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

EOG
Better historical revenue growth from Resources, a higher operating cash flow margin and a lower debt ratio, Trefis believes that EOG shares are a better buy than COP. We compare a multitude of factors such as historical revenue growth, returns and valuation multiple in an interactive dashboard analysis, EOG vs ConocoPhillips resources: industry peers; Which action is a better bet?

1. Income growth

EOG Resources’ growth was much stronger than that of ConocoPhillips

COP
In recent years, EOG’s revenue has grown at an average rate of 31%, from $ 7.6 billion in 2016 to $ 17.3 billion in 2019. ConocoPhillips revenue has seen an average growth rate by 11%, from $ 23.6 billion in 2016 to $ 32.5 billion in 2019. In 2020, EOG Resources and ConocoPhillips reported a decline in their revenues of 36% and 47%, respectively.

  • 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?)

3. Risk

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.

What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has been regularly beating the market since 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates


Source link

Steve R. Hansen