EOG Resources Versus Occidental Petroleum: My Take From An Investor’s Perspective (EOG)
Note: I am a long-term EOG and OXY shareholder and have followed EOG and OXY on Seeking Alpha since 2016.
As someone who invests in oil, I’ve always been curious about which options – OXY and EOG – would be the better investment based on selected technical and financial considerations. In this article, I’ll be sharing my analysis.
Although I own both OXY and EOG, I believe EOG is the clear winner from a long-term investing perspective.
Their business is comparable even though they have chosen different paths to reach their objectives. Nonetheless, the main issue differentiating them is the long-term financial impact of their expansion strategy on shareholders. In other words, which company delivered the best long-term return on investment at the lowest risk?
Why do I believe that EOG Resources is a better choice in the long term?
Both companies are regarded as among the U.S.’s most efficient oil and gas producers and are excellent long-term investments. Hence, investing in OXY or EOG will be fine, no matter what.
You can access my article on OXY’s CrownRock acquisition by clicking here.
Occidental Petroleum’s business consists of three major segments, not just oil and gas, albeit both companies get the lion’s share of their revenues from the U.S. onshore. EOG is a pure O&G domestic producer with only a tiny international production of 24.3K Boepd in Trinidad in 3Q23.
The third quarter of 2023 revenues show that Occidental Petroleum generated 20% more revenue than EOG. However, OXY’s U.S. oil and gas sales revenue was only $5.6 billion, as shown in the chart below.
Again, it’s important to note that EOG Resources’ revenue comes solely from oil and gas sales.
EOG Resources, unlike its rival OXY, has delivered strong and steady returns to its shareholders.
One of the main reasons for this difference is that EOG expanded its operations through organic growth rather than acquisitions. Meanwhile, OXY, led by CEO Vicki Hollub, followed a different strategy with less favorable outcomes for its shareholders.
I think acquiring Anadarko at a high price was a bad decision, which caused OXY to stop paying dividends. However, they have resumed paying a quarterly dividend of $0.18 per share in 3Q23, and it is expected to increase to $0.22 per share beginning with the February 2024 declaration. A yield below estimated at less than 2%.
Conversely, EOG Resources has never missed a dividend payment and raised the quarterly dividend to $0.91 per share with a payment of $1.50 per share in a special dividend. A yield estimated at 7.8%.
Let’s look at the chart comparison below:
Data by YCharts
I chose a 5-year chart instead of a 1-year chart because It clearly illustrates the effect of critical decisions such as the Anadarko acquisition in 2019.
EOG gained 28.7% during the same period, while OXY lost 6.4%, showing that the five-year return is not beneficial for OXY. Furthermore, I did not include the dividend impact in the chart above, another significant benefit to EOG Resources, which paid a yield of about 8% in 2023, including a special dividend.
Balance sheet and production comparison
Occidental Petroleum has used acquisitions to expand, but not necessarily in its shareholders’ favor. Recently, OXY announced acquiring CrownRock LP for approximately $12 billion. The deal details were made public on December 11, 2023, via the following press release:
The transaction’s total consideration is approximately $12.0 billion. Occidental intends to finance the purchase with the incurrence of $9.1 billion of new debt, the issuance of approximately $1.7 billion of common equity, and the assumption of CrownRock’s $1.2 billion of existing debt. The transaction is expected to close in the first quarter of 2024, subject to customary closing conditions and the receipt of regulatory approvals.
OXY will add over 1,700 underdeveloped sites and 170K Boepd of high-quality output by 2024. It will contribute 33% to Occidental’s inventory of Permian unconventional sub-$40 breakeven reserves.
It is worth noting that these secondary international segments will experience a possible contraction in 2024 due to the expected $4.5 billion to $6 billion divestiture, which will be partially used to finance the CrownRock acquisition and reduce debt, which will rise again to nearly $30 billion.
There is no Berkshire Hathaway involvement in the CrownRock deal. On December 13, 2023, Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A), led by Warren Buffett, bought 10,482,162 shares between $55.5822 and $57.0453, suggesting that the transaction was tacitly approved.
Presently, BRK.A. holds 238,533,189 OXY shares and 83,858,849 warrants, accounting for approximately 27% of the basic outstanding share count and about 36.3% when warrants are taken into account based on the share outstanding count (804 million) and before the effects of acquisition by CrownRock. A powerful declaration of Buffett’s confidence and support.
Debt is a significant problem for Occidental Petroleum, unlike EOG Resources, which is projected to have no net debt again in 2024. High debt can be risky and commonly underestimated, particularly when oil and gas prices are high. However, it can become a serious issue during a bearish market for oil prices, which may happen in 2024.
A significant difference between the two companies can be observed if we examine their net debt history.
In 3Q23, Occidental Petroleum’s estimated net debt was $18.45 billion, which is worrying. On the other hand, EOG Resources has a net cash of $1.82 billion. The situation for OXY is expected to worsen as they are set to acquire CrownRock, which will add another $9.1 billion in new debt and print an additional 29 million shares.
However, both companies are exhibiting strong free cash flow generation.
Finally, oil equivalent production is comparable to Occidental Petroleum’s output of about 20% more Boe due to its production in Algeria and Egypt.
Although the recent acquisition of CrownRock will add 170K Boepd to OXY’s production, the divestitures of international assets with a production of about 223K Boepd in 3Q23 will reduce the total production in 2024.
It is unclear what the production will be in 2024, but I believe it will be around 1,350K Boepd or less. EOG Resources, on the other hand, has been steadily increasing production since 2020, reaching 998.5K Boepd in 3Q23.
As I said earlier, investing in OXY or EOG will be fine, no matter what.
However, I enjoy trading OXY but prefer investing in EOG as it seems less risky overall. EOG Resources has an impressive debt profile, with a net cash of $1.82 billion, which will be a significant advantage if the oil market turns bearish. Thus, I feel more confident about holding a long-term position in EOG due to this situation.
Goldman Sachs reduced its price prediction for Brent crude in 2024 by $10 per barrel to $70-90 on December 18, 2023, citing robust production from the U.S. as a factor that would moderate any increase in oil prices.
Additionally, this situation enables the company to firmly secure its quarterly dividend, even if the special dividend could disappear due to lower oil and gas prices.
I can’t say the same for OXY, as it carries a significant risk due to its high debt load. Its debt-to-equity ratio was 0.65x in 3Q23 and could be over 0.75x in H1 2024.
It’s important to remember that the future is unpredictable, and no one can guarantee what might happen. Even if I have explained why EOG Resources is my preferred choice, it may not be a good option in 2024 due to unforeseen circumstances. Therefore, it is advisable to trade LIFO EOG as much as possible. You can use around 30%-40% of your position to take advantage of the frequent swings in the oil market while keeping your core long-term position intact.