Occidental Petroleum Vs. EOG Resources - How To Play It

| About: Occidental Petroleum (OXY)

Summary

With oil prices staying the mid $30s to low $40s which company has the best production break-evens.

Both EOG and OXY have strong balance sheets and are well positioned to weather the low price environment.

EOG and OXY continue to be well positioned in the years ahead to capitalize on the growing global oil demand.

In the past month oil has staged a pretty incredible rally, moving up $15 or 57% from its February lows of $26 per barrel. This price swing has not only rewarded holders of oil but also holders of companies that extract the oil. When trying to make an investment that is related to oil there is really two options. An integrated name like Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), or BP (NYSE:BP), or a pure play like Occidental Petroleum (NYSE:OXY), EOG Resources (NYSE:EOG), or Conoco Phillips (NYSE:COP) to name a few.

There are many other pure oil plays out there, but I personally prefer either Occidental or EOG as potential investments in this area due to their stronger balance sheets, low production costs, and strong management. Both companies are well posed to weather the current low price environment and most likely will emerge as stronger companies. The question that most investors face is which one is the better investment for the longer team. This article will attempt to make that determination in looking at several key factors that include: Financial Strength, Break-Even Oil Price Support, Current Pipeline of New/Old Projects, Revenue/EPS Growth, Dividend Yield, and Overall Valuation.

Financial Strength

Financial strength is extremely important for any oil company right now and is a clear signal as to who will emerge from the current oil crisis intact and who may not. Below I have outlined several key metrics that I feel are important to the overall financial strength and sustainability of each company.

 

Cash &

LT Investments

Levered Free-Cash-Flow

Long Term Debt

Debt to Equity Growth

Operating Free-Cash-Flow

OXY

$4.63 B

$3.46 B

$6.88 B

34.22

$3.35 B

EOG

$718 M

$613 M

$6.65 B

51.46

$3.6 B

Click to enlarge

In examining the above chart it is clear that Occidental is the stronger company financially. Both companies have strong financials, but Occidental seems to be much better positioned to weather this current low oil price storm for longer. Additionally, the large cash hoard and free cash flow that Occidental has at its disposal makes it a more interesting play for potential M&A activity.

As more and more high cost producers go belly-up Occidental will be a strong position to swoop in and buy up assets for pennies on the dollar. This activity should help them in further bringing down their production cost while increasing their current available BOE inventory.

Financial Strength - OXY

Break Even Oil Price Support

The next big question after examining the financials is what are the production break-evens for each one of these companies? Production break evens are a very important metric because they help determine at what price point these companies will be able to profitably come back online and resume oil production and ramp up other related projects.

 

Oil Breakeven Cost

(NYSE:BOE)

All-In Finding Cost

Total Production Growth

(MBOED)

Operating Cost Reductions

Current Inventory

(Locations)

OXY

$40

$16.46

580

-26%

($13.20 to $9.73)

8,500

EOG

$30

$11.91

500

-25%

($17.02 to $12.84)

3,200

Click to enlarge

While OXY has a larger potential inventory and lower operating costs than EOG. EOG has a lower break-even cost on majority of its oil equivalents and overall finding costs. Now it is important to note that OXY has a large percentage of its assets in the Permian where its overall break-even costs are closer to $22 per BOE, but when looking at the 'all-in' picture OXY has a high price point than that of EOG.

The price of oil right now is approaching the $42 dollar level which would mean that both companies would be able to produce in all of their wells and either break-even or generate a small profit. The problem that remains is that supply continues to build and demand is not catching up fast enough. Depending on the outcomes next month at the OPEC supply cut meeting we could see a lot of volatility in the price of oil. This volatility could either further prop up the price of oil or if cuts do not occur dramatically push oil back down toward the $26 level again. Given this uncertainty in pricing over the next several months I would be more inclined to side with EOG and its lower cost structure than OXY.

Break-Even Cost - EOG

Revenue/EPS Growth and Dividend Yield

This is a hard category in this environment to really see a lot of positives, but I feel like it is still an important one to examine because it is a good indicator as to how effective management is at running the business in a very challenging environment. This in turn should be a good indication as to how profitable the business ultimately will be when oil prices recover from their current lows.

The below table examines several key metrics that should be examined when trying to determine overall value and growth potential from each stock.

 

Revenue Growth

(YoY)

Revenue Growth

(Excluding 2015)

EPS Growth

(YoY)

EBITDA

Dividend Yield

Return on Equity

(3 Year)

OXY

-34.90%

-3.65%

-33.76%

$5.03B

$3 / 4.25%

-11.49%

EOG

-48.20%

52.50%

-55.82%

$3.25B

$0.17 / 0.89%

22.98%

Click to enlarge

After examining the table above OXY looks to be the most immediate winner, but when examining the 3 year return on equity and revenue growth (excluding 2015) EOG looks to be the stronger stock to own.

Over the past month as oil prices have rallied off of their recent lows EOG has very much outperformed OXY from a stock price appreciation standpoint. EOG has increased in price by 5.4% in the past month while OXY has decreased in price by 2.8%. That being said, I am more interested in the longer term potential of each stock/company. A compelling feature of OXY is the fact that the stock is yielding 4.25% compared to EOG's 0.89%. This dividend which I would consider safe given OXY's strong financial position also provides investors with a bit of a buffer short and medium term swings in the price of oil. Additionally, OXY's dividend over the past three years has increased by 17% providing long term holders with a nice steady stream of increasing income.

Picking a winner here is a bit more difficult, but given OXY's current dividend, its less of a loss in revenue growth compared to EOG I would have to lean more toward OXY as the stronger stock. That said, I do think that EOG has more upside price appreciation than OXY does, especially if oil continues to move higher. On the flip side if oil were to suddenly reverse course here I think EOG also carriers more downside risk. Depending on risk appetite EOG may be the better play here from a price appreciation standpoint, but for me I like OXY a bit more given all of the current market uncertainties around oil price.

Revenue/EPS Growth - OXY

Overall Value

After examining the above metrics, associated costs, and pricing structures it is still a very close call on which stock is the best overall value. Simply going off of the three categories that I picked for this article Occidental would be the winner, but Occidental is the winner of having a stronger balance sheet and higher yielding dividend. EOG on the other hand has much lower break-even costs for production which also makes the stock a very compelling buy here since oil is currently above those break-evens of $30 per BOE.

Since this is such a close call my overall recommendation would be to own both of these names in your portfolio. Instead of owning X shares of OXY or EOG I would suggest splitting that allocation up between the two stocks, especially since each stock's current price is relatively close to one another. This splitting of exposure I think is both prudent and a good tactic in oil diversification exposure, especially given the strength of both these names.

The long term price of oil is most likely higher from here, but the question of how long oil will remain low is anyone's guess. I for one would rather not have to be picking a short to medium term direction, but instead would prefer to have my oil exposure split between the low cost producer that can make money above $30 and the financially stronger player who will pay a handsome dividend for my patience.

Disclosure: I am/we are long EOG, OXY, CVX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.