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

All right. I think we can move on to our next fireside. Ezra, it's very nice to have you here. It's good to see you Ezra, the Chairman and CEO of EOG, don't need introduction. I think it's been a big year for EOG transformative deal in the Utica.

But maybe to kick off the conversation. To start with a bigger question of EOG getting into Utica and you also made announcement in the Middle East. And a lot of investors are worried about the maturation of shale. And they will say, "Hey, EOG is doing these deals because the rest of the portfolio is maturing. What would be -- what would you say to that? Do you think that's the case for you EOG?

Yes. First of all, thank you for having us here. It looks like a good turnout, great conference. So yes, on your question, no, I wouldn't say that at all. Our deal in the Utica and our exploration efforts abroad in the GCC aren't really a reflection of our inventory or sale maturation or anything like that. Really, what this year is us leveraging some of the recent advancements that technology, really the expansion of our subsurface knowledge and we found opportunities to expand that both domestically and abroad. In the Utica, still in early -- kind of an early play. We've been calling an emerging asset and we've basically gotten it to a point where we spoke earlier in the year about trying to get that to be a really foundational play for us, which the easiest way to think of it is a play that can manage not only consistent drilling rig, but consistent completions activity as well. So a play where you can really start to leverage the economies of scale, which ultimately make these unconventional resources so special. The Encino acquisition, which is a $5.6 billion acquisition, is very transformative for the company. It brings our total acreage position in the basin to just over 1 million net acres, brings the total resource potential, we believe, in that basin to over 2 billion barrels of equivalent resource. It really does transform that asset and take that asset probably 2 to 3 years ahead on the development plan. It really does turn into a foundational play in a core asset for EOG. And we were still able to do it while much of the industry is not really active there. And then you mentioned our exploration abroad. Our entry into the GCC. And this is an area where we think we can really build the business. These are 2 opportunities, really a bit more organic in nature as organic as international exploration can be. And it's an area where in Bahrain, we've captured an unconventional horizontal tight gas sand play that we'll be working on later this year. We'll be investing some capital there. And then the UAE similar scenario, but a little bit different. It is a larger scale oil play. It's an unconventional asset. It's a shale play. It's in an overpressured oil basin, and we've captured about 900,000 acres of a concession there that includes not only a bit of a basin, but also an anticline that comes down into the basin as well. And we'll start investigating that play also. Both of these opportunities, like I said, really came about because we continue to look for organic ways to improve and expand the inventory. Ultimately, things that are additive and quality to the inventory that can really continue to deliver shareholder value through the cycles. That's ultimately the value proposition. And the 4 pillars of that value proposition really start on capital discipline. So investing in each of our assets. We are a multi-basin portfolio. So each of those assets at the right pace, at the right time, capital discipline, is the hallmark on that. It's followed up with operational excellence. And that means utilizing again, collecting data, utilizing data to develop new technologies and continue to drive down well costs in a sustainable manner, which to us is operational efficiency gains. It's a commitment to sustainability, both safety and environmental operations. And then last but not least, it's protecting the culture. It's the culture of the company that continues to drive our organic value proposition of organic operations, organic exploration and being a first mover in the industry.

Right. Well, thank you very much for that overview. Some of the really important topics, which will unpack. But I want to follow that up with the question of capital allocation. You mentioned you have the foundational assets you're already focusing on, and you got the emerging assets plays and you have exploration. How are you thinking about allocating capital and balancing the near-term returns with the exploration versus the cash return, which you guys have been strong in as well?

Yes. Again, it starts -- it sounds oversimplified, but it's looking at -- it's disaggregating the individual assets. And it's looking at where are they at in their own individual life cycle. Obviously, the Delaware Basin is much further along than, say, the Utica or Dorado. The Delaware Basin has a lot more infrastructure. We've been drilling there for a number of we've collected a lot of data. There are still things to learn and unpack in the Delaware Basin, but we're much farther along there or even farther along in the Eagle Ford. It's kind of a single target, single zone. We've got a lot of infrastructure there. We've drilled some of the highest-quality rock there. We've moved into areas that a decade ago, we weren't sure how they would compete economically, but between collecting data, learning about the subsurface, investing in infrastructure and driving down our well costs, we've actually made those areas more economic than what we were -- some of the higher-quality rock that we were drilling 10 years ago. And now to your point, we've got some of these emerging assets. So the Utica, basically on the cusp of turning into a foundational play. And Dorado is basically right there as well, where Dorado, we anticipate being able to continue invest and maintain a full-time frac fleet in the coming year. Those are -- that's really what we look at is we want to be able to invest in each of these assets where we're continuing to move the ball forward. We're continuing to collect data, learn about the resource and again, capture the economies of scale. But at the same time, we don't want to outrun our learnings. We don't want to move so fast that we're not able to get the data and production from the last well that got turned on and incorporate that into our well model, into our geologic model on the front end into the very next well that we're drilling. That's really the pace. That's really what dictates when I say capital discipline and investing at the right place at the right time. Now in combination of that, we are obviously always watching the macro environment to see what our global supply and demand do. We're not a company that's driven by expanding margins only through production growth or top line revenue growth. We're much more focused on lowering the cost base of the company and looking for margin expansion through that manner. And that's again why we focus so heavily on capital discipline. Ultimately, for a multi-basin portfolio like us, if you're generating at the right pace, then it's a balance, not only with returns, but also between generating near-term and long-term free cash flow.

Yes. And that's the sustainability of that free cash flow is really important, which ties me into your inventory resources that you have highlighted 12 billion Boe of resources that's generating greater than 50% average after-tax return at $45 oil, which is quite high. And you guys used to talk about the double premium inventory. That's not a phrase that we are using now. But can you talk about the tiering of your resource backlog today? Do you think what you're growing this year or in the next few years is sustainable?

Yes. I think in general, the -- we're blessed to have a pretty deep and high-quality resource, as you pointed out. We think we've got over 12 billion barrels of equivalents captured with a 55% average direct wellhead rate of return, so that's half cycle at bottom cycle prices, that's $45 and $250 is what we're using today. That turns into over a 200% direct after-tax well return at mid-cycle prices or $65 and $350. The power of that is that we are in multiple basins. And the reason I say we're fortunate is this has been a continuation of a long-term strategy, long-term value proposition started more than 25 years ago at EOG to be focused on organic exploration, collect data, utilize technology to unlock new resources. And so we've been fortunate to be the first mover in multiple basins. Just about every, I would say, unconventional play in North America, we've been part of and dominantly we've been a first mover on those. What we see today is our program this year, as an example, in 2025 is well representative of a program that we could maintain for years to come. And the reason that is, is because we're allocating across the whole of our portfolio today. Definitely, the foundational assets take more of the capital commitment. We're running more rigs in the Eagle Ford and the Delaware Basin than some of our emerging assets. But nevertheless, we're allocating across our foundational plays, our emerging assets and our exploration portfolio, both domestically and internationally. And so again, I think what we've captured in this company is something that's very sustainable and more so than just a static look in time at our current 12 billion barrels of equivalent resource, what we've developed is a culture. And to your point, that's really the sustainability of the company is the culture and commitment to continue to utilize data and technology to unlock new resources.

Great. Talking about new resources, there is a lot of excitement with Utica with the Encino deal. You guys have called it transformative. And I know M&A is a big deal for EOG because historically, you were not a big proponent of it. And now [indiscernible] Encino came after Yates years, years ago. So maybe talk about how the integration is going so far? What did you see in that asset that really accelerates your vision for the Utica?

Yes. We've heard comparisons to our Yates merger and acquisition like you said nearly a decade ago. And we think they're well founded, quite frankly. They're both privately negotiated. They were both opportunities that really leverage the strength of our balance sheet at the time and opened up the opportunity to us. They both came at times where the plays were well delineated, but still relatively early in the life of the plays, which allowed us to capture large acreage positions significant upside potential at very attractive pricing. And that's what we see in combination between the two. Both plays also have some industrial logic when you just look at a map. There's a real hand-in-glove type of fit to the acreage positions. And that's one of the things that lends us to a lot of the upside that we see. Not only have we talked about it being the acquisition being accretive across just about all financial metrics, we also see synergies coming in about $150 million in the first year, dominantly on well cost reductions and integration across infrastructure, which we'll be able to share a lot of infrastructure and not just pipelines and gathering and things like that, but sand, water, the operational infrastructure, the things that really continue to drive down costs. The reason we say it's a transformative event for the company is, like I said, it takes an emerging asset on the cusp of becoming a foundational play and really pushes it pretty far down the line on that. So we'll have active programs there. We've talked about running 5 rigs for the rest of this year and 3 frac fleets delivering about 65 wells to sales. It exposes us to over 1 million acres in the play. It doubles the acreage footprint in the volatile oil window, which is where we've been focused. So it takes that acreage footprint to about 500,000 acres, just shy of about 500,000 acres. And then on top of all of that, it actually exposes us to a gas resource also. Prior to the deal, we did not have any exposure to the gas window within the Utica play. And now we've got just over 400,000 acres in a play where Encino did a good job not only negotiating and capturing some long-term transportation to expose the company to some good premium pricing, but also in a basin that we see continued growth in gas demand in the coming years. We couldn't be more excited about it. As far as what do we see that kind of unlock the play for us. Again, it comes back to what I talked about before in being a multi-basin operator. We have 9 basins that we're active in. And so when you think about that, those are basically 9 laboratories that we're out there every day collecting data on, drilling data, different rock types, different pressure regimes looking at production data, different geologic environment. And as we build this resource, we use that as the front-end exploration tool. So this most recent step into the Utica, which started for us back in 2021, this is actually the third time that we had investigated the basin and over about a span of about 10 years. And what really unlocked it for us was a technique for describing the geomechanical properties of the Utica. So how the rock is actually going to respond to horizontal completions and that's a model that we had actually developed in the Anadarko Basin when we were working on a Woodford oil play down there. And so that's why I say those are the types of technologies that we can bring from one basin into another and oftentimes can help unlock kind of overlooked value.

That's really interesting. And as already mentioned, the benefit scale and infrastructure and sand. Do you think you -- is there more opportunity to grow that industrial logic in that basin where there's -- what's a competitive landscape or the M&A landscape in that area?

Yes. I think not to grow through M&A for us, quite frankly. I mean, when we go back to what you're just talking about, this is our second large-scale M&A in about a decade. And when we think about corporate M&A or these large-scale private transactions, again, we're looking at it through a lens of returns. And so you need to be a first mover. You need to have low cost and you have to have significant undrilled upside that we can bring forward to help the returns profile of the company. What that means typically is in an emerging assay, you kind of get one shot to do it because once you do that, the market has been moved, obviously. So we think this is a fantastic position for us, because it was such a significant acquisition that we're able to execute on. Now as we integrate the asset, and I'll touch on the integration, again, that's part of the question I forgot a minute ago. But as we integrate this asset, yes, I think there's tremendous opportunities now that we'll be running multiple rigs, more than likely multiple completion spreads to really start to take this play to the same type of scale and operations that we have in some of our other foundational assets like the Eagle Ford and the Permian. Now going back again to how integration has been going, it has only been a month since we closed the transaction. We did close earlier than anticipated. And for a company that typically, I would say, is not known for corporate M&A or doing integration, it's been going better than expected. And one of the reasons is, I think it's similar to, again, our organic exploration. We don't really have a playbook. And you say, look, when we acquired this company, this is -- these are the check boxes, and this is the list and this is the cookie-cutter approach that you take. For us, it's been very a ground-up approach. We've utilized a lot of technology, some internal AI applications we've kind of developed to help integrate not only the people in the field to get up to speed with some of the apps that we use, but also to familiarize our new employees with not only our processes and procedures, but also to familiarize our existing employees with the actual assets that we have out there. We've also pretty quickly been able to roll out and deploy some of the production optimizers that we have, which again, is a mix of smart technology and machine learning and a little bit of deep learning tools that we put onto our wells and help not only monitor preventative maintenance, but also help basically run time and enhance our base production profile. And so we're pleasantly surprised with how quickly and how well the integration effort has gone over the past 4 weeks.

That's great to hear. And you mentioned Utica is going to be a growth asset within the portfolio. Then what happens to the other foundational plays when you think about the Delaware, the Eagle Ford, do they make room for Utica within the broader diversified portfolio? Or do you see them still contributing to growth?

Yes. I think each of our assets has the potential to grow, right? But again, it really -- I wouldn't say that we've got a goal that the Utica needs to grow. Again, it comes back to investing at the right pace at the right time, not only internal that asset, but also on what the global supply and demand really needs. With regards to the other 2 plays, though, our more legacy assets, these other foundational plays that we have, the Delaware certainly can continue to grow. The Delaware is like the gift that keeps on giving. In fact, in the past 5 years, we've started developing 9 additional landing zones that have been unlocked either through added technologies, the benefit of additional subsurface data and understanding lower well costs or additional infrastructure that drives down the well cost of these landing zones and makes them return competitive. So the Delaware still has a long ways really to go and going to be more blessed with our position there. And then in the Eagle Ford, the Eagle Ford certainly has slowed down from the pre-COVID levels of investment. I think in the past years, we've really level-loaded our activity there. And we've gotten to a spot where we continue to see growth in margins. But again, as I kind of mentioned earlier, it's less about growing top line revenue to satisfy that those margins through production growth. And it's actually more through allocating the resource so that we continue to add lower and lower cost reserves to the basis of that portfolio. And what you end up seeing is you're still ascribing margin expansion to the play, even though it's not through top line revenue growth. The Eagle Ford has gotten to a point where it's in a real sweet spot for us. And so I think you'd probably continue to see a level-loaded activity there and the ability to flex activity more both the Utica and the Delaware Basin and eventually Dorado as well.