The potentially impending conflict between Ukraine and Russia has pent-up demand for energy leading the way for Brent benchmark to surpass $90 per barrel and pushing upstream oil & gas stocks higher including EOG Resources (NYSE: EOG). Along with increasing production, the company is likely to boost capital expenditure in 2022 as high benchmark prices assist cash generation and profitability. The company’s oil, natural gas, and natural gas liquids account for 47%, 25%, and 28% of the 3,220 MMBOE of total proved reserves, respectively. Also, the company’s 98% of the proved reserves are located in the U.S. Thus, an uptick in oil and natural gas prices is likely to benefit EOG stock in the near-term. Per the Trefis machine learning engine which analyzes historical stock price movements, EOG stock has a 70% chance of a rise over the next month (twenty one trading days). See our analysis EOG Resources Stock Chance of Rise for more details.
Below you’ll find our previous coverage of EOG stock where you can track our view over time.
[Updated 01/04/2022] – EOG Resources Stock Is A Good Addition To Energy Portfolio
Last year, EOG Resources (NYSE: EOG) introduced the double-premium strategy which targets wells that have a potential to provide a return of 60%. Benchmark prices have remained volatile lately due to multiple waves of the pandemic and an uncertain transportation and industrial demand environment. After observing a sharp drop, Brent reached the highs of $85/bbl assisted by favorable macroeconomic conditions and pent-up demand in October 2021. EOG’s revenues depend on benchmark oil prices and hence the oil & gas business’ asset returns fluctuate every year. The Brent benchmark increased from $54 in 2017 to $71 in 2018, remained slightly lower at $63 in 2019, and subsequently declined to $41 in 2020. EOG reported an ROCE (return on capital employed) of 13.4%, 15.8%, 11.8%, and –1.9% in 2017, 2018, 2019, and 2020, respectively. Considering the company’s aggressive capital allocation strategy and rising production in the U.S., Trefis believes that the stock is a good addition to an oil & gas portfolio.
[Updated 11/10/2021] – Betting On Oil Stocks? Fundamentals Favor 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.
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?)
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.
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