ConocoPhillips (COP 2.44%) and EOG Resources (EOG 4.09%) are two of the country's largest independent exploration and production (E&P) companies. They have two of the biggest and lowest-cost resource positions in the industry. Because of that, they produce a lot of cash, which provides them with money to return to shareholders.
While they are two of the top energy stocks, most investors will likely only want to hold one in their portfolio. Here's a look at which one is the better buy right now.
Image source: Getty Images.
Growth visibility through the end of the decade
ConocoPhillips believes it has built an oil company that can thrive in any environment. It has an unmatched resource portfolio in the lower 48 states. When it comes to Tier 1 acreage (highest quality), ConocoPhillips holds the No. 1 position in the Delaware and Eagle Ford, No. 2 in the Bakken, and No. 3 in the Midland. It also operates in Alaska, has a growing global liquefied natural gas (LNG) business, and other operations around the world. Its diversified portfolio has low costs (it has decades of inventory with a cost of supply below $40 a barrel) and balances short-cycle growth (unconventional shale development in the lower 48) with long-cycle growth (Alaska and LNG).
The company's long-cycle growth gives it lots of visibility into its ability to grow its free cash flow in the coming years. ConocoPhillips estimates that Alaska and LNG will help drive $6 billion in incremental annual free cash flow through 2029, assuming oil averages $70 per barrel (just below the recent price point). That's a sector-leading free-cash-flow growth profile.
ConocoPhillips plans to return a meaningful portion of its rapidly rising free cash flow to shareholders. The company aims to grow its dividend, which already yields more than 3%, within the top 25% of companies in the S&P 500. It also plans to repurchase over $20 billion of its stock in the next three years. That's enough to completely wipe out the additional shares it issued to acquire Marathon Oil last year.
A three-year plan to boost its free cash flow
EOG Resources primarily focuses on the lower 48 states. It has positions in the Powder River Basin, Delaware Basin, Eagle Ford, Utica, and Dorado. It also has offshore oil and gas operations in Trinidad and Tobago and recently won an onshore exploration concession in the UAE.
EOG Resources primarily grows by organically exploring for oil and gas throughout the lower 48 states. It focuses on finding the highest-quality acreage before anyone else. That strategy enables it to acquire land at minimal cost, setting it up to generate high investment returns on new wells.
The company has recently deviated slightly from that strategy by making bolt-on acquisitions to expand its operations in key areas. It agreed to buy Encino Acquisition Partners for $5.6 billion to transform it into a leader in the Utica. EOG also made a smaller bolt-on acquisition in the Eagle Ford to bolster its position in that region.
Those deals will enhance EOG Resources' already low-cost resource base, which produces a lot of free cash flow. The company believes it can generate between $12 billion and $22 billion of cumulative free cash flow in the 2024 to 2026 time frame if oil averages between $65 and $85 per barrel. That positions the company to grow its free cash flow per share at a more than 6% annual rate.
Given its strong balance sheet even after the Encino deal, EOG will likely return most of its growing excess free cash flow to shareholders. It primarily does that by paying dividends. The company has grown its dividend twice as fast as its peer group average since 2019. It raised its payment by 7% earlier this year and by another 5% after unveiling the highly accretive Encino deal. Those raises pushed its yield further above 3%. The company will also return additional cash to shareholders via opportunistic share repurchases and occasional special dividends.
Two terrific options
ConocoPhillips and EOG Resources are two of the best-run companies in the oil patch. They have strong resource positions and great balance sheets, which enable them to generate a lot of cash, the bulk of which they return to shareholders. They also have lots of growth ahead.
However, of the two, ConocoPhillips stands out as the better oil stock to buy right now. Its investments in LNG and Alaska increase its diversification and add more visibility to its growth potential in the coming years. Because of that, it should be able to continue growing its dividend at a high rate through the end of the decade while also buying back a meaningful amount of shares each year. That could give it the fuel to produce a higher total return than EOG over that period.
