While 2014 wasn't overly kind to energy investors, some energy stocks actually performed pretty well. EOG Resources' (EOG -0.02%) stock, for example, finished solidly in the black, despite taking shareholders on a wild ride. In fact, when all was said and done, the company's total return (including dividends) just barely underperformed the broader market last year:
While EOG Resources' stock ended the year vastly lower than the nearly 45% return investors had enjoyed through early summer, at least it didn't end the year with the 50% haircut so many other oil stocks endured. Here's a look at why the company did not crash as badly as some of its peers when the price of oil plunged.
Superlative performance
Over the past four quarters I have called EOG Resources' quarterly results stellar, outstanding, surprising, and a gusher. The company has been firing on all cylinders, taking full advantage of its prime position in the top U.S. shale plays to exceed expectations every quarter. Clearly, I'll need to start using a thesaurus if the company keeps outperforming.
Particularly impressive, EOG is not only drawing more oil out of its legacy shale plays, but it finds new plays to drive future growth. In the past year alone, the company uncovered five additional oil targets, including four in Wyoming. Those four plays alone are estimated to hold about 400 million barrels of oil equivalent, as shown on the slide below.
Source: EOG Resources Investor Presentation.
Furthermore, these plays provide strong returns even if returns are reduced due to current oil prices.
Pillars of strength
One of the primary reasons EOG Resources' stock did not crumble last year was because the company can still make decent money even if oil prices keep dropping, as this slide illustrates.
Source: EOG Resources Investor Presentation.
Several of the company's plays remain adequately profitable even if the price of oil falls below $40 a barrel. That said, the collapse of the price of oil will likely put a damper on the company's continued outperformance: instead of earning 100%+ returns, its profitability is now going to be much lower for the foreseeable future. However, not many of EOG's peers can make any sort of decent profit drilling in the current environment, and the company's large inventory of future wells and strong balance sheet give it plenty of flexibility.
EOG Resources' balance sheet is the other major reason the stock nearly outperformed the market last year. The company has fairly low debt levels, as it invested within its cash flow instead of piling on debt like so many of its smaller rivals. These rivals are in serious trouble now that this debt has become a big weight, which could lead to a massive energy bond default wave over the next year if oil prices don't improve. Because EOG's debt isn't an issue, the company can continue to focus on profitable returns instead of on staying afloat -- making it a safe haven for energy investors.
Investor takeaway
If the price of oil had not rolled over, it's quite likely EOG Resources' stock would have vastly outperformed the market last year. That said, the company remains one of the best-positioned oil companies in the country thanks to unparalleled access to low-cost oil and a strong balance sheet. This should enable EOG to pursue further growth at a time when many of its peers are forced to retrench.
