Betting On Oil Stocks? Fundamentals Favor EOG Resources

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EOG Resources

The shares of EOG Resources (NYSE: EOG) and ConocoPhillips (NYSE: COP) currently trade 15% above pre-Covid levels observed in January 2020. Both companies are in the independent exploration and production business with operations in the U.S., Middle East, Europe, and Asia. As the finances of oil companies depend on benchmark prices, the recent stock price surge has been assisted by their strong domestic presence and rising transportation demand. Given EOG Resources’ better historical revenue growth, a higher operating cash flow margin, and lower debt-to-equity ratio, Trefis believes that EOG stock is a better buy over COP. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, EOG Resources vs ConocoPhillips: Industry Peers; Which Stock Is A Better Bet?

1. Revenue Growth

EOG Resources’ growth has been much stronger than ConocoPhillips in recent years, with EOG’s revenues expanding at an average rate of 31% from $7.6 billion in 2016 to $17.3 billion in 2019. ConocoPhillips’ revenues have observed an 11% average growth rate from $23.6 billion in 2016 to $32.5 billion in 2019. In 2020, EOG Resources and ConocoPhillips reported a 36% and 47% revenue decline, respectively.

  • EOG Resources’ three operating segments, United States, Trinidad, and Other International, contribute 97%, 2%, and 1% of total revenues, respectively. Nearly 98% of $36 billion in assets are located in the U.S.
  • ConocoPhillips’ five operating segments, Alaska, Lower 48, Canada, Europe, and the Asia Pacific, contribute 17%, 48%, 5%, 16%, and 14% of total revenues, respectively. Despite 65% revenue contribution, just 43% of total assets are located in the U.S. Moreover, Alaska, Lower48, Canada, Europe, Asia Pacific, and Corporate segments account for 23%, 19%, 11%, 14%, 18%, and 14% of total assets, respectively.
  • ConocoPhillips has a diversified geographic presence as opposed to EOG Resources.
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2. Returns (Profits)

Comparison of cash generation capabilities is more important than profitability as both companies return a sizable share of their operating cash flow to shareholders. In 2019, EOG Resources generated $8 billion of operating cash from $17 billion in total revenues – implying an operating cash flow margin of 47%. Whereas, ConocoPhillips reported $36 billion in total revenues and $11 billion of operating cash flow resulting in a margin of 30%.

  • Interestingly, EOG Resources’ cash generation capabilities are significantly better than ConocoPhillips largely due to lower production costs.
  • In 2019, EOG invested $6.3 billion in property, plant & equipment and returned $613 million to shareholders in dividends & buybacks. Thus, dividend payouts account for 7% of the total cash from operations. Notably, the company has been investing in new properties as well as repaying long-term debt in recent years.
  • In 2019, ConocoPhillips utilized $3.2 billion in investing activities and returned $3.5 billion through dividends & buybacks to shareholders. Thus, the company returned 47% of its operating cash to shareholders. (related: Is First Solar Stock A Good Pick In A Post-Pandemic World?)

3. Risk

In 2020, EOG Resources and ConocoPhillips reported a 0.25 and 0.50 debt-to-equity ratio, respectively.

  • Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
  • While high benchmark prices are a boon for ConocoPhillips stock, the downside risk remains low if investing in EOG Resources.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

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