Bet on oil stocks? Fundamentals favor EOG resources
Actions of EOG Resources (NYSE: EOG) and ConocoPhillips (NYSE: COP) are currently trading 15% above pre-Covid levels seen in January 2020. Both companies are in independent exploration and production with operations in the United States, the Middle East, Europe and in Asia. As the finances of oil companies depend on benchmark prices, the recent surge in stock prices has been helped by their strong national presence and growing demand for transportation. EOG given
1. Income growth
EOG Resources’ growth was much stronger than that of ConocoPhillips
- EOG Resources’ three operating segments, the United States, Trinidad and Other International, respectively contribute 97%, 2% and 1% of total sales. Almost 98% of the $ 36 billion in assets are located in the United States
- ConocoPhillips’ five operating segments, Alaska, Lower 48, Canada, Europe and Asia-Pacific, respectively contribute 17%, 48%, 5%, 16% and 14% of sales. total business. Despite a 65% contribution to income, only 43% of total assets are located in the United States. In addition, the Alaska, Lower48, Canada, Europe, Asia-Pacific and Corporate segments represent 23%, 19%, 11%, 14%, 18%, and 14% of total assets, respectively.
- ConocoPhillips has a diverse geographic presence as opposed to EOG Resources.
2. Returns (Profits)
The comparison of cash-generating capabilities is more important than profitability, as both companies return a significant portion of their operating cash flow to shareholders. In 2019, EOG Resources generated $ 8 billion in operating cash out of $ 17 billion in total revenue, implying an operating cash flow margin of 47%. While ConocoPhillips reported total revenue of $ 36 billion and operating cash flow of $ 11 billion, 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 and equipment and returned $ 613 million to shareholders in the form of dividends and buybacks. Thus, dividend distributions represent 7% of total operating cash. Notably, the company has invested in new properties and has paid off its long-term debt over the past several years.
- In 2019, ConocoPhillips used $ 3.2 billion of investing activity and returned $ 3.5 billion in dividends and share buybacks. Thus, the company returned 47% of its operating cash to shareholders. (Related: Is First Solar Stock a good choice in a post-pandemic world?)
In 2020, EOG Resources and ConocoPhillips reported a debt ratio of 0.25 and 0.50, respectively.
- Higher financial leverage coupled with continued income growth is a boon for generating excess returns from stocks. However, interest charges take a toll on finances as income declines, limiting dividend payments and capital spending.
- While the high benchmark prices are a boon to ConocoPhillips shares, the downside risk remains low if you invest in EOG Resources.
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