3 Reasons EOG Resources Inc Is a Better Growth Stock Than Devon Energy Corp

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The oil market downturn forced shale drillers to cut costs so they can run on lower oil prices. Through a series of innovations, efficiency gains, and other sources, both EOG Resources (NYSE: EOG) and Devon Energy (NYSE: DVN) are now in the position to thrive even though crude remains weak. That's clear from the growth outlooks they provided investors now that conditions have improved, with both expecting to deliver double-digit oil production growth over the coming years at around current oil prices. That said, after drilling down deeper into their plans, it becomes apparent that EOG Resources is the better growth company. 

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No. 1: EOG only needs $50 oil to fuel double-digit growth

In August of 2016, EOG Resources initially unveiled its oil production growth outlook through 2020, anticipating that it could increase crude production by a 10% compound annual rate through 2020 at a flat oil price of $50 a barrel. Meanwhile, it could boost output by a 20% compound annual rate over that same timeframe if oil averaged $60 a barrel. Further, it could achieve those robust growth rates and pay its dividend while living within cash flow. However, thanks to some additional innovations and efficiency gains, the company has since raised that outlook to 15% at $50 oil and 25% at $60.

Contrast that forecast with Devon Energy's plan. Earlier this year, the company stated that it expects to increase its oil output by 13% to 17% this year compared to the end of last year, which marked the low point in its production profile. Further, the company estimated that it could boost output another 20% next year. However, what's worth noting about Devon's forecast is that it needed oil to average $55 a barrel this year and $60 next year to achieve those rates within cash flow. While the company has improved upon that outlook thanks to some monster well results this year, the fact of the matter is, Devon can't grow as fast as EOG at $50 oil because of its higher cost structure.

No. 2: It's focused on growing returns, not just production

While most investors tend to concentrate on the headline number of absolute production growth, it's important to understand why some drillers can grow faster than others. In EOG Resources' case, one of the factors driving its higher growth rate is that it has shifted its focus toward drilling wells where it can earn a premium return, which it defines as 30% after tax at flat $40 oil. These wells not only generate higher returns, they also produce more oil. For example, last year, the company's average premium well delivered a more than 100% return while producing about 200,000 barrels of oil in its first year. Compare that to the non-premium wells it drilled, which only achieved a 20% return and produced 100,000 barrels per well.

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While Devon is also focusing its capital dollars on its highest-return locations, it's not quite to EOG's level just yet. That said, the company is making returns a priority and recently set a goal to deliver top-tier returns on invested capital as part of its 2020 vision. The company intends on achieving that aim by selling less competitive assets and focusing on drilling in its top returning regions. That's a slightly different approach than EOG, which hopes to convert more of its drilling inventory around the country to premium locations through innovation and efficiency gains as opposed to just focusing on where it can currently earn the best returns.

No. 3: EOG would rather find its own oil than pay the high price of M&A

One of the reasons EOG Resources can earn such lucrative returns in several different shale plays is because it primarily acquired the underlying acreage through organic leasing instead of via acquisitions. For example, the company was one of the early leaders in discovering and developing the Eagle Ford Shale, which enabled it to build up a leading position in the play for a minimal investment. Contrast that with Devon Energy, which paid $6 billion to buy 82,000 net acres in the region in 2013. Unfortunately, that deal hasn't worked out as well as Devon expected, which is why it's now starting to unwind its Eagle Ford position and recently unloaded 19,600 acres for just $190 million.

To avoid costly mistakes like that, EOG Resources currently has seven exploration teams generating new prospects for the company. CEO Bill Thomas recently stated that EOG plans to "continue to execute our robust exploration program to capture low-cost acreage in plays that we believe could contain premium quality rock that would add to our growing 10-year inventory of premium drilling locations." That focus on exploration should enable the company to deliver higher-return growth than competitors like Devon since it would start from a lower-cost acreage position.

It all adds up to a better growth stock

Because of its lower costs, EOG Resources can grow its oil production at a faster rate than Devon Energy at current oil prices. However, that's just part of the story. The company should also deliver better results for investors over the long run given its focus on organically drilling for returns as opposed to paying up to grow. That's why growth-focused investors should consider buying EOG because it stands a better chance at delivering market-beating growth than Devon.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.