remaining 40% of its free cash flow to further strengthen its balance sheet, make low-cost property bolt-on acquisitions, or for an additional cash return.

EOG Resources is already on track to return about $1.7 billion to shareholders through its quarterly base dividend. The company has delivered a stable and growing dividend for the past 24 years.

While it hasn't increased the payment every year, EOG has never suspended or reduced its dividend, a rarity in the oil patch. It currently pays one of the more attractive base dividends in the industry. Its dividend yield of around 2.4% is higher than the S&P 500 (1.3%) and its peer-group average (1.4%).

While the regular dividend remains the company's primary method of returning cash to shareholders, EOG Resources is joining a growing number of peers in setting a target to pay out a percentage of its free cash flow. They're all taking different approaches to achieve that goal.

For example, Devon Energy (DVN -0.94%) and Pioneer Natural Resources (PXD 0.36%) are paying 50% and 75%, respectively, of their post-dividend free cash flow each quarter via variable dividends. Meanwhile, Diamondback Energy (FANG 0.88%) is returning 50% of its free cash flow to shareholders each quarter through a combination of its base dividend, share repurchases, and variable dividends. This strategy is enabling investors to immediately cash in on higher oil prices via those additional cash returns.

EOG's cash returns will likely come via additional special dividends. The company has already declared $2.80 per share of special dividends for the first half of this year. Meanwhile, it sees the potential of paying out at least $2.45 a share to investors in the second half, to hit its 60%-return target.

It could accomplish that through additional special dividends or share repurchases. However, unlike many of its peers, EOG Resources hasn't traditionally utilized buybacks to return capital to investors.

Returning a significant portion of its growing windfall

EOG Resources is the latest oil company primed to return a large percentage of its surging free cash flow to shareholders. It set a target to return at least 60% of its excess cash to investors each year, positioning it to pay out upwards of $5 billion in dividends this year. While future payments will rise and fall with oil prices, EOG is becoming a great name for investors seeking an oil-fueled income stream.