ConocoPhillips, EOG Showdown: LNG Growth Story or Shale Drilling Stock?

ConocoPhillips COP and EOG Resources, Inc. EOG are two leading exploration and production companies, with operations mainly tied to commodity prices. Over the past year, COP has declined 10.9%, underperforming EOG’s 2.6% fall. But, as we all know, that price movement is not the sole parameter in determining the investment objectives. Let’s examine the underlying fundamentals and the primary drivers of their business models.

ConocoPhillips

Long-Cycle Projects to Generate Handsome Cash Flows

ConocoPhillips is investing heavily in a large-scale liquefied natural gas (LNG) project in Qatar and oil development in Alaska. Due to the scale of these projects, it will take several years to complete them and start generating significant cash flows. Once the projects come online, the upstream energy major expects to generate $7 billion more in extra free cash by 2029, almost twice what all analysts expected the firm to generate in 2025, as stated on the second-quarter earnings call.

Moreover, with a new 20-year agreement to buy 4 million tonnes per annum from Sempra’s Port Arthur Phase 2 project in Texas, ConocoPhillips has further broadened its LNG presence. This is on top of the exploration and production company’s earlier investment and secured gas supply from the first phase of the project, likely to commence operation in 2027. The development of this front has further secured COP’s long-term cash flows while strengthening its global gas supply network.

Marathon Oil Takeover: Unlocking Superior Value

By late last year, ConocoPhillips completed the acquisition of Marathon Oil Corporation. The buyout added more premium oil and natural gas resources to its portfolio, where the production costs are relatively low. This means COP is well-positioned to survive periods when the commodity prices turn low.

The upstream energy giant also anticipated significant cost synergies from the Marathon Oil takeover. Now the obvious question: Is the company actually witnessing all the benefits from the buyout? On the latest earnings call, ConocoPhillips revealed that it is doing better than expected from the takeover.

COP initially projected an annual cost synergy of $500 million from the Marathon Oil acquisition. However, during the second-quarter earnings call, it stated that it now expects to save more than $1 billion annually. COP is likely to realize this gain by the end of 2025, without needing to drill a single well. 

Investors should know that ConocoPhillips believes that it has acquired more valuable oil and gas resources from the Marathon Oil takeover than it had earlier estimated, thanks to the Permian, the most prolific basin in the United States.

Shareholder Returns Mostly Tied to Oil & Gas Prices

ConocoPhillips has decided to return roughly 45% of its operating cash flows to shareholders this year. This signifies that the company’s reward for shareholders is tied to oil and gas prices, as the operating cash flows are the money the company generates from its core operations, primarily from selling oil and gas.

EOG Resources

Expands Its Energy Future With New Land, Low-Cost Gas

EOG has a strong focus on efficiently drilling oil and gas resources while exploring new areas. Notably, the upstream giant recently purchased Encino Energy’s Utica shale assets in Ohio, gaining access to more than 1 million acres of land and billions of barrels of oil and gas for the future. On top of it, the exploration and production player is developing its low-cost Dorado natural gas project in Texas and working on new exploration in the United Arab Emirates. Essentially, EOG is expanding its land holdings and projects to further brighten its production outlook.

Dividend Reliability: A Stronger Track Record

When it comes to dividend reliability, EOG has a stronger track record. Investors should know that in the past 27 years, the upstream player has never cut its dividend, reflecting an average growth rate of 19%. Importantly, as a form of shareholder rewards for 2025, EOG is committed to at least $3.5 billion in returns. 

COP vs. EOG: Which is a Better Stock?

Coming to the stocks’ valuation story, both the upstream players are undervalued currently. While COP is trading at a trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) of 5.44x, EOG is trading at a trailing 12-month EV/EBITDA of 5.58x. Both are below the broader industry average of 11.03X.

But, investors shouldn’t rush to bet on the COP or EOG as the ongoing trade tensions could adversely impact overall energy demand. However, those who have already invested should continue to hold the stocks. Currently, both COP and EOG carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It is just that the growth story differs for the two stocks. Investors who have invested in ConocoPhillips would get exposure to the LNG growth play, while for EOG, investors will get access to more diversified operations in shale plays with quicker paybacks.

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This article originally published on Zacks Investment Research (zacks.com).

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