EOG Resources, Inc. (EOG) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks so much for joining us for Barclays 34th Annual CEO Energy and Power Conference. With us today, we are very pleased to have EOG Resources, and we have Mr. Bill Thomas, Chairman and CEO, with us. Bill, are you there?

Yes. Yes, I'm here. Thank you very much, Jeanine. We appreciate the opportunity to present this morning.

Well, thank you for your time. So I think, today, Bill is going to start off with some prepared remarks and a presentation. And then we're going to move right into Q&A. So I'll turn it over to you, Bill.

Okay. Great. Thank you very much. And I want to thank everybody that's listening today. Thank you for your interest in our business and particularly in EOG. We're going to talk about the sustainable success of the company. We've had a strong track record of creating value over 2 decades with a very sustainable business model. EOG is -- we believe, is a premium E&P company with ability to have sustainable value creation. As I said before, we've got a great 20-year track record, being able to recreate ourselves, continuously improve ourselves in every area of the company. So we're focused on value creation. And the goal is to maximize total shareholder return through disciplined reinvestment and free cash flow generation. And we've got 4 areas that we're really focused on. The first one, as you know -- if you know EOG, I mean, we're focused on returns. And we're not just focused on returns that we produced last year, but we're focused on improving the company so that our returns will continuously improve going forward. In 2016, after the last downturn, we shifted to a premium drilling strategy and made an enormous difference, reset the company to have great returns even in a $40 oil environment. We have sustainable cost reductions that are created from the bottom-up in the company. They're not top-down-driven, and they're not service company-driven. And we've also got a tremendous ability to continually improve the well productivity through our completion technology and more importantly, through better rock quality. We are a disciplined growth company. And I want to pause here just for a minute to talk about that a bit more. The #1 driver on disciplined growth is the market fundamentals. And I want to be super clear on this. We are not interested in growing oil in an oversupplied market. We have a history in the last downturn. We didn't grow oil for a couple of years. This year, we're actually one of the few E&P companies that actually shut in production during the second quarter. And going forward, crystal clear, we're not going to be growing oil into an oversupplied market. And we applaud the discipline that's been going on in the last couple years and that was accelerated -- has been accelerated through the COVID-19 virus pandemic and the tremendous discipline that's going on throughout the industry. And I'll talk more about this in a minute. So we're on board. We're part of the solution and not part of the problem, and we're committed to staying very disciplined in not supplying oil into an oversupplied market. We're also -- our growth is governed by continuous improvement. We're not going to grow to where -- at a rate that we don't significantly improve over time. The third point is, we're absolutely committed to generating significant free cash flow. We base our plan each year on a conservative oil price, and that gives us room. If there's upside in oil price, we're committed to funding a very sustainable and hopefully growing dividend as we go forward. And we're absolutely committed to maintaining a very, very strong balance sheet. We have a strong balance sheet, high investment-grade ratings, and we want to only improve that going forward. And the fourth point is, is we want to be a leader and we are a leader in sustainability. That's a very important part of our process. It's an organic process going on inside the company. Our culture owns it. We're excited about it, and we are making a lot of progress in each area of sustainability. So to reiterate, in 2016, we shifted to what we call premium drilling. And premium has proven very resilient through the cycles. We believe it's the most stringent reinvestment hurdle rate amongst E&P companies in the business. And premium drilling is to ensure that we can generate a really, really strong return even at a $40 flat oil price and $2.50 natural gas prices. So our drilling program is designed each year to where we can generate at least a 30% at $40 oil. It ensures we have strong returns and cash flow through the cycles. It maintains a very low direct finding cost less than $10 per BOE. And it helps us to achieve a higher capital efficiency each year as we continue to high-grade and improve the premium inventory. So that creates a long-term, low-cost structure, an improving cost structure and a very strong financial profile. As an example, when you consider the results that we've had from 2017, 2019, when we averaged $58 oil, EOG has been among the industry leaders in really every category. We generated a 14% average return on capital employed. That's industry-leading. We generated a whopping $4.6 billion of free cash flow. We increased the dividend by 72% from 2017 to 2019. And when you include the dividend increase we had at the beginning of this year, it's a 124% increase in dividend. We've reduced the debt by $2.2 billion over that time period, and we've grown our reserve -- our proved reserve base by 55%. So certainly, if you compare those numbers -- those metrics versus any other E&P in the business, that's -- we're certainly a leader, and we're going to emerge from this downturn an even better company going forward. We also have done this by only reinvesting about 80% of our discretionary cash flow back into CapEx. And as you can see by the chart in front of you, we're one of the most disciplined reinvestment companies in the business. And if you think about what's going on, now we see the rest of our peers, the private companies and even the major integrated companies all shifting to a more disciplined mode going forward. And if they all shift to where EOG has been the last 3 years, it's going to make a significant difference in rebalancing the market, which is very important. And then going forward, as prices improve, it's going to help certainly modify growth in the U.S. particularly. If everybody shifts to where EOG has been, we don't believe the U.S. will grow year-over-year for years to come. And certainly, we don't think we'll ever really get back to the 12.8 million barrels a day before the pandemic. So we're very excited about what's going on in the industry. And most importantly, EOG is going to stay very disciplined going forward. We have a relentless focus on well cost reduction. This is our -- one of our oldest oil plays, the Eagle Ford. Back in 2013, our well costs were $8.5 million. We continuously reduce our costs every year, very systematically through internally generated innovation, technology and efficiency gains. This year, we're averaging about $5.3 million per well and our best well is $4.6 million. So even with the reduction going on this year, you can say we've got plenty of room to go. We're not perfect in any one of our plays, even our mature plays. And so because of the internal ability of EOG to have sustainable reductions in cost, we're not through yet getting better. We're also -- every year since the horizontal drilling started, we've been the leader in well productivity. So this is a Thousand Club group that's put together every year by a third party. It's the wells that have a 30-day peak rate of over 1,000 BOE per day. This is last year's data, just like the year before. We have a 2:1 lead over our nearest competitor on a number of wells that are in this category. So EOG continually has low costs and drills the best wells in the industry, and that's why we have such a high return on capital employed. It's also premium drilling has made a significant difference on our finding and development costs. They're continually going down incrementally every year as we reduce costs and improve our well quality, and that's improving our capital efficiency, which is the amount of money it takes to either maintain or grow your oil going forward. So that's why we've had great success of generating free cash flow, increasing the dividend, reducing the debt, even when we had low oil prices in the past, and it will certainly help us as we continue to get better in the future to be a leader in capital efficiency. And we're also focused on operating costs. Every year, we systematically, just like well costs, we reduced operating costs. And you can see, we've got a 32% decrease since 2014. And incrementally, this year, it's going to be lower than last year, et cetera, et cetera, and the year before that. So that is an area that we've got a tremendous focus on and we'll improve going forward. We also have one of the most productive employees in the industry and really in the broader market. This is a chart that shows our production each year, and you can see we've been growing production over the last 3 years with our premium drilling. The red dots are our employees, the number of employees in the company. And so we've had a 44% increase in production employees since we shifted to premium. And so we actually peaked out in the number of employees back in 2014, and we've held it relatively flat throughout. As another data point, if you look at last year, EOG employees compared to the broader market, the S&P 500, all companies, EOG ranked #3 in net income per employee. So we've kept that intact. And that's a big advantage, I think, that we're going to have emerging from this downturn. Our premium inventory each year is growing in the quantity of it, and it's -- more important, it's growing in the quality. The premium inventory is improving every year because of completions, cost reduction, targeting to get better rock, et cetera. And we've got -- now, we've got designated 4,500 wells that have not only generated a 30% rate of return at $40, they'll actually generate a 30% rate of return at $30 flat oil prices. And those are the ones that we're focused on this year and next year and going forward. 4,500 is a massive amount of inventory in that kind of category. And that will put us another leg up on reducing per well -- I mean per BOE cost and increasing returns as we go forward. We continuously add by conversion. More importantly, we've got the most robust set of exploration opportunities that ever have been in the company. I've been with the company 4 decades and it's certainly the largest and highest-quality exploration inventory we've ever had. And we're super excited about it. Over the next 2 or 3 years, we'll be putting those into development mode in the company. And that will continue to increase our returns, lower our costs and help us to make a much better company going forward. We're working on prospects in 10-plus basins, not only in the U.S. but internationally, too. And you'll be hearing more about those in the future. We're also a leader in ESG, as I talked about. Sustainability and ESG are super important. This is a data from the recently -- report from the Texas Railroad Commission, and it shows that EOG is one of the most -- has one of the lowest flaring intensity rates in the industry. And so we're a leader in each one, and we're capturing our gas with captured gas closed-loop systems and other kind of technology, and we're committed to being a leader in that area. We're also tackling GHG emissions through a number of different ways. This is an example of an 8-megawatt electric power generation facility, we're putting online this quarter in New Mexico. And it's a combination of solar, 70 acre solar field with natural gas. We're super excited about this because it's going to significantly reduce GHG emissions for this facility, particularly, and it's also return-friendly. And we're going to generate a really good return because it lowers our operating cost in the future. And we've put in place a sustainable power group inside the company. And so all these ideas about how to reduce flaring, reduce emissions, et cetera, et cetera, are organic. They come up through our culture. And this sustainable power group will help enhance our current culture and bring the best ideas forward, implement them quickly and use -- and pick the ones, help select the ones and get the ones in place that will dramatically reduce GHG emissions in the future and also generate a positive return. So our strategic points this year are focused like they are every year. This is a super unique year. But certainly, the first one is to make sure that every dollar we spend generates a strong rate of return. We've already talked about this. We've high-graded our premium drilling to 30% at $30 flat oil. We've exercised tremendous flexibility to cut costs quickly with a 45% reduction in our CapEx. Our operating costs are down 20%. We've also seen a strong acceleration in our technical innovation. Our sustainable power group is just an example, but our information technology systems inside the company are enhancing our ability to continue to be very innovative inside the company with our existing culture. We want to exit 2020 with momentum. That means we've redesigned our production to be the highest at the fourth quarter. And we have a plan for next year to maintain that and generate free cash flow at $40 flat oil next year at $3.4 billion of CapEx. We've also -- as we talked about, our balance sheet is one of the best in the industry. It's our -- we have a low net to debt cap of 14%, a very strong liquidity position. And we're committed to spending within cash flow and generating free cash flow in the future and continuing to firm up and improve our already strong balance sheet. We have not stopped investing in the things that we think are strategically important like our exploration projects to make the company better in the future. And last but not least, we work really hard to protect and enhance our EOG culture. Like I said -- we said, our proprietary and information technology system along with our bottom-up value creation culture is intact. We've not closed any offices or laid off people. And that is really in stark contrast to what's going on in the industry. I've never ever seen the industry in a lower morale mode than they are this year, been tremendous amounts of layoffs and office closures throughout the industry. But EOG is going to emerge from this downturn with our culture and our tremendously, highly productive workforce intact and the morale inside the company is really high. So last, the -- really, the key to the companies, what I just talked about is the culture. That's why we have a sustainable competitive advantage. We have a pleased but not satisfied attitude. We never, never satisfied. We never quit. We look at every nut and bolt of the company. We're return-driven and we're return compensated. Everybody from me down to the -- every person in the company is return compensated. We have a decentralized nonbureaucratic structure. We're innovative, entrepreneurial, very technically oriented. Every person is a business person first and they're held accountable on that. And our culture is totally sold and bought and engaged in environmental, safety and community and ESG matters. So exploration operations, information technology and sustainability are our core competencies of the company. And those are the things that will make us a very sustainable in the past, and those will make us sustainable in the future. And it's certainly aiding EOG more than ever this time in this downturn. So we believe we're going to emerge from the downturn a much, much better company. So thank you, and I'll turn it back over to Jeanine for Q&A.

All right. Thanks very much for your comments, Bill. We always enjoy hearing them given that you're such a leader in the space. So I guess as we move into Q&A, maybe the first topic could be on investment frameworks. Sorry, can you hear me?

Yes.

Okay. Great. I look frozen on my screen, but we'll just go with it.

No. I can hear you.

Okay. Great. In terms of the topic du jour coming out of 2Q earnings, it really was the formalization of these investment frameworks. And several of your peers announced new ones. They were all kind of back stocked by 70% to 80% reinvestment rate. They all were capped with single-digit growth. On strip prices, we see a wall of free cash flow coming for E&Ps. But historically, it hasn't really materialized, and I think there's still a lot of skepticism in the market. But we think that providing these formalized frameworks are a way for the market to start capitalizing on that free cash flow given the commitment. And so I guess my first question for you is when we all look to see what we'll get the generalist investor back into this space, do you think that formalization of the frameworks are going to be a catalyst for E&P?

Yes. I do think, Jeanine, that there's been a structural permanent shift in the E&P space. And I think the discipline that's been going on too slowly over the last several years has been super accelerated by this downturn and by -- rightfully so by the investor pressure. And it's really happening in the private sector. It's happening in the public companies and certainly, the majors are all going through the same process. And they're really moving towards a more disciplined approach that we believe we've been producing over the last several years since we switched to premium. And we applaud that. We think it's fantastic for the future of our business. We think it will help stabilize oil prices, and make it a much better environment for each one of us. And we're going to -- the important thing to know about EOG, we are committed to being a part of the solution to rebalancing the market. We are not going to grow oil in an oversupplied market. We have a history of not doing that, and we've got tremendous discipline in our past, and we're going to continue to do that going forward. As a framework, we'll give more guidance as we enter -- get more data about where we are as a company and as we get more insight on to what the macro looks like in 2021. But certainly, we'll give more framework on what that is. When the market eventually rebalance, and we think it will because we just don't think $40 oil is sustainable over a long period of time after demand recovers after the virus, and it will at some point down the road. Maybe it's a year or maybe it's 2 years. We don't know. We'll just have to see. But when we get to a point when the market is rebalanced, the EOG is very, very committed to generating free cash flow every year and returning that to the shareholders. So we're focused on that and making sure that we have a strong balance sheet going forward and generating really high returns. That's the focus of EOG is generating really high returns with every dollar we reinvest.

Okay. Maybe sticking to the framework. And you had the slide, which showed your 80% reinvestment rate over the past 3 years. And I guess my question to you is, were you targeting that 80%? Or was that just an outcome of optimizing free cash flow growth and investment?

No, it really is an outcome. It's not a target. It's just the way we run the company in a very disciplined manner. We wanted to work on our balance sheet, even though it was very, very strong. We had pushback over the last 3 years, why are you working on your balance sheet? Your balance sheet is already really good. Well, we think that's a fundamentally important part of our business. And sure enough, it is when we come to downturns like this. And our dividend -- our commitment to the dividend is very strong. And I think we've demonstrated that. And we believe on a long-term basis, that's the best way. A growing, strong, sustainable dividend is the best way because the investors benefit during the downturn. If you have a strong dividend, they benefit during the downturn. So having a strong dividend is a very beneficial for everybody going forward. So it's really an output. We -- like we say, we budget each year with a conservative look on oil prices. So we don't like to take it to the hilt. We say, okay, if it's going to be $50, I mean, we need to budget on $45, et cetera, et cetera. That gives us room to have upside in our plan every year. And then as I said, not only the macro, that's very important. That's super important for all of us to stay super disciplined going forward and make sure the market rebalances before we even think about growth or talk about growth. But the other thing that governs us is that we've learned from -- in our very distant past that you can grow too fast and your costs begin to go up and your well productivity goes down. So every year, we have sustainable improvements, and that takes a certain pace. You have to go with the learning curve and take your time and don't grow too fast to make sure your returns are improving every year going forward.