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

Okay. We're going to get started with our next company. Next up, we've got EOG Resources. This has been an industry leader, kind of a bellwether for the group for several decades now, diversified portfolio, meaningful presence in several U.S. basins as well as an international portfolio as well. Presenting today on behalf of EOG is the COO, Jeff Leitzell. Jeff?

Well, thank you. I appreciate the introduction there. And as you said, my name is Jeff Leitzell. I'm the Executive Vice President and Chief Operating Officer of EOG. And we're going to run you through a little bit about the company here. We've got our earnings presentation. Obviously, we just had earnings here recently. A lot of great information on the company, talk a little bit about our plan and talk about our portfolio and some of the information associated with it. So this first slide here really, this is our value proposition as a company. I mean our main focus is obviously sustainable value creation through the cycles. We don't chase commodity price. We want to make sure that we've got investments that have great returns through the cycle through multiple commodity prices. So it really has kind of these 4 pillars, I would say, our main focuses. The first one is capital discipline. We want to make sure that we're investing in the right project at the right time, and we're maximizing returns. We want to make sure that we maintain our pristine balance sheet, that we keep that healthy and that we're generating plenty of additional cash flow to where we can return that to shareholders. And you can see up there, we actually have a marker right now that's a minimum return to shareholders of 70% of our free cash flow. But you'll see throughout the presentation for the last 2 years, we've been right around 100%. And in this current environment, we plan on probably being pretty close to that 100% moving forward. Second is operational excellence. It's basically doing what we say, making sure that we're executing, that we're improving the portfolio in each one of our assets day in and day out, that we have operational excellence. We continue to innovate. And then on top of that, what makes EOG unique is to make sure that we're exploring, looking for the next organic opportunity for the company to continue to improve the overall portfolio. Next, you can see sustainability. Obviously, we want to practice extremely safe operations. We want to be good stewards to the environment and obviously, great partners with our community. And then last but not least is culture. You'll hear culture a lot throughout this talk just because it's really what makes the company special. It's more decentralized culture. We're very non-bureaucratic. There's not a whole lot of red tape in it. People can get things done very, very quickly. All of our people are business people first. What's very amazing about EOG is they're interdisciplinary. You might talk to a geologist and you might think they're an engineer or vice versa. And each one of them on their projects, they understand the decisions they make, not only how it affects just their personal asset, they understand how it flows through to the income statement, really affects the business because each one of them are business people first. And you'll see a lot of that throughout the slides. This is why we think EOG is an extremely compelling investment. It's like a tear sheet that we put in there to really kind of talk through EOG as a whole. So you can see up in the top left, the first one, we obviously have an extremely high-return inventory, both domestic and international, and it's got extreme long duration. So the way we look at inventories, we've got about 12 billion barrels of total resource plus. And if you take that and you look at the economics of it at $55 oil, it's all greater than 100% direct after-tax rate of return. So extremely strong, strong portfolio. We obviously have a ton of experience in this. We've been operating unconventional for over 25 years, and we can really leverage that experience, both domestically in our operations and exploration and the same thing with international. We'll talk a little bit about international as we move, but we see a lot of opportunity on conventional because there really hasn't been a whole lot of exploitation of unconventional on the international front. And then obviously, from an operations standpoint, we're a low-cost efficient operator. We really focus on improving operationally every single year and primarily through what I would say is sustainable efficiency gains, efficiency gains that can basically stand the test of time with the asset and be there for improvement the whole time. We also look for places that we can take control of the supply chain. So whether it's sand supply, whether it's water logistics, it could be cement services. We actually have EOG cement services. We have EOG motor programs, EOG Mud, anywhere that we can take control of the supply chain side of it, we feel like there's added efficiency and quite a bit of cost reduction. And you can see the performance we had in '25. Now moving down to the bottom. Obviously, we want to make sure we've got durable cash flow. And you can see over the last 3 years, we've generated $15 billion in free cash flow. And you can see how that affects, obviously, the return on capital employed of the company, averaging 24% over the last 3 years. We're very, very focused on a sustainable regular dividend. We'll talk about it a little bit more in depth on another slide, but current dividend right now is $2.2 billion. That's $4.08 a share on an annual basis. And as I talked about before there, returning 100% of free cash flow back to shareholders. And then last but not least, just make sure that we're maintaining an industry-leading pristine balance sheet. And you can see currently right now, we're at 0.4x net debt to EBITDA. So extremely strong balance sheet, and we'll kind of walk through what we're focused on with the balance sheet here in a little bit. For 2025, I mean, really, the summary of this slide is in 2025, we basically met or exceeded all of our operational or financial goals. You can see impressive financial results on the left-hand side, $5.5 billion of adjusted income, outstanding return on capital employed there, and then it flows over, obviously, to the free cash flow with $4.7 billion of free cash flow and 100% of that return to shareholders. And really, what I'd point you to is down on the bottom right, strengthening the portfolio. 2025, I would say, was truly a transformational year for EOG. We really had 3 things take place. We had the acquisition of Encino, as you guys know, for $5.6 billion that expanded our Utica footprint by 1.1 million acres, and it immediately moved that play to a foundational play where it's free cash flow positive. So we're going to have quite a bit of additional activity there. We were awarded the first ever onshore concession in the UAE for unconventional oil. This is an area that has penetration points and a lot of data. So really, we just got to get in and operationally execute. And then we also executed on a JV partnership with BAPCO in Bahrain on an onshore unconventional gas play that's very similar, plenty of penetration points and data, a very exciting opportunity that we think we can bring our technology and knowledge to and really extract a lot of value out of. Taking a look quickly at our plan. So how we look at plans is, as I talked about in the first slide, we really start with capital discipline. We want to look and see where every one of our assets is in the portfolio in the life cycle and make sure they're improving and they're generating the target returns that we're looking for. Then after that, we'll take the macro environment and considerations and make sure that the market needs the commodity based off where we're at in the cycle. And what we ended up doing with this plan is based off current environment right now, we're actually holding volumes flat to Q4 of 2025. And what that rolls up to is, as you can see here, $6.5 billion capital budget. It's 5% increase year-over-year in oil. And what that takes into account is obviously Encino acquisition, which closed in August of last year. So we have 5 months in last year of Encino and then a full year this year. And total volume-wise, that's 13% year-over-year on a BOE basis. There's substantial free cash flow generation, as you can see with that. And some of the plan highlights, I'd say, is extremely capital-efficient plan. Our breakevens on it, if you look for the CapEx is about $40 WTI. If you take the CapEx and regular dividend into consideration, it's $50. And really, what we're doing with this year's program is the first thing is we're balancing the activity between our 3 foundational oil assets, which is the Delaware Basin, Eagle Ford and the Utica now, our new foundational asset. And then we have some additional investment to continue to grow our very prolific Dorado gas play down in South Texas. And then we have additional investment, obviously, in our international assets, which would be Trinidad and our new entries into the GCC. We did update our 3-year scenario. So we came out with this 3 years ago. And obviously, it's been 3 years. And then also with the Encino acquisition, we wanted to kind of dust this off for you. This is not guidance by any means. This is not our plan. This just kind of gives you an idea of the resiliency of the cash flow of the company moving forward. You can see over on the left-hand side, outstanding ROCE and free cash flow, cash flow growth and cash -- free cash flow growth at varying commodity prices there. And when you look at it, basically, this is going to be kind of a low single-digit oil growth, mid-single-digit BOE growth. It's got a reinvestment rate of less than 60%, and we have no improvement in the company here. There's no improvement in overall cost, efficiency, production whatsoever. It's basically maintaining the status quo. And you can see we've got a couple of different scenarios there at $55 and $70, but I really want to turn your attention to the right-hand side where you see the last 3 years at the actual price was about $15 billion. Well, with this scenario, if you move forward that exact same price for the next 3 years, we have about a 20% increase in free cash flow to $18 million. So very substantial and continued growth of free cash flow for the company. All right. This is a quick look at our multi-basin portfolio, which we think is a huge benefit. You'll hear me say this multiple times, but we have 7 different divisions domestically, multiple divisions internationally. And really, what each one is, is they're a separate business unit. So each one is focused on their operations of their assets, continuing to improve that. They're focused. Each one has an exploration team within their division. So they are strategically exploring for a next organic opportunity within their asset there. And what that really does is they're almost like separate laboratories. So as one of them learn something new, they don't just keep it in-house. They go ahead and share it with each one of the other divisions. So really, you have 7 different learning areas here domestically that really accelerates our knowledge, and we're able to share that and move along each asset that much quicker. So especially when we find a new asset or an emerging division or an exploration play, we're able to take all of our best practices from all of these divisions across and apply it directly there. So looking at the portfolio, we really started as an unconventional operator in the Barnett in the gas play. From there, we kind of moved up to the Williston Basin and the Bakken and had a large position there and have been active there ever since. Next, we discovered the Eagle Ford down in South Texas. We were able to and very lucky to acquire the majority of the acreage to the core in the Eagle Ford, which has been a very prolific asset for us. And then moving to the Delaware and the Powder River Basin, we had nice acreage holds there. But in 2016, we went ahead and we acquired Yates and greatly increased our overall footprint in both of those basins and really pushed them forward. And then the last 2 domestic that I'll touch on here is obviously our Utica play, which I've talked about with the Encino acquisition. We are the largest producer of oil and have the largest footprint up in Ohio, and we are focused on the volatile oil window up there. And then we have our South Texas Dorado gas play, 21 Tcf down there, very close to the market center. We feel like it's going to be a huge value to the company as we move forward from a gas aspect. And then over on the right-hand side, we have our international assets, Trinidad Tobago, shallow offshore gas play. We've been there for over 30 years, great returns. We're able to sell to premium markets there in Trinidad, Tobago. And then our 2 new entries, we've got Bahrain, which -- that's the onshore gas unconventional asset and the UAE, which that's the onshore oil unconventional asset, 900,000 acres. And obviously, these 2 are very topical at this point. We started exploration in the fourth quarter of last year, planning on results, Q2. Obviously, with everything happening in the events over there, I'm happy to say we had procedures and plans in place. Activity and everything is secure, all of our people are safe, and we're just monitoring the situation at this point. But excited about these assets once, obviously, things calm down over there in the Middle East. Moving on. Really on this slide, I just want to hit. We've talked about the multi-basin portfolio of long-duration, high-return inventory. Really, what I want to hit on here is just how good the returns on that inventory is. So on the chart on the right there, you can see bottom cycle, what we call bottom cycle pricing, $45 oil and $2.50 gas. Our full portfolio averages around 55% or greater direct after-tax rate of return. And you can see what happens with that with commodity prices, just continues to improve exponentially as you improve the commodity price. And that's what we like to do with our portfolios. We like to pressure test it against very severe environments just because we know it's a very cyclic environment. We want something that's able to, like we said, generate solid returns through those cycles. When you take that and you roll that up from a returns aspect from a company standpoint, return on capital employed, outstanding over the last 5 years. You can see EOG here in the dark blue versus our peer average, averaging close to 20%, if not higher for EOG and outpacing the overall peer average. So great results from an ROCE basis from a company. And then you look at that and you roll it forward into our cash flow priorities as a company. So first and foremost, our #1 cash flow priority is our regular dividend, as I talked about, $2.2 billion or $4.08 a share. We really think that a sustainable growing dividend is truly the hallmark and foundation of a really great company. Obviously, maintaining the pristine balance sheet, as we talked about. Balance sheet is in great shape right now, but we do have a marker out there, and we have that at bottom cycle pricing that we want to maintain less than 1x total debt to EBITDA, which is obviously an extremely healthy balance sheet. We obviously have the capital investment in the company, both through our activity and opportunistic entries and bolt-ons and other marketing opportunities that we can have for the company. And then last but not least, we obviously have cash returns to shareholders outside of the regular dividend, which we'll talk about a little bit here in a second. We have done special dividends in the past, but primarily here most recently in the last couple of years, we've really focused on buybacks. And I think you can plan on in the current environment, we'll focus primarily on buybacks moving forward and lean in that direction. So for the dividend, this just really shows the history of it. We've got 28 years of sustainable and growing dividend, where we've never cut or suspended it in that whole time period. So pretty impressive growth since 1999. And you can see there really a lot of growth in the last 5 years from a dividend aspect, where we jumped up quite a bit in '22 after the pandemic and then continue to grow it up to where we're at, at the $4.08. And I think this just shows you the confidence that we have in the portfolio and really the resiliency that we have. We take for this dividend too, every single year before we increase it, we run it through numerous different scenarios, both market scenarios and portfolio development scenarios to make sure that it is sustainable. And that even if we do go into a downturn that there's no reason that we have to suspend or cut this dividend. So it is pressure tested, and it is very, very resilient. And then we've talked about the cash flow returns to shareholders. I mean you can see what we've done over the last 3 years here as a company, significant returns there. You can see the regular dividend. We did do some special dividends back in 2023. But like I said, we've been focused more on the share repurchases, $6.7 billion in the last 3 years, and that's reducing our outstanding share count by about 10%. So substantial move there as far as buying back shares. And then you can see the breakdown down in the bottom, as I talked about, year-over-year, how that's been distributed between regular dividend, special dividend and share buyback. And then on the right-hand side, you can just see from an actual cash returns as a percentage of market cap, how we rank against the peers, obviously, being a peer leader there in cash returns. Our pristine balance sheet. I'm proud to say we think we have one of the industry's best balance sheets right now. Like I said, it's 0.4x net debt to EBITDA. You can see peer-leading from that aspect. And I think really the point that I'd like to get across on this slide is the balance sheet is in great shape. We really don't need to put a lot of cash in this current environment on the balance sheet. We've got very robust cash flows. And I think our primary focus moving forward is to be opportunistic for the company wherever we may, whether that's opportunistic bolt-ons, marketing agreements, other opportunities for the company and then obviously, additional cash returns to shareholders to really balance out and be able to support that 100% return of cash to shareholders as we've talked about. And you can see the last couple of years, we've been right around that marker. Okay. So I'll get into the assets here for a second. I mean this is really where the rubber meets the road, and this is really where our culture comes into play. As I said, that decentralized culture, the sharing, the innovative qualities being business people first. As I said, each one of these divisions is focused on their own asset. They've got boots on the ground. They can get to the asset every single day. So you really help -- that helps out see the improvement in the asset just from an efficiency standpoint and pushing forward innovation and then also from an overall exploration aspect. Instead of just having one exploration team and headquarters, each one of our divisions has an exploration team that is focused on organically growing. So here, first, starting in the Delaware, we've made outstanding progress in the Delaware. And I know the Delaware has been very, very topical for us. It's been in the news for productivity reduction year-over-year. And what I'd say is that was completely strategic, and it was by plan and by design. So what we've done is, you can see here, we've increased our lateral lengths like much of industry a lot over the last 3 years, 30%. Well, what that equates to is we've really lowered the overall cost basis there in the Delaware. The well costs are down 20%, reducing cash costs. And what that does is it's given us the opportunity to where there were certain targets that didn't meet our very stringent bottom cycle hurdle rate, but now it does. And it goes up above that, and it's very additive to it. Not only that, what it does is it balances out our actual payout and improves the payout of it. It's improving the overall margins of it. And really, we're starting to look at the value and an NPV per acre out there and make sure we're extracting the maximum amount of value and improving our recovery per acre. And where that puts us now is we're well over 20 unique targets across all of our Delaware acreage with just outstanding improvement there. And as far as the improvement, you can see here 4% improvement year-over-year in capital efficiency on that. And we feel very, very confident that now that we've set in this new actual development program, well productivity in the Permian will be consistent moving forward with this development program unless we have to have another step change where we're able to add more value because of cost reduction, which we will keep you guys apprised and abreast of that. But as far as our inventory, we did come out and we talked about it on the call that we can go at our current pace right now in the Delaware of over 300 wells, maintain the same economics, the same free cash flow and success for 10 years plus with the inventory we have out there. So very, very robust. And obviously, with adding in these additional targets, that just helps the inventory there in the Delaware. This is just quick. I'll breeze over this. This is Rystad data over the last 3 years. You can see how we kind of stack up operationally and from an efficiency aspect and then how that rolls through versus the peers from a breakeven. So a leader as we've been there in the Permian. Moving up to our Utica asset. Obviously, this is one that's a premier asset for us now, a new foundational one. We had the Encino acquisition last year, as we talked about. When we did announce that acquisition, we had put a target out there of about $150 million of synergies in the first year. And I'm happy to say we've reached that target early in about 5 or 6 months. So the majority of that, I would say, is obviously just in the well cost side and the efficiency side. You can see where Encino was at $750 a foot. EOG was at $650 or below a foot. And combined now after 6 months into the actual acquisition, we're pro forma under $600 a foot there. So just outstanding results across the board. You see on the bottom, just some of the efficiencies from an overall operational aspect that we've been able to enjoy through the acquisition and improving the overall asset over the last 3 years. And this has really become one of those foundational assets for us with a lot, a lot of running room. You're going to see we're shifting, almost doubling the activity there. We'll be running 3 rigs and 3 frac fleets. And this will really be one of the big growth arms for the company as we move forward. So extremely excited about the Utica, and I think we still have a lot more upside even just with the acquisition and synergies as we move forward. Next, we've got our Eagle Ford play. This is just one of those amazing assets that just keeps on giving after 15-plus years of development, where we've moved from -- the majority of our development was in the East where it's much more prolific, I would say, rock to the west through operational advancements through technology, through longer laterals, 15-plus years later, we're actually getting better economic results now than we did back at the beginning of the play. And you can see still improving our overall efficiencies, our capital efficiency there. We've got great operational performance even after the 15-plus years. So we continue to improve there. And you can see how that flows through to the breakeven price versus our peers there in the Eagle Ford being a leader and plan on continuing being a leader there. And then moving down to South Texas to our Dorado dry gas play in Webb County. This is a 21 Tcf resource. That is 21 Tcf, so it's massive. It's very, very prolific wells. We keep them choke back. We bring them on over 20 million a day. We've just made outstanding progress down there. Like a lot of the other plays that I showed you in the portfolio, you can see we've rapidly dropped our costs there. We've optimized our operational efficiencies. And on top of that, we've actually just last year alone, through unique designs within our wellbore and our completions, we increased the overall productivity per foot, which is a recovery basis in this play 13%. So continuing to improve it there, and we still got a lot of upside. It's very early in its days. We exited last year at 750 million a day, and the plan for 2026 is to exit at 1 Bcf a day. And it is, we think, the lowest cost gas in the U.S. We've got it currently with a breakeven price per Mcf of $1.40. And we're so excited in the play. We actually have installed a 100-mile 36-inch pipeline that goes from the center of the field, completely EOG-owned over to Agua Dulce. It has a capacity of 1 Bcf currently, and it's easily expandable up to 1.5-plus Bcf just by adding on some booster compression along the line for minimum capital, and that's completely controlled by EOG. So that allows us to get access over into the market center on the Gulf Coast and also take advantage of our LNG contracts, which we'll be able to talk about here in a minute. So how does that all roll up? I mean, not just even in Dorado, but from a full portfolio's perspective, we're looking at to make sure we've got an extremely diverse, flexible marketing strategy, and we're really not worried anymore about flow assurance. It's not about getting the molecules to market. It's about having numerous markets to be able to select it and maximize our overall netbacks of each one of the molecules. And you can see that on this price realization chart versus our peers. And we've always prided ourselves of outpacing what the average is to our peers in the market. And that is a huge priority to us to continue to make sure that we optimize our markets and that we're maximizing our netbacks on every single molecule. The great thing about this is it really has become a big part of technology, and we have control rooms in each one of our assets to where we're able to control where each molecule goes, move it from market to market as those markets move and make sure, like I said, we are maximizing that netback. And then quickly, these are the gas sales agreements that we have over on the coast from an LNG aspect. What I'd say about these is they're not tied to any specific play by any means. We can move any kind of gas to them. But you can see over on the right-hand side, we currently right now of that 420,000 MMBtu wedge, we're producing 280,000 MMBtu, and that is linked to either JKM or Henry Hub on a monthly basis. We're able to elect that. So you can obviously imagine in recent years, we've been obviously electing to JKM. So that was really a sweetheart deal. The additional 140,000 of that agreement comes on here later this year, so we'll be at full capacity there. And then we're also -- the other stacked bar on top of that, we're currently producing 300,000 MMBtu that's directly linked to Henry Hub there on the offshore. And then as we move into 2027, we have a Vitol agreement that's going to be coming online for 140,000 MMBtu, which is Brent-linked to take some of the volatility out of gas price. And then there's additional 40,000 that's either Brent-linked or linked to U.S. Gulf Coast. And then moving on to the last couple of slides here. As we talked about, sustainability, it's really core to our DNA. What I'd say about this is we've had a lot of success over the last handful of years. We did have targets set in 2020 with a 5-year goal. We achieved that goal 2 years early. So we did come out and set new targets. You can see on the left-hand side. Obviously, reduce GHG emission intensity, maintain near zero methane emissions there and then obviously maintain our World Bank zero routine flaring across the company to make sure we're good stewards. And you can kind of see our strategy on the right-hand side. The big thing I'll point out there and the easiest thing is reduce. Don't flare, make sure you get engineering controls in, engineer out any kind of venting or any kind of emissions from that aspect. And how we look at this is it's not only just being good stewards of the environment, but each one of these molecules, I mean, it's revenue. Why would we not want to capture that and go ahead and put it downstream to markets because a lot of the projects from an engineering aspect that you're able to apply here actually have returns to it. So this is a big piece of who we are as a company. And then lastly, as we finish up here, this is the last slide. As I said, everything kind of really all rolls up to the culture of the company. It really has to do with, as I said, each one of our people, they're business people first. They understand how they're affecting the business and how each decision is affecting the business. They're focused on the actual financials, the returns. They really utilize our decentralized culture, which is unique within the industry. We're one of the only companies that actually has divisions in each one of our assets. So we're close and proximal to it, and we can be hands on. Every one of our people is multidisciplinary. We really promote them, not just focusing on their discipline, but understanding the full cycle of jobs and technology we have in our industry, making sure they continue to innovate and that they're extremely responsible from a sustainability aspect. So with that, go ahead and hand it back over to John to see if we have any questions.

[indiscernible]

We prefer to invest in returns. This is -- that's what I would say. So we're not really -- we don't lean one way or the other. That's why we've got very stringent markers where at bottom cycle pricing, $45 oil, $2.50 gas, the minimum return that we look for is 30% direct after-tax rate of return at that bottom cycle pricing. So no matter if you're gas, no matter if you're oil, we're pretty agnostic to it. We're just about returns, and that's how we look at it. Obviously, as you look at where we stand right now with oil and gas, I mean, oil, we're obviously getting a little bit of a bump here with the unfortunate activities over in the Middle East. We think it's going to be probably short-lived and really what we need to do is we need to see how spare capacity flows through OPEC+ and where that actually sits. And once that actually flows through the market at the end of the year, and our personal view is we think that demand is going to be very strong and the spare capacity is probably not quite as high as what is thought of out there. So we think we'll have pretty robust pricing as we move into the end of the year and into 2027. And then on natural gas, obviously, we're pretty positive on natural gas for the foreseeable future. With all the additional demand, we see about a 3% to 5% compounded annual growth rate in demand over the next handful of years to 2030. And obviously, with all the LNG coming on, we think that there's going to be quite a bit of a support there, both domestically and international for the molecules.

With your 100% return of free cash flow to shareholders [indiscernible].

As far as -- I mean, when do we buy back and when do we not to make sure we're maximizing value of the buybacks?

I mean generally, not buy stock, increase your buyback and stock [indiscernible]

Yes. I think it's a great -- well, the one thing I'd say is what's the value of the company and where do we think the intrinsic value of it and stock price is. And I will say this wholeheartedly, we think we're undervalued. We've been undervalued for a while, extremely undervalued, I'd say, for the last couple of years. So we see so much value in the company right now based off how strong the portfolio and the inventory is. And then with some of the new opportunities that we've entered into, we see what the potential runway on those are and what they can mean to the company. So at this point right now, I mean, even with a little bit of surge in pricing, I'd say we still think we're undervalued and we're still at an attractive price.