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

We're going to keep things moving. Very excited to have EOG Resources to present. Again, they've been long-term supporters of the conference. So I thank David and the IR team for their continued support of the conference. Delighted to have President and COO, Billy Helms, to present today. Bill has done a fantastic job spearheading EOG's technology and use of new processes to really drill better wells for lower cost, more safely and with the better emissions profiles. I'm going to turn it over to Billy with some introductory comments, and then we'll continue with the fireside chat.

Yes. Thanks, Arun. First, I'd like to thank Arun and JPMorgan for having the conference and inviting us to participate. It's always good to be back in New York. I remember last year was the first time I've been back in New York for a while, and I was excited to be here and saying this year, it's good to see a lot of friendly faces and good people in the industry. So I just wanted to throw out this one slide really just to talk about -- this is kind of the starting slide in our investor deck, and it kind of talks about the value creation we see in the company, and we really just become kind of our mission statement, and that's to be among the lowest cost, lowest emissions and highest return producers in the industry. And so that's what drives us every day. It's about trying to always get better at what we do, no matter how pleased we might be with what our results are. And so we started the year with pretty good results in the first quarter, certainly generated solid results, a lot of that underpinned by our foundational plays, the Eagle Ford and the Delaware Basin. But on top of that, we've had excellent execution across all of our portfolio of multi-basin properties. And we're seeing a unique opportunity to continue to add to our inventory through our exploration effort. Just looking back the last 4 or 5 years, we've added really 3 key significant growth engines of the company that we see going forward, that being the Powder River Basin, the Dorado play and now our new emerging Utica Oil play. So on top of that, we feel good about our decades of multi-basin inventory that will continue to grow over time. So we're very excited about the future of the company and our going forward are more constructive about the outlook for both oil and gas prices on a long term, medium to long term. And so it's a good phase to be in the industry. So maybe with that, room, we'll turn it over to the…

Billy, before kind of digging down deeper into the company, I know you and the whole team at EOG do a lot of macro work. And so I was wondering if you could give us your latest thoughts on the oil market fundamentals and how constructive you guys are on oil?

Certainly, I think it's safe to say right now that the market is trading differently than we see the outlook on the fundamental supply and demand balance. I think going forward, we're seeing the market continue to tighten and inventories continue to draw down. This last year, you have to keep in mind the inventories rose largely on the back of the SPR releases. And so without that, the inventory would be a lot shorter than we are today. The supply has been muted in the U.S. I think we're looking at oil supply growth being somewhat similar to last year, about 600,000 barrels per day year-over-year, plus you add the liquids on to it is a little bit more than that. So U.S. supply growth has been somewhat muted. And then on top of that, the OPEC cuts are starting to manifest. They had their first month last month of cuts. And that's going to continue to stay with us for some time. You know they extended that through the end of 2024. And then Saudi instituted another 1 million barrel per day cut starting in July. So all that to say is that supply will be limited going forward. On the top of that, demand has grown. It's grown maybe at a little bit of muted pace compared to what I think people were estimating, a lot of that with China demand, although China is that their demand is at the highest level it's been. And yet it's not maybe as great as what people anticipated it would be. So when it does start to go again. I think if you break China down, you really look at it, the manufacturing mode has been somewhat muted and declining, but services sector has been growing quite a bit. So all together, their demand is about 16 million barrels per day, which is an all-time high for them. So once the manufacturing side starts to pick back up again and it will, demand will continue to rise. So constructively, going forward, I think we're feeling like we're short term away from seeing the market tighten even further. And so I think we're more constructive on where oil prices could go. The market seems to be trading in a kind of wait-and-see mode. We were in a wait and see when the market does tighten before they respond with near-term price increases. Now on the gas side, I think we also see the near term, the rig count is starting to drop and the gas plays in both Haynesville and a little bit in the Northeast, that will have an impact on supply. And the demand has been somewhat volatile with Freeport being offline. Now it's back online at 2 Bcf a day. Sabine Pass is going through some maintenance, about 1.6 Bcf a day that's kind of offline now that should be returning in the next few weeks. So LNG supply or demand should be at its peak back here in the next few weeks. So going forward, the supply kind of waning from the Haynesville and other places, you should see a little bit more constructive outlook for near term for gas. Longer term, we're still more constructive medium to longer term. Once the LNG -- next wave of LNG capacity starts to grow back in '25 and '26, it should be more supportive for a constructive view going forward on natural gas. So I think medium and long term, both oil and natural gas were more constructive.

I want to talk a little bit about -- or ask you about capital allocation. As we think about this year, you're relatively flattish in the Delaware. Quite a few more tills in the Eagle Ford. What was driving the kind of relative capital allocation this year?

So obviously, we always allocate as a return-based company, we could always allocate based on returns. We're generating solid returns in both those plays. In the Delaware Basin, though, so in the Permian in general, that's the area with the highest level of activity in the country. And that's not an area that we want to necessarily grow activity in the sense that's where you also see the most labor constraints. That's where you see the most service constraints. And what we want to do is try to maintain a flat level of activity there, we'll still grow volumes in that area, but with a flat level of activity. That way, they can continue to work on continuous improvements, drive efficiencies in our business, get better drilling the wells and completing the wells and overall lower the well costs. Now in the Eagle Ford, we did increase activity there relative to last year, but it's back to the same levels of activity we had the year before. And so it's just getting to a level in the Eagle Ford where we can maintain a consistent level of production in that play. And I might say on the Eagle Ford, it's a good example of how all these plays will mature over time. The Eagle Ford and naturally, we've been drilling that field for 12, 13 years now. And we drilled the best wells in that play early on as you naturally would. You always want to drill your best wells first. But we've since that time, we have lowered the well cost enough. So if you look at the returns we're generating on that play, the last 2 years have generated the highest returns in the history of that play. And that's because we've lowered the well cost so much. We've gotten a lot more efficient in what we do that we're generating higher returns today than we did 10, 12 years ago. And that's the way I think you'll see an evolution of these plays work. You'll drill your best quality wells first. And then as you improve and get more efficient and drive sustainable improvements in your cost structure going forward, you'll move down the ladder in your lower tier plays.

Bill, how should we think about other of your premium plays, capital allocation? You mentioned early on the Utica oil play. You get the PRB, which I think is going to have a couple of rig lines there this year?

Yes. So on top of that, so on the top of the Delaware and the Eagle Ford, what you're going to see is continued allocation of capital towards these emerging plays. So the Powder River Basin is going to have a little bit more activity this year. We'll drill about 40 wells and more than half of those will be in the deeper target, the more formation. And we're pretty excited about what we're seeing there on the early time results from the development program there. And then some of the capital will be allocated to Dorado. We're going to increase activity there slightly on the drilling side. We're choosing to delay some of the completions just to the near-term gas prices have fallen back a little bit. But with running 2 rigs in that play, we'll probably complete or drill about 30 wells a few more than last year. But we're starting to see the efficiencies coming through our business by maintaining a steady drilling activity. So we're pretty excited about what we're seeing there early on. And then the newest play, the Utica oil play, as everybody knows, that's in the oil window of the Utica play. We're seeing tremendous results early time from some of our initial wells, and we expect that to continue to improve going forward. But we've got to build out some of the initial gathering lines to be able to fully develop that property. So it will be a little bit of activity this year, 15 wells or so, and then we expect that to grow in the future. So you'll continue to see increased amount of capital allocated to these emerging plays on a go-forward basis.

I want to ask you about M&A, you guys have rarely done M&A been watching you since the late '90s. But your cash balance is going to swell to above $6.5 billion by year-end. And that's versus $3.8 billion in net debt. So you're going to have a pretty significant net cash position. And so investors have been thinking about, well, are they building cash to essentially use for strategic M&A? And maybe some thoughts on that.

Okay. Well, first of all, we do cover a strong balance sheet. That's one of the assets we really hallmark is the company. And I think having a little bit of extra cash on the balance sheet when you're in a volatile commodity business is probably a good thing. But yes, we're not really at a point where we're looking at doing a lot of M&A. We did do the Yates deal back in 2016. And I think most people recognize that as a very value-added a deal that we did back at that point and largely because it had a tremendous amount of upside. And when we bought that property, we actually increased activity drilling those properties sooner. So it spoke to the fact that we value that inventory at a pretty high margin. So we increased activity there. So I think as we think about M&A, does the inventory that we would add through M&A actually compete with what we're drilling today or does it go to the back of our inventory and then get drilled for, say, 10 years. And in that case, it really doesn't make a lot of sense to be spending that kind of capital on the inventory that we're not going to drill for a long time. So that's just kind of the way we think about large-scale M&A and the fact that we continue to add high-quality plays that compete with the top of our inventory through our exploration program, it really don't see the need to add to rush out and add a large M&A to our portfolio.

Okay. Let's talk a little bit about cash return. For the generalists in the audience, can you discuss your capital returns framework?

Sure. So we're definitely committed to returning cash to the shareholders. We've come up with a formula that says we'll commit to return a minimum of 60% of our free cash flow every year. to our shareholders through the form of a regular dividend. And we view the regular dividend as, again, a very valued part of our company. It's hopefully a growing and sustainable dividend. We've never cut the dividend. We've grown it quite significantly over the last several years. And we stress test that at low commodity prices before we decide to increase it to make sure it is sustainable. So that's our #1 form of returning cash to the shareholders. The second one is through making sure we have a strong balance sheet. So we've already talked about that. That's certainly a priority. And then the third form would be through some form of special dividends or share buybacks. And we'll venture into the share buybacks when we see the opportunity to do so at a value-added proposition. So we're also very familiar with the history of our industry in general of buying shares back when commodity prices are high. Correspondingly, that's when the share prices are high. We want to buy the shares back when we see the opportunity to add a disconnected price to what we think the market is indicating. We did so in the first quarter. And I think we'll continue to look for opportunities to do that on a go-forward basis. So that's kind of how we think about it. And then the last part would be for the extra cash is it comes in pretty handy to do small bolt-on acquisitions or do things kind of out of cycle like buying, casing at low prices, those kind of things.

Okay. And one thing to think about since 1929, dividends has represented about 40% of the return in S&P. So I do think having a strong dividend is a good value-added proposition for investors. Let's talk about free cash flow. You guys have outlined $5.5 billion of free cash flow at $80 million. Obviously, we're a little bit below that level. Any broad thoughts on the sensitivity of your cash flow -- free cash flow to oil and gas fluctuations?

Yes. So just on a general rule of thumb that for every dollar price and oil -- dollar change in oil price, it's about $135 million of free cash flow. And for every $0.10 of change in gas price, it's about $35 million of free cash flow. So in general, that's a rule of thumb. But I think the more underlying thing is that the company has been embarking since we adopted this premium strategy back in 2016, the company has been trying to insulate ourselves from the changes in commodity prices. So our breakeven price is now in the low and so that really helps to insulate the company from changes in commodity prices. So it knows we can generate solid returns at whatever the oil price is.

Billy, the company bought back, I think, $310 million of stock in 1Q. And obviously, we had some market dynamics. We had many banking crisis, a lot of volatility in the market. As the Board and management team think about allocating free cash flow to special dividends or buybacks, how would you frame the go-forward plans for the company?

So really on that light, the strategy really hasn't changed. I think we want to continue to look for opportunities to buy the shares back when it makes sense when we see that disconnect from the fundamentals of the business. And so if we see those opportunities, we're going to lean in and try to buy the shares back versus provide special dividends. On the off times when oil prices are higher and the stock is doing well, we think that's a good time to reward the investors with special dividends. So I think we're going to be flexible on that, but the strategy really hasn't changed. We're going to be very disciplined when it comes to applying that technique.

Okay. Next topic I want to ask you about just the overall portfolio of how things are going in the field. This year's guide in terms of well cost will start there was about a 10% increase last year. I don't know how you did it, but you held the line at plus 7%. Can you discuss kind of the state of your supply chain, how you're contracted and what is the potential for maybe CapEx to come in below the midpoint of your guide given some of the deflationary pressure?

Well, that's always my goal to come in at or below the guide, to be honest. So we -- part of that answer is the tremendous amount of flexibility we have with a multi-basin portfolio. We can move things around to make sure we can hit our targets, both on the capital side as well as the volume side and hit all of our other financial metrics. So having that flexibility is a unique advantage in the company. We started as you mentioned last year, we probably saw, I don't know, 15%, 20% inflation in our business, but we were able to keep our well costs within 7% of the previous year. We came in this year believing that we would see rig counts fall off, although I think they've fallen more than we thought they would, especially on the oil side of our business. Well, we saw the rig count peak back in November of last year. And the time we came out with our plan in January, we'd already fallen off some. So we expected prices to moderate as we went through the year. So I'd say we're pretty well on target to keeping our well costs from rising any more than another 10% going into this year. We're seeing the service constraints and prices fluctuate between basins. I think some basins, we're seeing more deflation, are pressure than other basins, again, speaking to the advantages of having a multi-basin portfolio. We talked earlier that most active area in the industry today is the Permian Basin. And so you're seeing less downward pressure on prices there just because I think there's still a lot of activity there to drive prices -- some of the areas that we're -- other areas we're seeing, we're definitely seeing prices come down. And we'll continue to moderate that or monitor that as we go forward. Our contracting strategy is to try to lock in about half of our well cost each year going into that next year through a variety of different contracts, and they're always staggered somewhat to some degree. So it leaves us very available to take advantage of opportunity to reduce cost. But on top of that, I think rather than being subject to service cost pressure or inflationary pressures, what we try to do in the company is really drive sustainable cost savings through our operations. trying to always get better at what we do, drilling wells faster, more efficiently, completing wells faster and more efficiently, those kind of things, we believe, drive sustainable cost reductions. And you've seen that play out in our business. If you look at our financials, we've seen our unit costs come down over the last several years. Our finding costs come down over the last several years. We had a $5 per BOE finding costs last year in the company. So that rolls through your D&A rate helps to generate higher margins, both on a cash and an income basis. So that's the kind of sustainable value added we try to do in the company. And we're pretty excited about some of the initiatives we're undertaking this year to do that.

Billy, shale has matured. We've been -- you mentioned you've been drilling wells in the Eagle Ford for 12 or 13 years. So one of the biggest questions from the buy side is duration and inventory down. Can you give us thoughts on how you feel about your inventory depth of premium, double premium locations?

Yes. Thanks for that. I think one of the last things we worry about is inventory depth, to be honest in the company. We've given you a slide, I think -- and I'll go ahead and refer to it in a minute. I think it's -- let me find this right there. Slide 7 in our deck. If nobody has seen this, it gives you a look at not only the inventory and resource potential and we've switched to our resource potential because as an industry, we're starting to drill longer laterals. And as you drill longer laterals, you well count naturally will go down over time, but the resource potential is still the same. So we've got over 10 billion barrels of equivalent of resource potential at a finding cost of less than $10 a BOE. And then medium F&D cost of $5 a BOE continues to drop over time. Why is that? Just because we continue to add things that are more competitive today than they were several years ago. So we're adding things to the top of that inventory that we compete with our drilling program. That's coming from our exploration effort. We just talked about the 3 new plays we've added that are going to be emerging over the next several years. So those are things that are really competing. So I'm not worried about being able to continue to add to that going forward. And it's already a high quality and multi-decade inventory list that's high return.

Okay. Billy, as you shift towards newer plays, the Utica, Powder River Basin, how do you think about capital efficiency on a go-forward basis? It's been maybe a concern of investors that you go from drilling wells in Lea County, which is some of the best acreage in the lower.

So first of all, yes, on the Delaware basin, let me just touch on that in a minute. So we're very pleased with our execution and the performance we're seeing from the wells. So we're not seeing a degradation in well performance there. And we added some slides in our deck this last quarter to address that. I think you have to look at the mix of wells and the targets to understand the quality of the wells and the oil mix versus the gas mix. And we're seeing the same level of performance this year and expect that same level going forward by target to be consistent going forward. So we're not worried about the degradation of the quality of our inventory. It's meeting our expectations as we move on. Naturally, as you move to a gassier mix. drawl being 100% gas, you'll see on a capital basis, you'll see that roll out. On a BOE basis, we think the capital efficiency will continue to improve going forward because of the quality of the assets that we're adding.

Okay. Delaware Basin. On the 1Q call, you highlighted a new completion design that could result in a 20-plus percent uplift in recoveries, I think, from select intervals. Can you maybe give us a little bit more color on that?

As a company, we're always trying to provide innovation to our all of our operations, and we're also being in a multi-basin portfolio, and I've said that many times, but we transfer technology between plays at a rapid pace. So we take learnings from one play and apply to the other. This new technique we're applying in the Delaware Basin is something we actually generated in the Eagle Ford. And we're trying to apply it to other areas, including the Delaware Basin. We've learned that it's is not going to work on every target. It's going to be applicable to a lot of the deeper targets that we're seeing, but we're seeing dramatic improvements in the productivity, both near term and long term. We think we're seeing about a 20% uplift near term, and that sustains itself long term through the play. So that's pretty impactful to be able to do this. It involves understanding the rock mechanics of the target intervals that we're selecting to make sure this is applicable. And then it involves constructing the well bore in a way that lends itself to this new technique. So those 2 things allow us to be able to execute this program. We're very excited about it. We've done about 40 wells so far this year, and we'll probably do about 70-ish wells this year in total, but we expect to expand that going forward. And we're also trying to leverage that technique in other plays as we see it would benefit.

2 more questions, I'll turn it over to the investors. What are the near-term plans in the Dorado play just given the softness we're seeing in the gas strip?

So near-term plans rate, as I mentioned earlier, we're running 2 rigs there to really continue to gain the efficiencies on the drilling side. And we're seeing the benefits of that as we speak. On the completion side, what we elected to do rather than have a continuous frac fleet working in that drawl play, we scaled that back. We're going to share a frac fleet between it and other areas, namely the Eagle Ford area. And so we still get some economies of scale. We're testing some zones. We are completing a few wells, but we've scaled back the completions there just in light of the pullback in gas prices and reallocating that capital throughout the company.

Okay. Just one question on exploration. Can you give us an update on how things are going? Obviously, I think we're excited about BI, which you could test next year?

Yes. I think the safe thing to say is the exploration effort in the company has never been stronger than it is today. We've got a lot of opportunities we're chasing. Some are further along like Hub that we -- off the coast of Australia. We're excited to test that. Everybody -- I think it's a well-known industry known fact that it's a large undrilled structure. We're taking some of the expertise we have in the company outside of drilling horizontal wells. We're also very good at shallow offshore drilling. We've been doing that in Trinidad for about 30 years. We're leveraging some of that expertise into other offshore areas Australia being the first one. We expect that well to be drilled sometime in '24. But we're also excited about some other opportunities we're chasing. So I think exploration-wise, the company continues to be very pleased with the early signs of the success we're seeing in some of these other plays, and that's encouraging us to look at new ones.

Great. don't we turn it over to the audience for a couple of questions. Okay, let me keep going. Can you talk about the Utica Shale? What are some of your delineation activities asset some excitement on some of the initial results?

Yes, we're very excited about the Utica play. It's just to look back at the play, it's probably taken us about 3 years to put together the acreage position in that play. We did it at a low cost, which we think is a very value-added part of our business. And the early delineation wells we've tested so far are meeting all of our expectations. So we're very excited about the potential of that play. There's enough well data across the play, too, that gives us confidence that we'll be able to continue to see consistent results throughout the play. This year, we're going to strive to drill and complete about 15 wells as we build out some of the initial gathering infrastructure there that's needed. And with the success there, we expect to increase activity in the following years.

Okay. I got a couple of questions.

Just on the Utica play, do you own the levels above and below that? Or do you just target that one? Do you just buy that? I know some operators have the top but not the bottom and so forth.

No, we own pretty much the Utica window. We own some other depths as well, but the target really is for the Utica, the Point Pleasant play.

One in the back.

Sorry. Just to follow up on that. What's the oil content? I mean, historically, there was a lot of NGLs, I think, and there was historically, I think, condensate issues that people always feel good.

Yes. No, that's a good question. So just to make sure everybody understands, this is in the black oil window. It is a low gravity, 38 to 40 gravity oil. And it's about 1/3 of all 1/3 NGLs and third gas. So these wells come on at a pretty good rate, probably in the order of 2,500 barrels of oil per day plus $2 million to $3 million of gas. So the biggest part of the mix is oil early on, which drives the economics of the play. So it's not a condensate play. It's not a gas play either that we have to worry about takeaway. It's predominantly an oil play. And so building out the gathering lines as the kind of the necessary part of making sure you produce it more efficiently. But we're very excited about the potential of that play.

All right. Billy, we're out of time. Thank you so much.

All right. Thank you, Arun, and thanks, everybody, for your support.