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

All right, guys. We'll kick off here. So in our fireside chat here, we're going to have EOG, we're going to talk about balancing growth, returns, and free cash flow. We're with Billy Helms, the President of EOG. Billy, thank you so much for being with Umang and I today.

Well, thanks for having us. We're excited to be here and excited to participate in this.

Billy, let's start on the macro. We spent a lot of the morning talking about it and just heard from Conoco, Don and Sam about their perspective. But what are your thoughts about the oil outlook as we move our way in through 2024 and '25? Certainly, a lot of volatility here recently. How does EOG seen the setup?

So I think you've probably heard this several times. I think for us, we're looking at a market that we feel like is going to be constructive going forward, I guess. We're seeing demand to be fairly strong. Depending on whose forecast you look at, I think IEA has come out and said that they believe there's going to be a demand increase of 1.1 million barrels per day next year. OPEC is a little bit more aggressive, they're thinking 2.2 million barrels per day demand growth next year. Take whichever one you want. I guess for us, it means demand is going to continue to grow and be strong next year. On the supply side, I think everybody is aware, OPEC's has got a lot of supply off the market. And if you look at the non-OPEC supply numbers, IEA, again, is forecasting about 1.6 million barrels a day of non-OPEC supply growth. OPEC is a little bit stronger on that. But if you look at the balance of the numbers, if you look at the IEA numbers, basically you're looking at a small build in the first half of next year with the draw in the second half of next year or this year, I'm sorry. And then OPEC numbers are a little bit stronger on the demand side. So you're looking at a draw throughout the year, which means OPEC will be able to start bringing on more volumes back by the end of the year. So to paint that story, I think we're looking at fairly constructive price levels going forward. Now I guess the wildcard last year was the U.S. supply. U.S. supply certainly grew quite a bit last year. And I think more than most -- everybody would have forecasted and certainly outpaced our growth forecast. And so -- but is the U.S. going to be able to continue to maintain those levels of growth? And we're not seeing that being the possibility, I think. I think last year, the rig counts were up at the start of last year. They basically are down 20% year-over-year. Frac crew count is down about the same amount. And so you had a lot of the private stepping up last year and increasing a lot of activity and brought a lot of supply on. Since then, yes, rig count's down, frac fleet count is down, DUC count's down. And on top of that, bringing on a lot of production last year, you've got a steeper decline to offset this next year. So that tells you that U.S. production is not going to be able to continue to grow at the pace that it did last year. So all it being aside, it says, the market is going to look more constructive as you go through the year. So for us, that's kind of what we take into account when we put together our macro picture.

Billy, when you translate that in that oil exit to exit, this year, it looks like we're up 900,000 barrels a day. What does that look like for you in '24?

It will be measurably less. Probably it's hard to throw a number out there and were not very good forecasting oil prices or demand. But I think it's going to be considerably less, less than half of that number.

Okay.

Maybe turning to natural gas. Right now we are obviously running more close to around 105, 106 Bcf per day. If you look at Genscape numbers. A lot of people, investors are questioning that number right now. So what are your thoughts around current production? And then when you think about the outlook for '24, '25, how do you think the macro is set up for U.S. gas prices?

So yes, for gas, yes, U.S. grew quite a bit last year. I think about 3.4, 3.5 Bcf a day year-over-year with the latest EIA numbers. And so that's been on the back of, again, increased rig counts that started last year and that's been tapered off quite a bit. So activities scaled down along with gas prices. And so, you know, we're also in a period where it looks like we're going to have a warmer winter than probably was expected. So that demand has been off. So you see gas prices follow suit. So the next wave of demand to come on for gas is going to be the LNG that everybody's talking about, which would be like '25 through '28. You'll see another 7 to 10 Bcf a day coming to the market through that time frame. So between now and then, I think the gas market's going to be largely dependent on several factors. I think one's weather, unfortunately. What's the weather look like in the summer and the winters? So with the shape of the winter season right now, storage is 10% or 11% higher than last year in the five-year average. So gas prices are correspondingly weak. So I think for us we're thinking gas longer term is going to be very strong gas demand. And so we're more constructive longer term. Near-term, I think we're in a period of softness. But longer term, the U.S. is going to be positioned to be a big LNG exporter. And so how do you take advantage of that and grow into that market. For us, we've captured a very large gas play along the Gulf Coast 21 Tcf, very large resource to scale it out for everybody. That's over Bcf a day for over 50-years. A very low cost play right along the Gulf Coast. Very well positioned to take advantage of the LNG market. So what we want to do is to be able to understand that play well enough to grow into that market when the time is needed.

Billy, let's spend some time talking about capital spending. We're going to get some update on Q4. But as you have been going through budget in season, you take into account the fact that we've seen some softness in the commodity. How does that affect your thought process about setting the budget for 2024 and talk about some of the increments and decrements as we work our way off of the ‘23 base?

Okay. So -- as we look into '24, again, we're constructive on oil prices, still a little wary of gas prices. So we're running an activity level right now to -- basically, we try to run an activity level to make sure we always continue to improve the base of the company. So we're very pleased with the activity level we have in all of our core plays. So the Delaware Basin, the Eagle Ford, we have a very solid activity base there that we continue to improve the quality of those assets going forward. It's not just about a volume strategy. We invest for returns and the volumes are really a byproduct of that investment. So we're not targeting a specific growth number, we're going to grow oil this year, '23 would have grown. We haven't reported numbers yet, but it will be on that order. We've been talking about 3% oil growth, 8% or 9% BOE growth is kind of the numbers that we talked about for last year. As we move forward into next year, we're very comfortable with the activity levels. We don't really see the need to increase activity based on what we see the macro look like. We want to continue to run at a pace that we can improve the company, as we talked about. We do have some emerging plays in the Powder River Basin, Dorado, and then our newest Utica play. We're very excited about our Utica play, so we may run a little bit more activity there. Bring on a few more wells as we delineate that play. But in general, that's kind of -- we're very comfortable with the activity level we see. Now just a reminder to the group, we're investing at a $40 oil price. So we're very comfortable with our investments and being able to generate the returns we're wanting. And in today's prices, those are monstrous returns. And that's gone to help improve the financial performance of the company. So overall, that's kind of how we think about it.

One of the points which you had made is you want to be the lowest cost operator within the U.S. And if you think about investors and what they are concerned about today, it's maturity, right? Maturity in the Delaware, maturity in the Eagle Ford. So when you think about those assets, both for the industry as well as for EOG, how do you think about share maturity? How much running room do we have right now?

Yes. That's a good question. Yes, for us, let's say we like to focus on returns first. So we want to be the highest return, lowest cost, and lowest emission producer out there because we think over time, the investors will gravitate towards those companies that can deliver those kind of things. So that's our ultimate strategy. So as you think about the broader industry, all these plays, every play you're in, I don't care if it's conventional or unconventional, the quality of the wells you bring to market will be great over time. Everybody should be drilling their best wells first. And so in any asset, whether it's Permian or Eagle Ford or wherever, the quality of the wells will degrade over time. For EOG, what we've tried to do is focus on continuous improvement. So the Eagle Ford is the best example to look back at. We've been drilling in that play for 12 or 13 years now. And certainly, we drilled the best wells at that play early on in that play. And you can look at the well quality, we're drilling today, and it's certainly much less than it was years ago. But what we've done in that time frame, the same 12 or 13 years, we've improved the efficiency of that play. We're drilling wells much faster than we did. We found better ways to complete them to get more oil per foot out of the rock than we did. So yes, overall well quality is down, but the economics are still very, very strong to be able to command a certain amount of activity in that play. The Delaware Basin is a little bit less mature than that play. We're still finding ways to improve the quality of the wells in those plays. We have embarked on a new completion technique there. And I think you've heard us talk about that we're very excited about the results of that. It's improving productivity about 20% earlier time and EUR from where we're applying that new technology. So there's still improvement yet to come in some of these plays. But over time, they are going to degrade. So for us, what we think about is, okay, how do we maintain relevance in the market? Inventory is always a question. I've been with the company for over 40 years. Been talking to investors for over 10, and I swear for 10 years that question has been there, every year. And what's the quality of the inventory and what are you going to do next? And so since then, in the last -- I think since 2019, we brought on the Powder River Basin, the Dorado play and now the Utica play. So we're adding to that inventory faster than we can drill it. And we have over 10 billion barrels of oil equivalent in our inventory at a finding cost that is lower than our current DD&A rate. So it tells you what the outlook is for the future of the company as we bring those properties to market. To continue to improve the financial performance of the company. So we're pretty excited about that, and we're going to continue to explore. And we have a stronger exploration effort going on today than we probably have in the history of the company. And you're seeing the evidence of that in these plays we're bringing to market. And we don't see any into that. We're also looking not only domestically, but we are looking internationally as well. We've also developed a skill set. So we're very good at drilling horizontal wells in unconventional plays. We also have a skill set in drilling shallow water offshore plays. We've been doing it in Trinidad for 30 years. And we're taking that expertise and looking around the world as well looking at unconventional plays in other parts of the world. We drilled a well in Oman a couple of years ago. Turn out to be gas instead of oil in a long way from market so we didn't pursue it. But we're looking for more opportunities like that where we can leverage our experience base and our technology to bring those volumes to market.

On the 20% productivity improvement, new completion design, when can we start to see that in the results, which the company reports?

Well, I think you're seeing it today. I think there's even some sell-side reports out in the Delaware Basin, I think, as early as this last week that show productivity improvements in the Delaware. So I think the market is seeing it. We [indiscernible] because they don't have the details that we do. Look at it by zone and by a special pattern and where you are in the Basin, make really good analogous comparisons. But you're seeing it in the public domain already. So it doesn't work in every particular zone, but -- and it does cost a little bit more to deploy this completion technique. But where it works, it works really well. So we're being very strategic about where we lie.

How about the -- in the Eagle Ford, what are your thoughts on the direction of travel for productivity there which is a -- it's a more mature base?

Yes. As we talked earlier, we've been drilling that play for 12 or 13 years, and it is a very much mature basin. We drilled a lot of wells there. And so productivity per foot is not going to improve a lot there going forward. We're going to maintain what we have and pretty much try to maintain a very consistent level of output in that play. That's a very economic play. It's a good solid base of production, and it helps the company on a lot of metrics. So with the new premium strategy, every barrel we're bringing to market is at a lower finding cost than our current DD&A rate in the field. So it improves the margins as it continues to mature. And that's what we're about is -- it's not just making better wells, but how do we improve the margins. And ultimately, how do we improve the shareholder value for the company going forward.

That's a good pivot over to some of the emerging plays. Umang, you want to kick it off there?

Yes. Maybe we can start with the Utica because you guys provided a big detailed update with third quarter results. Results have been strong than what you had expected initially when you guided it. So talk us through the next stage in the evolution of Utica as a development player? And when does it start to garner more capital relative to some of the franchise assets which you have right now?

Yes. We're very excited about the Utica play. It's our latest result of our exploration program that we've been talking about. We've put together 430,000 acres in the oil window of a very well-known gas play. And so from that standpoint, and the play in tested in the past, 10 or 12 years in the past. So we take a look at all the data. So as a company, we've collected a lot of technology and a lot of data, the ability to analyze wells in the past and the future, apply EOG's technology to those productive metrics that we see in ever play and understand what's the uplift we could get from applying those new technologies in these new plays. And the Utica is at a textbook example where we took a look at some of the older wells in that play, analyze it with our approach and determine what the uplift could be and lo and behold, it exactly matched what our results were. So very excited about our ability to understand the rock and what is expected from an approach like that. So since then, we've tested several wells. Our activity in that play has been focused really in one area. Largely because that's where we had 3D. 3D technology in seismic coverage is really important in the development of these plays. And so we built out an initial amount of a little bit of infrastructure that was needed to get those molecules to market. And our activity there has been consistent with that. And it's been -- the results have been consistent in every well we've tested so far in that play. So the economics are very strong. And on top of that, we have about 130,000 acres of minerals, which really enhances the economics on that part of the play. And then going forward, so let me back up a minute. So the latest four-well package we brought to sales was our Timber Wolf package. Initially, we started out a fairly wide spacing, a 1,000-foot spacing. And productivity from those -- the average 30-day rate from that four-well package was 2,150 barrels of oil equivalent per day. And that's an 85% liquid number. So pretty strong economics and the performance has held up really well. So the next step is try to increase activity, to some more spacing tests to understand what the ultimate spacing of that package of the play needs to be. It will be less than 1,000 feet, most likely. And we'll work our way towards that number this year. So we expect to bring in a few more wells online this year, probably have more on the order of a 1 drilling rig activity in that play versus half a rig last year, and gradually increase that and understand the play and then hopefully develop it out over time as we get more 3D seismic coverage. We did shoot some 3D last year. So as we develop more of that understanding and that technology will bring it to market.