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

Welcome to day 2 of the Barclays -- 40th Barclays Energy and Power Conference. We have a full pack schedule in the E&P track for the rest of the day. So a lot of great conversation to look forward to. Taking off the E&P track today is EOG Resources. Jeff Leitzell, CFO, is really looking forward to the conversation to start. So Jeff, why don't you join me on stage? And as we've been doing with the conference, we're starting with the audience polling questions, so let's do 2 quick ones to start. At what oil price do you expect to see a meaningful increase in U.S. shale activity, $70 to $80, $80 to $90, $90 to $100 and more than $100? Where are you seeing more increasing private activities? All right. $90 to $100, I think that's pretty fair. It's -- we haven't -- we're seeing more from private, but certainly not from public. Next one, [indiscernible] development area: Argentina, Canada, Middle East, conventional and unconventional or others? Argentina and unconventional and Canada. All right. Well, at least I picked the right one to go on that multiple choice. So thank you very much for participating.

Jeff, thank you so much for being here and having this conversation. I want to kick off with exploration. I think you guys have been talking about exploration and maintaining that expertise for a while, but I think the market has really catch up to it. And growing enthusiasm around what you're doing both in U.S. onshore and international in UAE as well. But before we go to UAE, I want to ask about how's EOG's capabilities internally able to set up the company to identify these opportunities early? And what characteristics around these opportunities that make them worthwhile for EOG to pursue?

Yes, that's a great question. And it's -- exploration is near and dear to our heart. It's obviously a big part of the company. It's a core competency. And really, we like to tell people it's part of the actual company's DNA. So one of the things that we've always done since the inception of the company is we really honed that skill set. So it's something we've tried to hold on to. And as we have new generations come in, we try to pass down that information to them. So we have future explorers to continue that skill set. . The other thing is our decentralized structure really helps that out because we have 7 domestic divisions. We have a division in the [ GCV ] now. We have one in Trinidad and then we have an international division in Houston. And each one of those are exploring in their area. So they can really put a lot of focus and intention on finding what the next resource is in that area. And we've got a very structured way we look at exploration. What we're trying to do is really look for 4 primary characteristics and at least check 3 of the boxes. I mean, the first one would be scale. It's got to have enough size. You want to have high rate of return. You want to have low or potential for low F&D and then you also want shallow decline, if possible. And those are really the things we look for. And in order to really gauge those things, you have to have some data. So we go into areas. It's nice if there are obviously some penetration points. Maybe there's some geologic data, older vertical data, maybe some older cores, older log, seismic that we can work on. Maybe there's a little bit of vertical production that we can go ahead and we can extrapolate out to what might happen in a horizontal. We like to see if possible, maybe there's a little bit of services in the area that we can utilize and then also infrastructure. If you have some infrastructure in the area, you can really keep your all-in in the front -- at the front of the actual play down. So it really makes the full cycle economics that much better. I think a couple of great examples of what we've recently done. I mean, obviously, people know about the Utica organically exploring and finding that then making the Encino acquisition. But even if we found that it doesn't necessarily have to be a greenfield entry. I mean we've seen bypass pay step-out areas and extensions just with technology that you're able to explore for. And a couple of good examples of that would be the latest Austin Chalk sweet spot that we talked about there in Eagle Ford. Just southeast of our Eagle Ford primary, we could use that geologic data and reservoir data to find that. And then also, as we've talked about our entry into the GCC, we see a lot of opportunity in international unconventionals. And obviously, our entry into Bahrain, which is an unconventional gas play and then the UAE, which we're excited about, which is a pure oil play over there with 900,000 acres.

And before we talk about the UAE, maybe how is the opportunity set that's out there in market -- out there in the world today, different than what it used to be? We're hearing more and more about governments looking opening resource access. So how do you think the opportunity set has also improved?

I think it's getting better, yes, absolutely. I'd say the first thing is we see people think that there's inventory degradation and there's no more places to find domestically. We don't believe that. We still see a lot of opportunity for exploration and to be able to find very economic resource here in the U.S. But yes, as you look internationally, there's been very little unconventional international operations. I mean, obviously, some Argentina, there's been some up in Canada, but there's unconventional rock all around the world. It's really just about having some of those boxes checked that I talked about as far as characteristics and hopefully having a little bit of data to get into them. But we have seen an evolution with a lot of the different governments out there where they're becoming much more knowledgeable and understanding not just how conventional operations and financials work but also unconventional financials. So we've been able to see we can get in and we can actually partner with some of these entities and get a piece of the actual resource and be able to go in with our technology to exploit it, but then also partner with them to where they can learn off of us from our unconventional technology.

All right. Talking about learning from your unconventional technology, your view is really to transport or export a lot of your capabilities in U.S. unconventional to international to UAE. What gives you the confidence that this can translate given regions different, equipment might be different? Like, so what gives you the confidence that what you do in the U.S. can be applied internationally?

Yes, I'd say the easiest thing to point to is the actual success we've had out of the gate over there. I mean we knew there was going to potentially be some challenges, but we've been extremely happy with what's happened over there in the UAE. So what that is, is it's a 900,000 acre, first of its kind unconventional concession there in the UAE. And we've went in. We started our exploration program. We have a 3-year exploration phase on it. We've drilled our first handful of wells. What I'd say is, operationally, we're very happy with what we're seeing there. We're able to apply some of the technologies out of the gates, not all of them, but at least initially, to be able to look at the reservoirs. We brought on our first 2 wells, and they were just 1 mile laterals, not necessarily optimal casing designs or optimal completion, but really just to test the formation. And those wells, they produced each 25,000 barrels of oil in the first 30 days. So -- and what a caveat to that, I'll say, is we had about a week or so that we were having to optimize facilities within that. It's the first time that you're kind of stepping in and you're learning about it. And there's still a lot of upside that you can bring to it. Both of the wells were flowing natural with no artificial lift. And what we've seen is we see great pressure profiles on them. The fluid mix is matching exactly what we thought, and everything is really encouraging. So I think the exciting thing is we see so much upside to this. There's a lot of improvements that we can continue to make by applying that unconventional technology. And what we're planning on doing now is we're going to move forward. We're going to drill some longer laterals 2-plus miles because we've seen the success from the drilling activity, and then continue to hone in. We'll work on understand exactly what's the best target, potentially what's the best spacing. We'll delineate the 900,000 acres to really understand what we have there, confirm the fluid mixes. And yes, we'll hopefully move towards a declaration of commerciality with success and all that, but extremely excited about the opportunity over there in the UAE.

All right. I was going to ask what characteristics do you want to derisk before you get to development plan, and you just gave me a list of the -- on the operational side on the rock side. Is there anything else on the infrastructure or on the commercial side that you need to derisk as well?

No. I think everything, previous to making the agreement with ADNOC, we had checked a lot of those boxes to make sure that we would have adequate takeaway throughout the life of the play and be able to have that infrastructure in place in a timely manner. So really, what I would say is, we've been asked that multiple times, what are the challenges and what are the hurdles we see, I think if anything, we see a lot of low-hanging fruit, is where we're at. And I would also say ADNOC has been an absolute amazing partner so far out the gate. It's really been a hand-in-hand relationship there, complete transparency, sharing, and they've really been willing to work with us and help us remove road block to continue to make that asset better. Some of the things that we're allowed to do, too, is we can bring that technology over, and they know that's very important. We have EOG motors over there on site right now drilling the wells. And actually, we've just started in-basin sand mining in the dunes, which normally, they're transporting in sand and super sacs. And from many, many miles away, and we see all this very, very high quality sand right there, so we're able to permit, and we're actually working with them to show them how to mine sand right there, and it really minimizes the cost in the transportation.

Great. Well, bringing back home to the Delaware, EOG has continued to find zones and improve the overall recovery of the asset. Where do you think we are in the inning of that asset now? How -- are we -- is it fairly optimized at this point between return, maximizing NPV at a section level versus like return on the individual law level?

Yes. I'd say the Permian is the gift that keeps on getting. And we keep finding ways, whether it's through technology and our development approach, as we lower costs, that we're able to bring forward more and more value there. Now you are correct. It really is a balance of maximizing the total resource extraction with optimizing those economics. And that's something that we've had to kind of work our way through, as you know. And the one thing that we really base ourselves around and underpin everything on as we start kind of our [ IA ] is going to be returns. . We've got our stringent threshold of a 30% direct after-tax rate of return at $45 WTI and [ $2.50 ] Henry Hub gas. And as long as you meet that threshold, you can actually get investment. You have to actually hit that minimum criteria. But once you hit that minimum criteria, you have to continue to optimize the economics. So what we look at is we try to optimize the payout on a well basis, we'd like to have at least probably a payout of less than a year by a well basis. We want to have the ability to obviously drive cost down, improve performance to where you can lower that F&D cost, which obviously flows through to the DD&A rate and it really helps for margin expansion from that aspect. So I think that's one thing as technology continues to evolve. So that's pushing the limits out there in the Permian. But not only that, obviously, we drove down our costs over the last handful of years. We talked about 20%, and last year, we brought in numerous new unique targets that meet that threshold and that rate of return. So you're constantly evolving your development approach. You're working on your completion designs or spacing, you're looking at different targets. So I would never count the Permian out. I think there's still a lot of value as far as different potential targets within the stack pay and then also extensions in the step-out areas. But what I'd say is with our Permian acreage because of this technology and how it's moved forward, being able to really maximize that NPV per acre, that's why we've got such a robust inventory there. I mean we've got 10 years plus of total inventory still in the Permian at our current pace. It's going to have very similar economics and financials to what we have today.

Shifting to the Utica. That's your newest foundational asset in the U.S. You're gathering more and more data, there's more development on the asset. Is there new things that you're finding, operational advantages or new data that influencing how you think about the development of that play going forward?

Yes, it's been a great progression there. And I say kind of out the gates, we haven't had a miss in the Utica, all the way from exploration to delineation. And it really has to go back to understanding the rock. And really what makes the Utica work, which many have looked for it and tested it over the years, is you have to understand depositionally where you're actually at throughout the play. So if you look at the play and you start over to the east and you're over near Pennsylvania, you're deep in the basin, so you're in very mature gas. But as you start to move into Ohio, you start moving up dip, you get into a condensate window and then a volatile oil window and then up into an actual black oil window as you continue to shallow up in the section. . And what we found was that volatile oil window is really the key point. You get to a point where you still have enough depth and pressure to really get good production rates. And you also get enough associated gas along with that oil to help really energize into the well throughout its life. And that really seems to be one of the better productive areas. So that's really where we're focused on at this point. And then as we got into continued delineation, we noticed there is differences within the rock as you move kind of from North to South. In the North, you tend to have maybe a little thicker section without an actual frac barrier, so it's very conducive to maybe stacks or staggers up there, and you can have a little bit tighter spacing because you don't have that barrier that you'll frac into and then frac out. Down in the South, a little different, we have a very robust frac barrier down there. So you're facing, you might have to space out just a little bit wider because you tend to frac up and actually hit that barrier there. But just through our success here in the first handful of years, it's really given us the confidence to move forward, actually make Encino acquisition, which we did last year below mid-cycle pricing, which is normally kind of what our target would be for an acquisition like that. We're able to increase that volatile oil window by over double, to 485,000 acres. And then also on top of it, we got about 300,000 of premium gas acres, which we're not focused on the gas window, we really are focused on that volatile oil, but we did acquire a DUC package in there and went in. It was 3.5-mile wells 3-well package. We just wanted to see what the performance was and each one of the wells came on at 35-plus million a day. So [indiscernible] gas that came along with it. And then from an operational front, we just had huge success, especially with the combined company between Encino and us. So on the drilling side, we've been able to reduce our feet per day drilled by 23%. On the completion side, we've been able to increase the feet per day, I should say, for both of those by 12%. We were able -- with our supply chain, we have a robust supply chain as a group that really worked hard, and I think we've dropped our casing and tubular costs by about 30% there. And then on the facility side, just with doing much more centralized facilities and bringing our knowledge to that, we've reduced it by about 20%. So when you own all that up combined between the 2 companies, we're well below $600 a foot. And I think the exciting thing is we still have a long way to go because we actually are partnering with a third party, and we're going to be opening the first in-basin sand mine in Ohio, and it's right in the center of our field, prolific reserves for kind of the life of our play, and it's really going to minimize transportation and the overall cost of getting sand to our location.