While ConocoPhillips (NYSE: COP) is the world’s largest publicly traded pure oil and gas producer, I have stated on many occasions that I think the second-largest, EOG Resources (NYSE: EOG), is the best. I have both in my portfolio, and I have been adding to my EOG position over the past year. Today I want to discuss it in more detail given last week’s earnings release.

As I noted in a July article in The Energy Strategist, EOG stacks up well among the top 10 oil and gas producers in the U.S. Since then, a number of companies have released earnings, so here is an updated top 10 ranked by enterprise value (EV) and with data updated through Aug 5:

• EV – Enterprise Value in billions of U.S. dollars as of Aug. 5
• EBITDA – Earnings before interest, tax, depreciation and amortization, in billions for the trailing twelve months (TTM)
• FQ – Fiscal quarter
• Debt – Net debt at the end of the most recent fiscal quarter
• FCF – Levered free cash flow in billions
• YTD Ret – Total shareholder return (TSR), including dividends, thus far in 2016   

Note that EOG outperforms the group averages in all but one category. One notable contrast between this table and the prior one is that free cash flow for the second quarter improved significantly. And, despite the recent weakness in oil prices, several stocks have made strong upward moves since July. One of the fastest risers was EOG, which has led to many articles on the company — both pro and con — indicating a high level of interest in last week’s earnings release.

There was much in EOG’s Q2 earnings release to validate my belief that it’s the best-run U.S. oil and gas producer. Among the highlights:

• Increased its inventory of net premium drilling locations from 3,200 to 4,300.  Premium inventory is defined by a direct after-tax rate of return hurdle rate of at least 30% assuming $40 crude oil prices

• Increased premium net resource potential from 2 billion barrels of oil equivalent (BOE) to 3.5 billion BOE

• Produced 265,400 barrels of oil per day, exceeding the midpoint of the company’s guidance by 2%

• Compared to the year-ago period, decreased lease and well expenses by 23%, transportation costs by 13% (both on a per-unit basis), and total general and administrative expenses by 5%

• Reduced exploration and development expenditures by 49% year-over-year, while crude oil production declined just 4%, and natural gas production slipped 5%

• Reduced net debt by $111 million from the previous quarter.

The single biggest piece of positive news in the earnings release was the huge increase in the number of premium drilling locations, indicating that EOG has survived the bear market in good shape and is poised to resume the strong growth it displayed prior to the plunge in oil prices. The company also generated more than $300 million in free cash flow for the second quarter after two straight quarters of negative FCF. Among the Top 10, EOG is the only producer to have generated strong FCF over the past year.

Overall, this was a very strong quarter for EOG, especially considering that the company’s average realized oil price dropped to $43.65/bbl in Q2 from $57.45/bbl a year ago. The only red flag is that the stock continues to trade at a premium to peers, so this isn’t one for bargain hunters. Nevertheless, EOG Resources is a company that has proven to be adept at surviving a long downturn in oil and gas prices and in thriving during better times.

While the stock is currently trading near its 52-week high — leading some to conclude that it has gotten ahead of itself given recent weakness in oil prices — this is one I wouldn’t hesitate to add to my portfolio in the event of a pullback in the next few months. Please consider subscribing to The Energy Strategist, where EOG Resources has a total return of 171% since joining our Growth Portfolio.

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