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

Bernstein's North American oil analyst. It's my pleasure to introduce you to the second set -- of the second day of the 39th Annual Strategic Decisions Conference. We are not expecting a fire drill. So if the fire alarm rings, take it seriously, your primary path of exit is straight out the back door to the right, to the escalators that you came up, you'll go down the escalators, and you will muster the quarter of 54th and 6th. For any reason that path is blocked, you will go straight back. There's an internal staircase halfway down this hall. You'll take that down one flight and then you'll exit on to Sixth Avenue and wait for further instructions. I'll remind you again of the format of this. This is a fireside chat. However, this is your conversation. You have QR codes in your agenda. Please use those QR codes with your phone to send questions up to the iPad that I'll be monitoring that ultimately I would love to have you drive the conversation with the questions that you want the answers to. In lieu of that, I will start the conversation and think of it as a pyramid. We're going to start high level with Ezra's views of macro down into thinking about strategy, and then we'll work our way through the various aspects of the portfolio. So that's kind of how we'll lay out the conversation. Before we adjourn, however, let me introduce the CEO of EOG Resources, Ezra Yacob. We'll come to the podium and make a very short number of comments and then we will adjourn for the fireside chat. Ezra, thank you.

Thank you, Bob. So good morning, everyone. The first thing, I just want to thank Bernstein and Bob for hosting us. It turned out to be a great conference, a lot of good energy in the meetings and some fantastic meetings. So I'll go through just a couple of slides here to kick things off. And this is really the first one, the most important one, and it's really our value proposition. It's become our mission statement. We're focused on really being among the lowest cost, lowest emissions and highest return producers in the industry. We think that's what our customer base wants. And we're off to a great start this year in 2023. We finished up the first quarter, ahead on CapEx, ahead on operating costs and ahead on production. We've made great strides, not only in our foundational our core assets, but what we call our emerging plays, our emerging assets. That's the South Powder River Basin where we're drilling Mallory resource play and a [ Niobrara ] resource play. It's our South Texas Dorado play, which we believe will compete as the lowest cost natural gas play, better positioned than much of the gas out there across the U.S. and then also our emerging Utica combo play, which we announced last year, we're still really in the phase of delineation, but we're seeing great results there. And we've kicked off our drilling program just in the recent months here. So when you think about EOG, that's a great place to start. It's with our #1 most important thing, and that's that we're a multi-basin operator. We've got a deep inventory of high-return assets. It begins with an investment on a premium price deck. That's something we use internally. It's $40 oil and $2.50 natural gas for the life of these assets. And when we invest on that price deck, we like to see each of our wells to be able to clear a 30% direct after-tax rate return hurdle. And more recently, we've increased that hurdle rate to 60% direct after-tax rate of return. What that does is, obviously, in a commodity-based business, investing on that low oil price basically gives us line of sight to being able to create value through the cycle. And we support that really by being a low-cost operator. That's how we're able to do that. And we utilize technology to empower our frontline engineers and geologists to really be committed to working to lower cost every day and improve well performance. We also strategically reach out and grab different pieces of the value chain or the supply chain when it's opportunistic for us, things like drilling mud, motors, things of that nature, sand, water. We're able to do that by leveraging one of the things we're able to do is leverage our balance sheet for that. We have a pristine balance sheet. It's been a hallmark of our company, really for decades. We also have a very clear cash return policy. Hopefully, it's very transparent and easy for everyone. We announced this last year and committed to returning at least a minimum of 60% of our free cash flow in any given year. The reason we phrase it that way is that we want to focus it on our regular dividend. We think that's the hallmark of great companies to have a continual -- continually growing regular dividend and growing it in a sustainable manner. What I mean by that is we grow it in concert with expanding our margins, right, on a flat oil price or flat commodity price deck. We also backstopped it again with that pristine balance sheet. Last year and the first year that we had that commitment, we actually ended up returning 67% of free cash flow to shareholders. Above and beyond that regular dividend, we switched between special dividends or buybacks depending on where we're at in the commodity cycle. The next thing that you should think about with EOG as I started off with is our commitment to environmental and safety performance. We want to be a leader. We have a net 0 ambition that starts with reducing our own Scope 1 and 2 operations -- emissions. We plan on being able to capture some, and we've kicked off a small CCS pilot project to really educate ourselves on what it takes to make that process more fit for purpose. The second thing that we've done is we've actually achieved our near-term targets set for 2025 of our GHG emissions and methane emissions percentage. We've deployed some new technology called iSense that allows us to do continuous methane monitoring. And lastly, all of these things I'm talking about really comes from the people. It's the culture of the company, just about 30 years now that we've been focused on, on really providing a decentralized organization that empowers the frontline employees to really take ownership of value creation for the shareholders. So when you think about EOG, those are kind of the 5 characteristics that I want you to keep in mind as we go through the Q&A here for the next 45 minutes. Thank you.

Great. Thank you, Ezra. One of the things generalist investors always want is a sense from a CEO that watches oil price every day, where the price of oil is going, where are we in the cycle? What are oil prices going to be at the end of the year?

Yes, that's an easy question. I'll take the cliche answer that's either going to be higher or lower than it is today, right? But we'll go with a little bit of background there. I think everyone knows, and this is public data, so it's not going to be a secret for anyone, but inventories were coming down. We entered the year with relatively high inventory levels as a result of -- much of the result of the SPR release last year. Inventory levels were coming down throughout the year as the U.S. continue to recover as China started to open up. And we find ourselves now with a small SPR release. You've got OPEC having taken some barrels off-line. But all things tend to forecast, barring a massive recession or anything like that, that as you go into the back half of the year and really exit the year that we should be undersupplied globally is what we're seeing. China's demand has obviously come back, I think, a little bit different than most people anticipated. Stronger on the services side, weaker on the manufacturing side. But nevertheless, when you put it all together, they've turned in basically record oil demand months for the last 2 months, back-to-back months. And so that bodes very, very well for the industry. I think on the U.S., North American growth, what we're seeing is relatively muted growth as we anticipated. Last year, coming in at about 600,000 barrels a day. Liquids growth this year maybe forecasted to be about the same, but much of that was going to be a year-on-year growth, not necessarily entry to exit. And I think we're seeing that with really relatively little activity, a little growth going from kind of February until now. And you're starting to see the rig numbers kind of softened, dominated on the gas side, for sure, but a little bit in the oilier basins as well. All those things kind of add up, I think, to basically where we're at today with front month pricing really being fairly reflective, maybe a little bit soft on current inventory levels. But looking forward, you can see inventory levels potentially have the -- at this point, I would say, look like they're going to continue to decline as we enter the back half of the year with the undersupplied market.

Yes, it's been funny to have the thesis on being an oil bull, which I have subscribed to has been overall, Russia volumes are going to roll over. China is going to come back, and the SPR will end. And I've been able to use that same report, just keep dusting it off. Right now, it's got good shelf life, because someday it will be true. I think the one thing in hindsight was just the impact, the inertial impact of the SPR release. Like we all tend to look at commercial stocks -- U.S. commercial stocks and correlate them to oil price, not total stocks. And so we're just trying to absorb a bunch of SPR, which again should be benefiting oil price. The other to your point is the fall in rig count. Did that surprise you, the last 3-plus weeks now?

Yes, I'd say on the gas side, not so much. I think everyone recognizes the volatility in the gas markets and the reaction sometimes that's needed for that. On the oil side, a little bit, I think what's happened on the oil side that we haven't talked about, you just briefly mentioned too, was the impact of Russia, right? The Russia-Ukraine war, I think a year ago at this point, everyone was anticipating a lot of those Russian barrels being off the market, right? I think that's one of the big reasons for the SPR being released. And what has happened is we find ourselves today with plus or minus, maybe 0.5 million barrels of Russian oil not making it to market, significantly less than the $2 million, $2.5 million, maybe that was forecasted a year ago. And on the gas side, it's not unlike the same thing. It just takes 1 or 2 things to really throw the market out of balance. And I think you're seeing U.S. producers and operators kind of respond to that. On the gas side, obviously, there's a bit of a warm winter, but there's always a risk of seasonality, but really last year, it was the outage of LNG demand associated with Freeport going down for some repairs. And you're talking about 2 Bcf a day going offline for roughly 8 months. That's back online right now, but it had the same effect as an SPR really, is it drove those inventory levels considerably higher.

Yes. If you think about the way you allocate capital is against a rate of return 60% at $40 oil, $2.50 gas. Those are close to shut-in economics, not for you all but for the industry. So when oil gets to $30 or $40, folks -- marginal folks shut in, that's a decent floor and net gas a little below $2 maybe, but we could quibble on that. Sitting here today, we're still at a wonderfully reasonable oil price, not as high as I'd like, not as high as investors might like, but certainly a reasonable oil price but we're awfully close to that floor on gas. So how do you think about longer-term gas? And are those levels correct? Or do you stick into them? Or how do you think?

Yes, we're sticking to them. So I'll start with that last part first. We're sticking to them, because we don't run the business, right, based on $40 and $2.50. We run our investment case on the investments that we make. And the reason we do that is we want to run the business so that we can provide value to the shareholders through the cycle, right? We don't anticipate oil ever being at $40 for -- well, look, we test it in 2020, right? Oil was at about $38 and look at what happened, oil whipsawed back after about 12 months, 14 months. So we don't really anticipate oil ever sitting at $40 for the life of these assets, say, 20 or 30 years, right? But what that does by investing on that is it continually lowers the breakeven. Now we're able to do it, because we have the depth of inventory and the quality of inventory to do it. It helps focus our staff on really bringing forth the lowest cost reserves as quick as possible. And that's what allows us to be confident that we can provide value through the cycle. When I look back on the last 5 years, the average oil price, average Henry Hub gas price is about $65 and $3.50 even with all the volatility and ups and downs. When you look at the previous 5 years on adjusted, low oil price was about $64.50, and the gas price was about $3.60. So yes, the $40, $2.50 is -- seems very, very conservative, but that's right in line with where we want it for where we're trying to drive the company. Now as I sit here today, you're right, gas is floating with -- is basically beneath that. So we have taken a few moderate steps. We have deferred, and we're trying, we're working through options to defer a couple of pads at Dorado without upsetting the operational efficiencies that we're trying to get that play up to, to try and push off some of the gas to when we think the market will be a little bit more [ in balance. ] But ultimately, again, we're in -- our capital allocation is based on each of those assets I described when I started the opening comments. And how much can each of those assets absorb from investment on that $40, $2.50 price deck while still getting better year-over-year? It's that simple, honestly. And the way we measure getting better, it's as easy as did your finding and development cost, your cost reserves, did it decrease by $0.01 year-over-year? If it did, you're getting better, right? That's all we're really looking for. And that's the best measure of whether or not you're overcapitalizing or potentially even under capitalizing any of these assets. So the depth of the inventory, the quality of the inventory and really focusing on that $40 and $2.50 for decades for the entire lifespan of these assets, that's what gives us a little bit of confidence in being able to move forward, progress with an asset, even though you're looking at front month spot prices a little bit underneath that.

Decades -- for shale, like 5 years is forever for a shale well, right? The last years 6 through decades, does it really matter?

On your operations cost, it definitely does. But you're right, on a direct rate of return, you're right. It's 2 to 5 years, 3 to 5 years is what's going to dominate. And so that's when you need to start to think about being strategic. Years 5 through '20, yes, it's all about those costs that you put in at the front. It's all about what have you done to keep your costs low when those wells have started to decline. It's what steps if you take -- look, everybody has Tier 1 acreage and everybody has Tier 4 acreage, right? It's what steps have you taken early in these plays to make sure that your Tier 4 acreage is actually going to provide economics when you end up drilling that stuff. So whether it's talking about an individual well or an actual asset position, you need to be thinking clearly about when you're committed to being a low-cost operator, you need to be thinking about that on day 1. You can't just think about, well, yes, we're leaning in on a higher cost today, but we'll make up for it later. No, no, no. You need to have the discipline from day 1 when you're moving forward and thinking through these plays.

The other thing you mentioned is moderating completions of some pads. I remember early in the shale era, people like how I'm going to do my big, long-cycle projects. And then I'm just going to use shale up and down to fill in the cycles and the edges, but it's actually terrible to bring a shale operation. I mean the cycles are disruptive to logistics, they're disruptive to cadence. So you've talked about moderating that cadence. How do you make sure that you don't disturb sort of the inertia of getting those logistics?

Yes, it's perfect. So I'll approach it from a little bit of a different area. We've got these 3 emerging assets. The South Powder River Basin, as I talked about, or the Powder River Basin in general, the Utica Combo and Dorado. And in each of these plays, there is something to be said for the economies of scale. That's what makes these resource plays work. And so after you explore for these plays, you identify that you've captured some sort of resource, do a little bit of delineation. The next step is really to try and get to a critical point of activity where you can capture those economies of scale, not only learnings, right, through opportunities to drill wells and bring them on and see the production and get that feedback but also being able to actually put in some infrastructure, whether it's local sand, water reuse systems, water lines, gas lines, so on and so forth. So that's the key with Dorado. This is the first year that we've actually gotten that play up to a point where we're feeling the -- where we're at that critical point and being able to capture some of the economies of scale. We're running a rig program consistently. We're not going to move away from that. And we're running a frac spread, not consistently throughout the year as far as 365 days, but we're running it for big blocks of time. The worst thing you can do is either have a rig come in, drill some wells and then go away and then come back, and you've got different crews and maybe different rigs and rig up takes a long time. It's the same on a completion spread. If you have a completion spread come in, you lay down a bunch of lines, you set up logistics, and then you send it away for a month. And then you have it come back for 2 weeks. It's just -- it's as you described, it just builds in a tremendous amount of inefficiencies. So we've kind of captured that. So we're keeping it for a period of months, a period of pads. And really what we're trying to do at Dorado, because in addition to capital allocation at the kind of life cycle of each of these plays, the other thing we look at is the macro market. And you see gases at very high storage levels right now. So we've basically taken a couple of pads. We're trying to and operationally just shift those to the beginning of the next time that a frac spread comes back. Things of that nature allow you to continue to capture the efficiencies, progress through learnings and seeing wells come on. But at the same time, you have the flexibility to adjust a little bit for what you're seeing in the macro environment. The last thing you want to see -- and we all know that there's a lot of LNG demand coming online. The last thing you want to have is 6 months before all that LNG demand comes on here, the industry ramps up 100 rigs in gas basins to try and meet that demand, right? What a squandering of resources and efficiencies that would be. And so slow and steady, continue to invest in these assets to the best of your ability at the right pace so that you're learning and pushing them forward, but always with an eye on being low cost, doing everything to the point where you can guarantee that the assets will be able to provide value through the cycle.

The challenge with squandering is we're almost predisposed to do it as an -- drilling the wells is faster than building the gathering to the coast, gathering to the coast is faster than building the LNG. So we almost always see to shove all the molecules up against the biggest capital project.

That's it. In any commodity-based business, any cyclical business, it's really easy. It's human nature to get sucked in. When times are good and cash flow is there, you reinvest more and more, right? It makes more sense. But does it really make sense? You're leaning in on probably a higher cost environment. Those costs are going to stay with you through the cycle. The true discipline comes, I think, we think, when you're investing and holding yourself to the bottom cycle, right? You're holding yourself to do an investment at a $40, $2.50 gas price. That's what should really make the industry or at least our company investable for the generalist investors, the energy investors. And I have confidence that they can still receive value through the entire cycle.

You mentioned LNG. LNG is very much viewed as part of the energy transition for an E&P company. You've taken interest on the midstream side of LNG export volumes. But broadly, how do you think about the energy transition? How are you preparing for it, allocating capital against it?

Yes. We think of it -- the transition is more of a solution, really long-term energy solution. We're big believers that technology will be able to provide a bit of a solution to energy poverty throughout the world. But it's not going to come from any single source of energy. That's really -- and that's why we say solution. That includes oil, natural gas, some coal. It includes renewables. What it's going to require is each of those getting a little bit cleaner than they've previously been. Each of those need to provide reliability and each of those need to provide a decent amount of low cost. That's really the solution that the world is looking for. And so that's really how we define the transition as a bit more of an evolution that encompasses a basketful of different energy sources.

And you mentioned CCS at the start. Two thoughts. One, I'll ask you to talk about what you're doing there. But at a higher level, you've got a $40 oil price. You've got a $2.50 gas price. What price of carbon do you -- what's a double premium carbon price?

Yes. So that's interesting. Listen, the IRA has definitely helped. The updated 45Q, I think, is doing what it's supposed to do. It's spurring a lot of investment and driving forth technology and innovation, which is what it should be doing. For us, we don't necessarily look at it that way. We do look at it as this is a piece of our business, and it needs to generate returns to be sustainable for the investment community. I don't think part of our value proposition is just to throw money at a solution and increase operating costs long term. But lowering our emissions is what the consumer wants, and that's what they're asking for. It's not unlike in our mind, SWD or water disposal, right? SWD and water disposal originally was a pretty high cost of operating, and what's happened in recent years? We've driven down that cost. We've developed ways to reuse the water. So now that it's actually you're getting some capital benefit from having produced water, because you're not having to pay for sourcing. That's the way we think about our emissions projects. Our strategy overall for a net 0 ambition, it's really a 3-pronged approach. And the first one is reduce, right? Just reduce our operation -- our emissions from our operations at the field level. And some of you know there are ways to do that through pneumatics, through capture things of that nature, just electrifying different parts of the business, really just being more cognizant about reducing your flared volumes, things of that nature. That step #1 is to actually operationally reduce your emissions. Step #2 then is to capture. And with the CCS, I'll go ahead and lean in on your question about what we're doing. We're looking at CCS as the potential for more of a fit-for-purpose brand, right? We're not a large industrial. We're not a super major company. Our goal is not to capture all the emissions for the city of Houston and storage...

Dump it into the Gulf.

Yes, offshore with -- that's not our expertise, right? That's not what we do. What we do is we're very mobile. We're agile. We're decentralized. We're in many basins. And we've got a lot of technology. We've got a culture of innovation. And so we've developed one pilot project we're looking at right now, and we're developing ways to try and utilize that to, again, make it a little more fit for purpose, make it a little more economic where you can actually chase some of these smaller, and I don't mean very, very small fugitive emissions, but things that come off of say, compressor stations, combustibles out in the field, things of that nature because we think that that's where a lot of the industry and the innovation is going to need to go is some of these more remote sources of emissions. The last part of our approach is obviously going to be offsets. I think everyone to get to a net 0 ambition will need to utilize some amount of offsets. In our impression, our perspective is that this will be a real minor piece of it. It will be to clean up the last little bit of really dispersed minor emissions that, again, you really can't economically justify kind of going after and chasing. Some of these emissions are things that are not even required to be reporting. That's kind of the way we view it.

In terms of what's inbounds, out of bounds, could you -- you've made efforts for solar installations supporting electricity in the field, but not building solar farms to support Houston. You're certainly working on the pneumatics. What's inbounds and out of bounds for tackling all of that?

Yes, anything I think that lines out with our core business strengths, our competitive advantages. A lot of these projects, they don't come from the top. They don't come from me. They don't come from Billy Helms, our President and COO. These are things that are kicked up in the field on the workstations and the desktops of our engineers. That's where -- again, the real value creation comes from. So some of the things that Bob was mentioning, we piloted a solar-assisted natural gas compression unit, right? It makes a lot of sense during daylight hours or when it's cloudy out or a dust storm in West Texas, right? You go ahead and have a natural gas compression system. When it's sunny and times are nice and moderate, you go ahead and build a small solar facility and I think can run off of solar right off the bat, you would think you'd have maybe a 30% reduction in emissions. Well, we didn't really see it work that way. The returns weren't quite there as we forecasted. We ended up using a lot more land used for that solar field than what we had originally anticipated. And it really just didn't work out very well. And we developed some of these things as kind of shareware. So the technology is out there for the next time, if somebody wants to take a look at it and try to innovate on it. On the flip side, a project that's worked phenomenally well is something that we call closed-loop gas capture. And this is simply if there's a downstream interruption on our marketing. And typically, at that time, your gas would go to flare until that interruption clears, our engineers have designed a way where we either reinject that gas downhole to a nearby depleted well, and then we can basically turn around when that downstream interruption clears or for -- there's minor amounts of gas, we can kind of just loop that back through the facility system until the downstream interruption clears. Again, the returns on that are infinite, right? Because instead of flaring your natural gas, you're actually protecting it, being able to sell it, providing that value back to the shareholders. More recently, as I mentioned at the top of the hour, we've developed in-house continuous methane monitoring called iSense. These are basically methane monitors that are out on our pad locations. The fantastic thing about them is we get real-time data that's tied into the rest of our monitoring on our facility. So not only are we detecting when there's a methane leak and we can send crews out there to fix it, a little bit more quicker response time than just our voluntary LiDAR program. But even more important is we're combining that methane data with pressures, other data that we're seeing, production data across the facility and starting to identify what is the root cause of that methane leak as it occurs. Ultimately, this data should lead to really the front-end design of better facilities to begin with.

If we pivot a bit to financial strategy, you're sitting at positive cash in an industry that never had cash, how do you think about the balance sheet? What's the right level of cash? And what's the right use of that extra cash once you've -- we'll come talk about dividend and buyback [indiscernible], but what's the right level of just net cash on the balance sheet?

Yes. We don't have a cash target. We never really had. We do covet a pristine balance sheet. We covet being low debt. We have a history through the company of having a strong balance sheet. And in a cyclical industry, look, we invest on $40 price deck, but we are still subject to ups and downs in the commodity price cycles, right? When oil prices are $100, we're going to be robust with free cash flow. When oil prices go down to $40, things are going to get squeezed. We've leaned in on that balance sheet before during downturns. We did it during the global financial crisis. We did it during COVID. So having that as our shock absorbers, what gives us confidence in growing the regular dividend as consistently as we have. We've paid the regular dividend for over 20 years. We've never cut it. We've raised it in each of those years, except for, I think, 2. And that's one of the reasons that we've been able to do it is because of that strength of the balance sheet. Having -- we find ourselves now with cash on the balance sheet as well. And we do have some strategic initiatives for that. The first thing is just to keep some reserve cash to run the business, right, to stay out of commercial paper markets and things like that. The second piece though is really for counter-cyclic investment. In past years, we've opportunistically prepurchased casing during 2020 at a relatively very low time in industry. We prepurchased some line pipe that is actually going in the ground right now to help service Dorado. And last year, we have done some small acquisitions. We prefer small bolt-on, dominantly undrilled acquisitions when we can get them last year in the Utica, we purchased acreage, including 130,000 net acre minerals -- mineral acres as opposed to just the lease, which provides tremendous value. Ultimately, we can also use it as we start to lean in on an opportunistic share repurchase. We have a reauthorization in place of just under $5 billion right now. And while we prefer not to use that as a programmatic buyback, we prefer an opportunistic buyback. We recognize the challenge with doing that in a cyclical industry is typically when times get tight, you're not going to lean in and do an opportunistic buyback, because you don't have the cash and you're worried about what the outlook looks like. The opportunity there, though, will be there, you'll be able to have the backbone to exercise on it if you actually have some of that cash on hand. Now that doesn't mean we want to leave cash on hand just forever until we're waiting for another COVID or anything like that. We're calling us in if the opportunity cost associated with it. But having the flexibility and the strength of the balance sheet is what allows you to be more strategic and opportunistic not just in buybacks but in counter-cyclic investments to really provide value for the shareholders.

So I've got a long-term financial model for you all. It's probably wrong. One thing I never had in that model was much of a buy -- zero.buybacks because historically, that did not -- you'd have the authorization. We were kind of waiting, never saw it. So that line was all 0. That line is not 0 anymore and as of last quarter. So talk to that. And what does that change mean? And how should we think about your propensity for buybacks?

Yes. What we saw in March was what we considered a dislocation. We saw a lot of panic associated with the SVP, the financial banking crisis, many crisis, crisis there. In late March, we saw oil sell off pretty dramatically. And our equity position followed even more dramatically. What I mean by that is industry's multiple really compressed even more so than just the oil price falling. And we really didn't see any change in the macro environment as we started the conversation off with inventory levels were still going down, demand was still going up. Supply was not out of balance. And so we figured that, that was a great time. It's one of the opportunities that we're looking at as we saw a dislocation there. Now I will say dislocation is kind of a moving target. And I know that that's what makes your model kind of difficult. But the strength of the company is part of what determines how we consider a dislocation. The company, since we first came out with the repurchase authorization 18 months ago, has already gotten much, much stronger than where we were coming out of the pandemic. We're reallocating across many more basins than we were during the pandemic time. We've strengthened the balance sheet, as we've just talked about. We've lowered our breakeven to the point where this year, we're growing production at about 10%, 9% on a BOE basis. We've got a roughly midpoint of a $6 billion capital budget, and we've got to break even on that capital budget plan of $42 oil. We've also been able to kick off some of these exploration plays and invest in and move forward some of these emerging assets that we already have. So again, as the company continues to strengthen, the idea of that dislocation continues to evolve and how we measure it as well.

If we go back, 2016, and now we'll talk about the dividend and the base dividend, which is clearly differentiated EOG versus others, it's too little historic sides. One is a bunch of your peers that pay variable dividends had fought with the Bloombergs of the world, the CapitalIQs to get those variable dividends shoved in as dividends when you pull it up on. And then suddenly, that measured the top of the cycle, and the cycle drops and variable dividends follow. So there is a differentiation on a base dividend. If you go back 2015, the Big Short comes out. Great movie, the villain in the Big Short is the rating agencies. So 2016 starts and the rating agencies slash the price of oil they use in their models. And that effectively kind of closed debt markets. And you saw a bunch of large high dividend paying E&Ps cut them or get stuck with them and forced to do other things strategically down the road. So how do you think about what's the maximum base dividend where you can kind of through that cycle, support it, not worry about it, not worry about funding it?

Yes. That's fantastic. So we look at it from the breakevens. We definitely don't want that regular dividend to get ahead of ourselves. And so the way -- when we discuss it as a management team, when we discuss it with the board, we look at many different things. We look at where our current breakeven is. We look at less about the macro forecast because, again, we know that prices are going to go up and prices are going to go down, and that's not going to determine what we do with the regular dividend. That will be reserved for a special dividend. When we think about that regular dividend, it all comes down to where we're at with our inventory, where are we with our exploration or emerging assets, what's the line of sight on continuing to lower our breakevens? We've raised that regular dividend right now to a spot that's very competitive, very compelling, I think, with the broad market. It sits at, unfortunately, with the pullback here, we're probably at 3.25% yield or something like that. And it's very manageable right now. But again, it's the strength of the balance sheet that we think we could lean on if we are in to support it for a short period of time. It all starts again with investing and having an investment criteria based on what we think the bottom of the cycle could be.

And if we think about inorganic growth, you've committed forever to not be interested at all in expensive M&A. The word expensive is pulling a lot of weight in that sentence. So talk about what expensive M&A means to you and what it doesn't mean to you.

Yes, we continue to evaluate the market. We look at a lot of different deals out there not because we're active, but we want to make sure we're not missing anything. Again, the strength of the business continues to improve, and so we want to be knowledgeable about what's happening in our industry. And we usually arrive -- we always arrive at basically the same criteria. And what we see is, I just eloquently spoke up here about our investment criteria on a $40 price deck and that we're investing in wells of return of 60% direct after-tax rate of return. Well, you can't really get that when you're buying something. You really can't. If it comes with production, typically, production is going to require a bid ask somewhere in the range of 10%, maybe 8% to 12%. So any capital you're putting towards that right off the bat, you're diluting the return profile of the company from just investing in what we believe is already a pretty robust inventory. Now it would need to carry that return, obviously, is a significant amount of undrilled acreage that's higher quality than what you already have. And what I mean by that is I don't know when you've got a robust inventory, I'm not sure if you need to buy undrilled acreage unless you're willing to put rigs on it. If you're buying a whole bunch of acreage and reducing the rig count, that kind of signals to me that you don't think it's as good as what you're already drilling. And so it doesn't make a whole lot of sense to us to be able to drill that. We're -- our exploration program is focused on not just adding more inventory. It's really focused on adding better inventory, things that we want to drill, things that we're -- are going to be additive to the front end of our existing inventory. So you should be seeing activity, capital allocations and rig activity entering on these exploration plays. And that's the same thing that we consider with M&A. Now when you do go back into our history, we did do one large deal in 2016 timeframe with the Yates merger and acquisition. And for those of you that aren't familiar, when you look back on that deal, it basically came with very, very low PDP, very low production and a significant amount of undrilled acreage upside. That was contiguous, not only in our Delaware Basin with our existing acreage position, but also in one of our emerging plays, the Powder River Basin. And so those are the types of deals that when we look at how to be value accretive, those are the types of things that end up happening at some point with low production, something that's got a lot of upside Tier 1 undrilled acreage.

And importantly, it was a merger that was not a competitive auction where you raised the paddle last and pay the most. So that's the other part of that formula.

That's right. And a big piece of it was they were interested in having EOG shares, and the biggest reason was because of the strength of our balance sheet.

If we switch to -- we're in the Permian now, because we're talking about Yates. And if we switch to more of the production side, a lot of time on the most recent earnings call around development strategy. And there's been a bit of a journey and a bad one, a learning journey in the industry from putting a single well in a zone, depleting that badly and then coming back and drilling poor child wells in that zone. Now the industry is kind of learning, we'll wait a minute drilling a zone and then coming -- drilling that zone badly and then coming back and drilling the zones around it was suboptimal and people are pivoting. And you all sort of highlighted a co-development strategy. Generally, people talk about single zone versus cube development. You're somewhere in between. Like give a little more color of what you're doing there. And I'm not sure I left that earnings call kind of figuring out your secret sauce. Maybe that was deliberate.

Yes. I don't know if it was deliberate. We look at it -- it starts with the geologic model for us. We look at developing all of the zones that are going to be in communication with one another. And that doesn't contemplate an entire top to bottom on the Delaware side, from the Avalon or Leonard Shale, all the way down to your deepest Wolfcamp target, because you've got mechanical units in there that are basically frac barriers. And so what we end up looking at is co-developing, sometimes it's 2 zones, sometimes it's 4 zones, sometimes it's 6 zones. We try to develop all the zones that are going to be, let's call it, in the same flow unit, if you will, a portion of the reservoir that's going to connect up. And that's really kind of how we manage it. Now to take it a step further, there are different things that we do, and this is a little bit of the secret sauce on the initial well package that kind of helps when you come back. At some point, you always have to offset it well, right? When you have a large contiguous acreage position. And we do some things on the completion of the wells upfront. That kind of helps, make it a little bit easier to come back and not suffer some of the issues from the production that have plagued industry. Now these are things that we've learned through almost 2 decades of unconventional development, right? We've been in just about every North American major unconventional resource play that there is. And we've learned a lot through trial and error. We've learned a lot through collecting data through all the horizontal wells that we've drilled and completed. And that's how we approach it in the Delaware Basin.

Yes, if you think about the Eagle Ford and think about middle of the Cretaceous in the middle of the Eagle Ford, there's volcanos all across Texas, laid down this gumbo layer that ultimately becomes a beautiful frac barrier between the upper and the lower Eagle Ford, there's no such barrier, right? You look at the logs across a big stack of oil. And so what you're kind of saying is you found the [ baffles ] that weren't obvious at first.

Yes, that's exactly right. It's a different level of scale. It's a different rock type and it takes a lot of -- again, it kind of goes back to what we were talking about before is being committed to continually learning, continual improvement, continuing to think about how am I going to make this play better. After I drilled the #1, #2, #3 locations, how am I going to make locations #4, 5 and 6 just as good? So continuing to learn about the basin and starting with the geologic model and continuing to work it, we've been able to identify some of the mechanical units in there. Now one of the benefits also is it goes back to our multi-basin portfolio, we're able to utilize data from across different basins, different geologic environments, different pressure regimes. And that's really what continually helps our modeling and geologic understanding of any of the plays that we're in. And it's not just one directional, it's bidirectional. Things that we've learned in the Eagle Ford have led to better understanding in the Permian. Things that we learn in the Permian go back and eventually help our understanding of the Eagle Ford and help progress the development there as well.

I ask a question on the Utica and then, investors have some questions that I'll pivot to. So the thesis on the Utica is here was a play early in the shale oil revolution that came and went quickly. We haven't drilled a decent well there, a modern technology well in a dozen years. So it seems trivial to go back and apply today's technology to a place where we know that there's hydrocarbons. Why would the Utica not work?

Yes, that's a great -- that's exactly it. It's funny, right? When you take the blinders off and you come with a different perspective from different basins, it's amazing the things that you can uncover. But the key to exploration, right, has always been trying to figure out why something will work, not why it won't work. There are a million reasons to find why an exploration play won't work. And a lot of those things do. There are a lot of failures out there. But the real beauty is trying to apply technology and innovation in a different perspective, to try and figure out what will make something work. And I'll be honest, it's not the first time that we've looked at the Utica, right? We've been in and out of looking at the Utica and the liquids-rich window for a number of years. But again, as you are committed from continual learning and you're learning things about the Delaware and you're learning things about the western areas of the Eagle Ford that are less pressured, you start to apply these understandings to different basins and that's when you start to unlock new found value.

And then if we kind of pivot to some investor questions, how does your CapEx guidance assume for service cost inflation or deflation or disinflation for the remainder of the year?

Yes, that's a great question. We started this year anticipating about 13%, 14% inflationary pressure year-over-year. We baked into our plan at 10%. That's our goal because we believe that we can probably offset another 3% to 4% through just operational efficiency gains. Some of the softening that you're hearing being talked about in the market right now. I'm not sure if that's really going to show up for many operators this year, ourselves included. Things like casing, you end up buying so far out in advance that the softening you're seeing in the spot market today is really going to show up late in the year. Wells that are being completed today have been drilled a few months back with -- under a higher service price environment. So things are, I think, softening is leading edge. You see rig rates pulling back and activity levels like that. But we'll just have to see how it progresses out throughout the year for us. We still feel very confident with the model that we've played out there and the CapEx plan.

I will start the three big buckets of steel, fuel, which you can see on the screen every day and labor -- talk to labor.

Yes. Labor for us, we increased activity last year, and so we got caught up on the labor squeeze. Labor for us hasn't really been about wages that's not it. Wages have gotten back to pre-Covid levels, but it's nothing exorbitant. For us, those challenges were labor availability, right, getting qualified personnel to show up on day 1, but also to show up after 2 on and 7 off, 2 weeks on, 1 week off to show back up, right, on day 22 as it would be. And that's been the challenge with it. When you're running a drilling rig and you expect a $6 million crew and you have a $4 million crew come up, there's going to be less efficiencies there. And so the challenge on the labor side last year was really cost creep due to nonproductive time or inefficiencies that were there. This year, we've maintained a pretty consistent program. And so we're doing much better on the labor side. I think industry is in general, but the ability of being able to really run a consistent program from year-to-year has been the biggest impact on that.

On that day 22 absence, where did that person go to a different job in the past, they went back -- did they...

Yes, that's a great question. I think last year, you had a lot of new employees coming and basically trying out the oilfield and then going back as part of probably just a more broad socioeconomic kind of demographic shift or job function shift. In general, what we saw with the labor workforce on the oil and gas side during the pandemic where things like truck drivers, we're able to start driving trucks closer to home. Welders construction form and things of that nature, all of a sudden found jobs closer to home in like the housing construction boom, residential or commercial construction boom. And don't forget, just the basically the shift change that we saw throughout COVID, not just in the oil and gas industry, but in any of these industries where you had people that were ready for retirement retired, people that were supposed to enter the workforce didn't necessarily enter the workforce. People that were hanging on for a year or 2 past their retirement age went ahead and retired and people within a year or 2 of retirement eligibility went ahead and retired at all. So you just, in general, lost a lot of people from the workforce and didn't have a lot of backfilling on there. And I think that's just starting to work through the system as basically part of the post-pandemic economic recovery that we're in.

Another question. How do you think about reserve duration and portfolio mix given factors such as EV adoption, which may be positive for nat gas over time, but detrimental for oil.

Yes, that's great. We are bullish long term on nat gas. We think that, that will be a bigger portion of the basket of energy resources that I talked about earlier. We think it has the ability to displace coal. And it definitely has the reliability that many of the renewables can't quite offer. And so we're very bullish on that. On the oil side, regards to EVs, what we see -- when we look at it, and this is, again, public information, there's a lot of models out there that kind of suggests your EV penetration rates almost offset the same amount of oil demand loss from just natural efficiency gains on ICE on internal combustion engines. And so that's how we kind of look at it. As far as our product mix going forward, we're somewhat agnostic as long as we adhere to the $40 -- $250 pricing. When we found South Texas Dorado's natural gas play, we weren't necessarily discussing amongst ourselves that we should go find a massive natural gas play because one day, there could be a lot of LNG demand and offtake for it. What we really found was a reservoir in the Austin Chalk. And we found a way to identify the pay criteria, the reservoir quality that was providing very large wells overlying our Eagle Ford oil window. What we did is we identified that through core and log work. We mapped it up basically across the entire Gulf Coast, and we leased a number of different areas where we saw there was potential. The one that ultimately competed again, that was additive to our portfolio was a Dorado. The other one certainly weren't dry holes, but they also certainly did not compete. We're not additive to our portfolio. And so that's really how we forecast and move about on our exploration program. It's really, again, comes back to a returns-based question and what's going to create the most value for the shareholders.

And in our last minute, can you let the audience know what's the value proposition for owning EOG stock as a way to close?

Yes, I love it. We'll reiterate, we'll finish up the way that we started and it's still on the screen. We are focused on being a lower emissions, low cost, high-return operator. That's what we think the world needs. That's what we think our consumers are wanting. And we think that, that's with the shareholders. That's the best way to create value for the shareholders. We do it through being committed to a multi-basin operator, right? We see significant -- we've talked about it today, significant advantages, not only for geographic diversity and product diversity. But think of it as a rising tide lifts all boats. We can utilize learnings across all those basins that allows us to optimize development across each of our assets. We're committed to being a low-cost operator. You've heard me talk about that. That's the critical thing going forward, be a low-cost operator and do it through applying technology and innovation, encouraging our employees to put forth whatever they need to, to basically keep this a real simple mission, right? It's a real simple job. It's creating more hydrocarbon for less cost. We covered our pristine balance sheet and our transparent cash return strategy. It supports all of our strategic initiatives, including supporting that regularly continuing to grow sustainable regular dividend and then our cash return strategy at minimum a 60% cash return to our shareholders. We're committed to sustainability on both the environmental and safety side. We utilize technology and innovation, just to lower cost, but also to lower our emissions. And we think that, that's really the path forward. And we think the industry, in general, will play a big role in reducing emissions globally. And then lastly, it comes down to the culture of the company, the people that we have here. We're committed to being a decentralized organization. I'm a big believer that any industry, any company, if you can execute on a decentralized strategy, that's the best way to do it. We push decision-making powers further down into the organization of the people that really touch the value proposition of the business every single day. And for us, that's what we're committed to, and that's the value proposition you should be thinking about when you're looking at EOG.

Well, ideal. With that, I thank you, Ezra. Thank you to the audience. And if we could thank Ezra for joining us.

Thank you, everybody. Thank you.