Cost Cutting Measures Should Push EOG Resources Higher

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For the last two years EOG Resources (NYSE: EOG) has been an aggressive growth story, and on Tuesday it hit multi-year highs following its earning report. Yet, because of its valuation and its implied growth, the company is still presenting value, despite trading at these highs.

EOG Resources is a company that has consistently improved its revenue, but has been somewhat inconsistent in regards to profit. Though the company’s recent quarter destroyed expectations, its net profit still fell 34% compared to the same quarter last year.

Energy has been one of the most important topics of the recent presidential race, and there were many investors who were uncertain of their outlook for energy companies. On Monday, EOG Resources put much of these concerns to rest, and provided some very encouraging guidance.

The $32 billion company has been plagued with higher costs, but announced that it plans to spend less on “money-losing” drilling in the next year. Some have viewed this statement as a way of the company being conservative, but others see it as a sign of long-term certainty.

As a result of EOG's cost-cutting measures, the likelihood for significant bottom line growth is great. The company has continued to modify the completion techniques in its Eagle Ford, Bakken, Three Forks, Wolfcamp, and Leonard plays. Then when you incorporate a 45% rise in production with more efficient drilling, I think it’s safe to assume that EOG’s future is looking bright.

There are, of course, other great plays in the space; for instance companies such as Cabot Oil & Gas Corporation (NYSE: COG) are very popular. This is a company that has managed to grow its bottom line by 30% year-over-year, but its revenue is growing by less than 15%. Therefore, despite EOG being a much larger company, it is growing faster than Cabot.

Cabot Oil has been one of the better performing energy stocks of the last decade, with a 1,200% gain. The company trades with a P/E ratio of 87.29 and a forward ratio of 41.03, therefore implying that earnings are expected to double over the course of 12 months. However, with EOG announcing significant cost cutting measures I believe it is the better stock, and among the best in the entire sector.

A forward ratio of 21.01 for a company such as EOG Resources is a good bargain. The company’s improvements over the next year could push EOG into uncharted territory. The bottom line is that it's a safe and secure company that is moving forward in an energy sector that is plagued with uncertainty. Therefore, I find it difficult to understand why anyone would want to invest in a questionable company in this sector, such as Chesapeake Energy (NYSE: CHK)

A company such as EOG is worth the 3x premium compared to sales, and is certainly more worthwhile when compared to a company such as Chesapeake, because of what it offers investors. Much of the energy industry depends on government policy, and EOG appears to be marching to the beat of its own drum. Take  into consideration that EOG and Chesapeake are near equal in terms of revenue. However, Chesapeake has more than double the amount of debt, and is seeing significant fundamental declines, while EOG continues to excel in all fundamental metrics, and is now cutting costs to improve its bottom line performance. 

In my opinion, with there being so much uncertainty in the market, it makes sense to pay more for a well-established company with a bright future. The market has a history of rewarding fast-growing and efficient energy companies that manage to cut costs and maintain growth. And at this point, I see no reason to believe that EOG's growth will not continue, and for the first time, it just might see consistent bottom line performance to match its impressive sales growth.

BrianNichols has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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