Investment Review - EOG Resources

 

I've been investing in individual companies for over a decade now.  Honestly, it still seems like just a few years ago that I nervously made my first purchase of an individual stock.  

While I do these reviews internally, I felt that it was probably best to share my thoughts on my investments as a way of thinking out loud.  Over time I plan to recap my investments that have at least 5+ years since the date of my first investment.  

Overview

One of the first companies that I invested in was EOG Resources (EOG) with an investment history that's just a hair over 11 years and still going.  EOG Resources is an oil and gas E&P company.

The O&G industry has seen some wild swings in pricing during the time of my investment.  Oil traded around $116 when I made my initial purchase of EOG in August 2011 and plummeted down to the low-$40s by 2016.  

Oil prices slowly began grinding higher reaching over $70 per share and then COVID came and we saw WTI trade at -$37 per barrel.  Absolutely crazy!

Oil prices have moved higher although they have retreated from the highs from earlier this year that came in the period following the Russian invasion of Ukraine.  Currently oil is around the $94 level.

As a commodity E&P company I'm not the least bit surprised to see the stock returns come and go as the underlying price of oil rises and falls.  Such is the nature of investing in commodity companies where there's essentially no differentiation between the end product from one company to another.  

Honestly, commodity focused businesses are probably best suited as ownership rentals rather than long-term buy & hold positions.  However, that comes with the caveat of being able to predict the turns in the pricing of the underlying commodity.  If I only I could reliably do that.

Dividend History

As a commodity producer dividend growth hasn't exactly been steady and predictable.  However, whenever EOG's management has felt comfortable making a raise it has typically been very, very generous.  During the time I've owned shares the quarterly payment is up 838%.  Not bad at all!

Even more impressive is that includes a 14 quarter stretch of a frozen dividend.

From a dividend growth perspective, even though EOG hasn't been the most consistent, I'm more than happy with the results.  

Unfortunately, the initial yield when I purchased shares was quite low for EOG at just 0.68%.  However, thanks to stellar dividend growth my yield on cost is up to 6.21% compared to the current yield of 2.37%.

Investment History

My investment in EOG wasn't exactly a good one, although the returns have been adequate.  The main reason is that as it was one of the first investments that I made in an individual company, I dipped my toes in with a very small purchase of just 8 shares for a total basis of $385.95.  

Mistake #1 purchasing such a small amount of shares/basis.  Mistake #2 doing so with commissions of $7.95 per trade. Ugh!  That works out to a 2.1% "load" on that purchase.  Hanging my head in shame.  Although lesson learned.

I first purchased shares of EOG on August 16, 2011 for $48.24 per share, split-adjusted.  I then reinvested the first 8 dividend payments which added an additional 0.098 shares. The next 36 quarterly dividend payments were taken in cash along with four sizable special dividends being paid since mid-2021 with another on the way due to be paid in September.

Dividend Payback

During the time I've owned EOG Resources I've received a total of $125.28 in cash dividend payments, regular and special, with an additional $5.53 being reinvested.  That $5.53 in reinvested dividends is now worth $12.21. 

In just cash dividends my EOG investment has a 32.5% payback.  Including the dividends that were reinvested, but not what those additional shares are currently worth, gives a payback of 33.9%.  Counting the current value of those reinvested dividends and the payback rises to 35.6%.

Adjusted Basis & Returns

My per-share basis started at $48.24 split-adjusted.  Thanks to the reinvested dividends and the cash dividends paid along the way my per-share basis is down to $32.87, 31.9% lower than when I first purchased shares.

The following chart shows my investment history with EOG Resources.  It's a pretty simple chart since there has been just one purchase of shares and just a handful of reinvested dividends.

The pink cumulative cash dividends is a nice looking part of the chart.  Steadily climbing payment after payment.  Of course that pesky capital gain/loss has been very volatile as expected.

The following chart shows the total return that I've received from my EOG Resources investment.  *Warning: it's been quite volatile*

Volatile is definitely the story here.  Total returns were sitting pretty by mid-2014 at over 130% and then retreated to just over 50% by early 2016.  Total returns then came roaring back to 177% by mid-2018 before being completely wiped out by late 2020.  However, since then the oil markets, and in turn EOG, have been on a tear and my total return currently sits at 198.0%.

Based on the timing and sizes of cash flows my EOG investment has provided a 10.7% IRR over ~11 years.  That's a solid return although it's lagged behind the S&P 500 Total Return Index (SP500TR) which has generated a 13.9% IRR over that same time.  

Lessons Learned

As I mentioned above, commodity producers are probably best suited as rentals.  However, considering everything that the O&G market has been through the results have been pretty solid for this buy & hold investment.

I'm very encouraged by managements' shift towards special dividends and I honestly wish more management teams would take this approach.  Commodity businesses obviously have flaws in that they don't control the pricing of their product so they are very much at the whim of a global supply and demand and pricing.  

Eventually those pricing tailwinds will shift to headwinds with revenues and cash flows being squeezed.  That's why I think special dividends with a more measured increase for the baseline regular dividend is probably the best route to take especially for commodity businesses and even more so compared to share buybacks. 

Overall I can't really complain about the results even though they have lagged behind the returns of the S&P 500.  Especially now that there's a more clear capital allocation plan for EOG Resources, we'll see how long that lasts for them and the E&P brethren in general.  For now I'll continue to hold my stake in EOG Resources although at this time I don't intend to allocate more capital there as I believe there's better long-term opportunities available.

Do you review your investments periodically?  How do you feel about commodity based businesses?  Buy & hold long-term or intermediate-term rentals or avoid them as best as you can?  Is there any further information you would like to see in these reviews moving forward?