The Shale Giant Showdown: 2 Oil Stocks to Watch in 2025

As it’s Christmas, and here at Oilprice.com we like to give back to our dear readers, we’ve decided to give you a little holiday treat.

Here is this month’s Intelligent Investor – our deep dive comparison service for Global Energy Alert subscribers. If you like what you see, feel free to gift yourself and your loved ones a subscription next year.

In this month’s edition of our comparison series, we take a look at two upstream powerhouse producers. The first, Occidental Petroleum (NYSE:OXY), is in the process of digesting a large acquisition and carries a lot of debt as a result. Is the share price fully discounting this factor? We will see. The second is EOG Resources, (NYSE:EOG) a company that in recent years has chosen to grow organically, eschewing the M&A craze that has brought a lot of consolidation into the sector.

There is a reasonable comparison between the two even though EOG is priced at about 2.5X OXY. Both have big acreage positions in the Delaware basin that are the cornerstone of their income. Both have international exposure with operations in Middle East-OXY, and in Trinidad-Tobago-EOG. Both have catalysts for growth in the coming year. And, like many comparisons, there isn’t necessarily a bad choice. So let’s dive in.

But first, let’s review the thesis for investing in the stocks of shale drillers

Are we near a bottom in upstream oil and gas stocks? I think we are. It should be understood that oil production is a cyclic business -production rises until prices stabilize – and then it begins to decline as activity tapers off. We’ve had a step change from technology-driven cost and efficiency improvements that have extended the period of production semi-levitation at current levels that must come to an end. Sometime. Without going through a lot of verbiage and reference citations, it just makes sense that we are nearing a peak in the last reservoir to show significant growth – the Permian.

If you think about it, since 2010 we have stuck a straw in the Permian, and production has risen from about 1 mm BOEPD to over 6.2 mm BOEPD. Today we are extracting 2.23 bn BOE annually from the Permian, and that just can’t go on forever. Estimates are that we are well past the midpoint of production from the key reservoirs that deliver this oil and gas to us. G&R put out a newsletter in conjunction with Novi Labs recently that discussed some aspects in detail that largely agrees with this thesis.

Concerns about demand-which has actually stayed fairly robust recently, have offset the plateauing of output in traders’ minds, and led to a weakening of prices. Does that reflect reality?

My core macro for upstream oil and gas investing is that North American producers are undervalued due to a lack of understanding about the fragility of current shale production levels. Shale is also called ‘short-cycle’-meaning that output is related to activity and can be controlled thereby. Obviously less so now due to technology, but the principle remains valid up to a point. The point is growth may be constrained by lower-tier development not being as productive and other logistics impacts-water injection may put a damper on output.

The incoming administration’s plan to increase production by 3 mm BOPD may also be putting a ceiling on crude and upstream E&P’s. I view this as a near impossibility in liquids, and highly doubtful in gas-which is increasing all by itself as the reservoirs being drilled are gassier. There simply aren’t enough rigs to generate this kind of growth, and no sign the industry is willing to build them up to that level. When the disconnect between what the incoming administration wants to do and what is possible becomes evident, the drag on prices will evaporate. I think there will be extreme winners, and extreme losers when the real impact of declines in the Permian are noticed by the market. In that scenario, I think we are near a bottom for stocks in the upstream sector, particularly ones with the critical mass that OXY and EOG possess.

Occidental Petroleum

Occidental Petroleum, (NYSE:OXY) was one of the big wins for investors coming out of the pandemic. Many recognized the value Anadarko brought and loaded up in the teens. It’s been a rough ride since late 2022. The fact those who bought at the 2020 bottom are still in the black after a 35% capital implosion since April of this year, doesn’t ease the pain of seeing all that money shifted over into the loss column.

Now with the post-election jitters of “Drill Baby, Drill” roiling the market, if anything the slope has gotten worse. Notably absent from the market since midyear, has been Uncle Warren, who over the last couple years has been busy, amassing, a 29% stake at prices well above $50 in some June-24 buys, above $60. Until the other day we were wondering what was it about OXY that Warren liked in $50s that he didn’t in the $40s? That curiosity was resolved last week with news of his buying another $400 million in OXY shares.

Buffett is sitting on a huge pile of cash and holds; warrants that would let him add another 90 mm shares bringing his position to about 40% of the float. If you have any faith in domestic energy at all, it would seem that this is the time to be adding to upstream positions. Buffett may have put a floor on OXY shares with his vote of confidence last week, as the company navigates softer commodity prices.

Energy comprises only a tiny fraction of the SP-500 index now, thanks to multiple compressions over the last couple of years. Does that make sense? I don’t think so, but things are what they are, and the decline in the sector weighting certainly has a rationale to it as commodities have underperformed.

OXY has struggled in comparison to a loose peer group over the past year, only slightly outperforming, bottom-hugging Devon. Only a couple, EOG and Diamondback Energy, (NYSE:FANG) have managed to deliver any growth, while other Delaware basin-focused producers, OXY, Devon Energy, (NYSE:DVN), and ConocoPhillips, (NYSE:COP) are down. FANG and EOG top the list with Operating Margins (OMs) of 42% and 35% respectively. DVN comes in right behind EOG at 32%. This article isn’t about DVN, but I must say it makes the negative sentiment toward the company all the more odd.

The thesis for OXY

The company is an oil and gas producing juggernaut with total output currently at 1.42 mm BOEPD and guiding to 1.47 mm BOEPD in Q-4. OXY’s cornerstone is in the Permian’s Delaware basin, but through the CrownRock deal has a significant foothold in the Midland basin. It also has production from the U.S. GoM, and internationally in the Middle East. The company also has a chemicals-caustic soda business that operates in the black and actually is symbiotic to their nascent Direct Air Capture-DAC business – in that caustic drives a reaction to liberate the carbon for capture.

The company is successfully integrating the CrownRock purchase into their operations which is receiving an increasing share of D&C capex this year – the goal being to increase the overall oil percentage of total production. It was also noted that legacy CrownRock water infrastructure is contributing about $10 mm in savings this year. OXY is successfully managing LEO costs down through production increases, leveraging infrastructure around new pads, and actively engaging with service providers to minimize the white space-slack time, between TD’ing a well and rigging up to frac.

The Delaware continues to perform with the company increasingly drilling secondary benches and seeing better than anticipated performance. Speaking for OXY, CEO Vicki Hollub feels the Permian can continue to grow for another few years as they wring superior performance out of low-tier benches-Wolfcamp B & C as an example.

“These secondary benches that we have second and third and fourth benches that we can develop in the Permian in the Delaware and the Midland Basin, and we’re still continuing to get more out of those reservoirs. I expect though in the near-term with weaker prices that what we used to think as a peak in say in three years, moves further out because with weaker prices I think there’s going to be less growth in the Permian.”

I don’t think this is true for all companies (if my prognostication that the Permian peaking in the nearer term is way out of whack), as OXY has some of the best Delaware dirt around, thanks to the Anadarko deal.

All in all, OXY is generating $3.1 in AFFO and netted $1.5 bn in free cash for the quarter. Pretty much every nickel they take in is going toward debt reduction, which is as it should be. OXY’s cashflow priorities are shown in the slide below. Once LT debt is less than $15 bn, then the focus shifts to buying back shares and redeeming Warren’s 10% yielding Preferred stock.

This puts holders of the common stock at the end of a multiyear list for any significant boost to the dividend. This could be problematic for the stock affecting any chance of a price recovery. I also think that this mindset on the part of management may be contributing the weakness in OXY shares, as investors look for steady cash. A recent WSJ article noted that in turbulent times, investors shift from growth stocks to dividend payers.

“Investors typically flock to the dividend payers in down markets or when the economic outlook turns cloudy. Indeed, many companies with big payouts, including utilities and consumer staples, produce stable earnings in any weather.”

Ok now let’s review EOG.

EOG Resources

The company has a reputation as being one of the best-run shale drillers and has consistently returned capital to shareholders through the cycle. This shows in the value creation claimed by the company in the slide below. If WTI sees the gain projected over the next couple of years the free cash available for distribution could be enormous.

Analysts rate EOG as overweight, but I doubt that rating takes into account the swoon since early November. The Q-4 EPS forecast for the company is $2.57 per share. This is down from the $2.78 per share forecast for Q-3, which they crushed at $2.89. If they beat on Q-4, it will be consistent with their performance over the entire year. Share price forecasts range from $146-$170, with a median of $144, making an entry point sub-$120 a very reasonable short-term prospect. Particularly when the shareholder-friendly plans for capital returns are factored in.

The company has just made a triple-bottom sub-$120, and with a Q-4 beat is unlikely to get much cheaper. I think there will be extreme winners, and extreme losers when the real impact of declines in the Permian are noticed by the market. In that scenario, I think we are near a bottom for stocks in the upstream sector.

The thesis for EOG

The company is banging on the door of the million barrel-a-day equivalent producer club. One of the things that sets it apart from other shale players is its well-distributed legacy positions in key shale plays that date from early shale E&P activity in the 2010’s. The company has first class assets which are shown in the company graphic below. Recently it’s made a big push into the long-neglected Utica shale.

EOG has mostly legacy acreage positions that date back to the Enron days pre-shale revolution when dirt was cheap, and thus have avoided the need for big capital outlays to snag competitors at $50-100K per acre. The last big EOG acquisition was Yates Petroleum in 2016, which they comparatively ‘stole’ for $5,400 an acre. Deal execution like this shows on the balance sheet with a paltry $3.6 bn of long-term debt presently. On DE basis none of its peer group even comes close.

The Delaware Money Machine

EOG has some of the best dirt in the Delaware, thanks to the Yates deal. Perhaps you’ve seen the Wolfcamp white paper put out by the EIA. If not here’s a link. It shows that some of the best Wolfcamp A, and Bone Spring benches are in southern Eddy and Lea County New Mexico, and in Loving County, Texas. A recent WSJ article discussed the intensity of drilling in these areas.

We’re a fan of good dirt around here as it drives cost impacts from logistics and technology. This enables EOG to be pretty selective in the projects they sanction, putting a 30% after-tax rate of return at $40 per barrel. That’s a pretty steep hill to climb, but it insulates the company from all but the wildest swings in commodity prices. It also enables price realizations that top the peer group at $77 for Q-3, 2024.

Now down to the nitty gritty

I think most of us get the idea behind stock buybacks and their intrinsically increasing the value of remaining shares. That has to be balanced though with the fact that much of this is fraught with peril at squandering capital. This is done by buying back stock in one quarter and seeing the price continue to decline. That is certainly the scenario extant these days. I am surprised equity analysts don’t pursue this in conference calls more.

EOG has been bitten by the share buyback bug-noting that it will be done ‘opportunistically’, but shows a much more shareholder-friendly attitude with its robust $3.90 per share annual dividend, than many companies that have totally scrapped special dividends in favor of buybacks.

The Yield on Cost (YOC) is actually pretty decent at 3.28%. Bottom-line management at EOG knows shareholders need to eat while waiting for the stock float shrinkage to drive share prices higher.

A catalyst for EOG

EOG’s entry into the Utica shale was done in 2022 with relatively little fanfare. Things seem to be going pretty well from the comments in the slide below. EOG has a huge acreage position, and the Utica is far less developed than the Marcellus. The northeast is gas hungry from the explosive growth in AI data centers and the demand coming from the Cove Point LNG terminal on the Chesapeake Bay. On the horizon, new East Coast plants are under review creating a potential uplift in demand.

Risks

It is fair to say that EOG isn’t cheap here. But against a cohort of near-million barrel producers, it’s reasonably priced. Things can always get cheaper, so this multiple might shrink. I am betting there is less elasticity in EOG than in others.

Your takeaway

I don’t think there is any doubt that OXY is a buy for long-term capital appreciation at current levels. As I have noted, I feel strongly that American oil and gas companies are undervalued in terms of their true impact on society, here at home and globally, and lack only a catalyst to rerate higher. This would totally change the dynamic for owners of these assets, but there is no date certain as to when this will occur.

The question is, can we wait that out while receiving peanuts for our capital? That leaves us looking for income while we wait for growth, and the money coming quarterly from OXY will not buy Porterhouse steak at Kroger. It may not even buy chicken breasts without a coupon. Chicken leg quarters are the immediate future of OXY holders as we wait on capital appreciation in the commodity rerating I expect.

The problem I see is management’s dogged determination not to pay a respectable dividend to reward shareholders now. Let’s review.

First, they had the debt from Anadarko. Ok, that transformed the company…while almost killing it. They got through that and then rising oil prices worked their magic and we had a 5-bagger in appreciation, with the stock price peaking at $75 in late 2022. Holders of OXY stock will listen to any song management sings with that kind of growth in their portfolio. Then came the CrownRock debt and dilution. As I have noted, the company is rightly knocking down the debt, but their single-minded focus on buying back stock at multiples where no one else, except Warren Buffett, is buying does investors no service.

The YOC is under 2% and there are no special dividends planned to spread a little cash among shareholders. Since reinstituting the regular dividend in 2022 it’s been raised twice and I expect it will be raised again when Q-4 earnings are announced. By another 4-5 cents. To continue our chicken metaphor, this is chicken feed.

OXY trades at 5.5-6X EV/EBITDA and $48K per flowing barrel. Not terribly cheap on either metric, so it’s probably a toss-up,-pay interest on debt or capitalize on a 30% downdraft in stock prices…since April of this year. Now let’s look at EOG.

EOG is trading at a flowing barrel price of $69 per barrel. Again not give away prices. You can buy shale cheaper. EOG has a reputation of being one of the best-run companies in this sector and most of the metrics I’ve seen substantiate that notion. I’ve always been willing to pay up for quality, and that’s the recommendation here. Buy EOG.

EOG has 4.43 bn bbl of 2P reserves as of the end of 2023. During the year they replaced 202% of production with new discoveries. Both are solid metrics and justify the current prices for the stock. At $40 per bbl, EOG has a net present value (NPV) of $179.00 per share, which comes pretty close to analyst’s topline estimates for the share price. This doesn’t take into account future revenue from the Utica play, so I regard it as conservative.

Also, investors entering EOG before 1-17-25 will receive the previously announced and just raised regular dividend of $0.98 per share on Jan-31st. I regard the timing as auspicious. The yield is admittedly not spectacular-3.08% but I am expecting a special dividend at some point in the coming year that will improve the overall yield on cost.

I think EOG is an outstanding bargain for future growth and immediate shareholder returns. Every serious investor in upstream E&P companies should have a position in the company. Accordingly, I rate EOG as the winner of this month’s comparison.