NOG - EOG Resources: Well-Positioned For Continued Growth

2023-08-28 17:02:14 ET

Summary

• EOG Resources is one of the largest producers of oil and natural gas in the United States and continues to deliver superior results.
• The company is focused on growth in its Permian Basin positions similar to other companies while exploring new possibilities such as its Utica Shale Combo Play.
• EOG Resources is a company worth holding long-term through market cycles thanks to the culture it has created centered around growth through entrepreneurship and capital discipline.

EOG Resources ( EOG ) is one of the largest producers of oil and natural gas in the United States. In fact, in a press release in 2016, it claimed to be the largest producer of oil in the contiguous 48 states. Like me, you might have thought that that title belonged to a giant oil company like Exxon Mobil. That said, I'm not sure if EOG Resources still holds that title but nonetheless, they are undoubtedly still one of the largest.

Brief History of EOG Resources

EOG Resources has an interesting history. They were spun-off of Enron in 1998 and kept the name Enron Oil and Gas but abbreviated their name to EOG Resources. Given Enron's mire that it had gotten itself into, this was an appropriate dissociation. And although they were a subsidiary of Enron, their history preceded Enron. However, for this article, I will only discuss their more recent history.

In 2002, EOG Resources opened their first international office in Trinidad and Tobago. Trinidad and Tobago are small island nations just off the coast of Venezuela. Although Trinidad and Tobago are not the same as Venezuela, it is interesting that EOG has operations so close to Venezuela and Guyana, where the largest remaining conventional oil reserves anywhere in the world are found. Who knows what will come of this.

While EOG Resources was opening an office in Trinidad and Tobago in 2002, Devon Energy was quietly unleashing the horizontal gas shale boom in the Barnett Shale with its acquisition of Mitchell Energy.

In 2003, EOG dove into the Barnett Shale and by 2004, they had managed to lease 400,000 acres in the play. By 2009, EOG Resources was the second most active operator in the Barnett Shale on a per well basis. While EOG Resources was jumping on the opportunity of shale gas, they were also quietly researching how horizontal drilling and fracking technology could be applied to shale rock that contained a greater concentration of hydrocarbon liquids such as oil. They were exploring north of the Barnett Shale in a play they called the Barnett Combo Play, named for the fact that it yielded both natural gas and oil.

They were also experimenting in the Bakken Shale as well as discovering a completely new liquids-rich play in South Texas called the Eagle Ford. In fact, although Devon Energy and Mitchell Energy get full credit for discovering horizontal drilling and fracking in 2002, I would say EOG Resources gets credit for discovering how to unlock oil from shale rock in 2008 and 2009. There was also a company who has since been acquired called Brigham Exploration who was known for using new techniques in the Bakken Shale play. That said, the Bakken Shale creates a shale sandwich around a sandstone formation which was what was commonly accessed and exposed with horizontal drilling at that time.

Free Cash Flow and Dividend Growth

EOG Resources produced $7.6 billion in free cash flow in 2022 and was able to return $5.1 billion back to shareholders through dividends and share buybacks. They were also able to replace 244% of their oil production in 2022 with new oil discoveries. EOG Resources continues to perform like a machine.

The chart below demonstrates how they have consistently returned greater and greater dollar amounts to shareholders. This chart also demonstrates how EOG has been able to consistently grow their free cash flow which is where dividends are paid.

For the past decade, EOG has consistently had a lower dividend rate relative to some of their peers. For example, their annual dividend right now is 2.5% of their share price. This is lower than competitors like ConocoPhillips and Devon Energy, but EOG has historically been much more disciplined with capital and so although they have a lower dividend now, when you study the chart above, if you hold the stock for a decade, the dividend as well as the stock price will probably be higher than if you chased a higher dividend paying E&P company.

The point is, unless you absolutely need the income from the dividend, don't be blinded by a higher dividend yield.

Balance Sheet

Speaking of EOG's capital discipline, year in and year out, EOG Resources remains disciplined with their balance sheet. EOG is rarely enticed into chasing production or acquisitions at the expense of their balance sheet. They are not flung around by the whims of oil market booms and busts. They continually maintain asset-to-debt ratios less than 50%. Below is a chart that proves their discipline.

Companies that remain this disciplined throughout the boom and bust cycle are difficult to find. Most companies are very reactive and so when oil prices rise, they go on a spending spree. This results in constantly diluting shareholders via new shares and purchasing assets in the oil booms, rather than the busts. And unfortunately, for many companies, it can create a vicious repeating cycle.

This slide below from EOG's 2022 Q4 results demonstrate EOG's consciousness surrounding their balance sheet

For greater historical context, I've gone through every end-of-year result for EOG Resources since 2013 and calculated their asset-to-debt ratio. In 2015, they reached their highest ratio at 0.52 and since then have continually used cash flows each year to bring their debt-to-asset ratio lower. It increased slightly in 2020 as oil prices and the economy took a dive.

EOG Resources Debt-to-Asset Balance Sheet Ratios Each Year

Thus far through 2023, the company has brought the asset-to-debt ratio down to 0.36 indicating that they have had a very strong year thus far.

Growth

Like other oil and gas companies that I'm bullish on, EOG Resources holds noteworthy positions in strong plays. And they too, are focusing most of their energy and capital in the Permian region to maximize shareholder returns.

EOG Resources acquired Yates Petroleum in 2016 and the acquisition catapulted EOG's net acreage in the Permian Basin to 574,000 acres. Today, it is likely much higher than that.

At the end of 2022, EOG announced that they have acquired over 400,000 in a new liquids-gas combo play in the Utica Shale which will be something to watch over the coming years. To acquire 400,000 acres may signal that this is something significant and based on their track record for exploration, it's probably worth keeping an eye on.

Conclusion

EOG Resources has a bright future. They are creating strong returns for shareholders and are returning cash to shareholders via a dividend and share buybacks in a sustainable fashion. Holding their stock for the long-term should create some fantastic returns via dividends as it continues to increase exponentially while providing stock appreciation as well.

In my last article , I spoke about Northern Oil and Gas and how I think it is a great leveraged play to hold if you are bullish on oil prices . However, it wasn't the kind of company I would want to hold through the entire cycle of rising and falling oil prices. I only say that to say that EOG Resources IS the kind of company I wouldn't mind holding for multiple decades with little concern for wild swings in oil prices. And this is due to several factors but primarily this is due to their commitment to maintaining a strong balance sheet.

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