EOG Resources, Inc. (NYSE:EOG) J.P. Morgan Energy, Power and Renewables Conference Call June 22, 2022 7:40 AM ET
Billy Helms – President and Chief Operating Officer
Conference Call Participants
Arun Jayaram – J.P. Morgan
Welcome back to our J.P. Morgan Energy Conference. This is the seventh year. We’ve had the conference in New York City, but as you know, for the last couple of years, we’ve been in a virtual mode. So, couple of things I’m excited about as we have a fantastic roster of leading E&P and oil services companies in my coverage and we’re starting the conference with a bang with EOG Resources who’s been, you know, one of the leaders in U.S. conventional development since they went public in 1998.
Thrilled to have Billy Helms, who’s the President and COO to give a few prepared remarks and then we’ll turn it over to me and we’ll do a little bit of a fireside chat. As always, we welcome your comments. So, please, if you do have a question, raise your hand, happy to get to those. And with that, I’ll turn it over to Billy.
Thanks, Arun. And it’s great to be back in New York. It’s great to see everybody again. I was telling Arun; this is the first time I’ve been here since December of 2019. So, it’s nice to see everything opening up again and welcoming people back. So, with that, I’d go ahead and jump into the slides. Value Matters, that’s kind of the way we think about the company.
We’re focused on adding value to the company. And everything we do centers around that effort. And this next slide just jumps in and illustrates why we think that. We’re certainly a company that has a vast inventory of low cost, long duration assets. They’re based on a return principle. So, we focus everything on how we generate returns with a very high hurdle rate.
As I mentioned, multi-decade inventory level in multiple basins and that’s a very unique thing amongst our industry. We also added this last year natural gas option with our South Texas Dorado Gas Asset. We’re very excited about that. That’s a continuation of our exploration efforts that’s the latest example that shows the impact that that’s having. We are recognized as being a leading operator in the space.
We’ve been doing this a long time. We’ve probably drilled more horizontal wells in just about anybody in the industry. We’ve taken that history. We learn from every well we drill, to apply those learnings to the next well, to continue to improve. And then on top of that, the financial discipline that we’ve been adhering to really since 2016, we’ve been in a positive cash position.
Since 2016, we’ve made our first shift to this new premium strategy to try to focus more on returns. We’ve got a very strong balance sheet. Our first commitment is always to increasing the regular dividend and we feel like that competes across the sector. And then we also have a very strong track record of approving our ESG metrics. That’s also very important to us as being a long-term part of the energy solution.
So, just to dive into our inventory, just a minute. This really focuses how we feel about our inventory. It’s a chart of the number of locations against the rate of return for those locations. We have every one of these locations with a type curve, so we can understand the reservoir performance and the cost performance. And you can see how it’s improved over time. The lower part of that curve, you see the premium area.
So, the type curves, the well locations that we had at that time from 2016 to 2020, they averaged about a 40% return, and this is at a flat $40 oil price, just to make that clear. We run our investments based on a flat $40 oil price. So, we don’t really take this trip into account. So that kind of guarantees that we’re going to make a return through the cycles, which is the whole focus of the company. But since then, we’ve added a high number of high quality inventory that continues to improve that.
You can see the Median Return now is over 60% and then the things we’re chasing today and our exploration efforts are things that will be competitive with what we’re drilling today, so equal to or better than what we’re currently drilling. So, you see that the return for our exploration plays that we’re chasing is even better than that. So, it’s a good illustration of the quality of our inventory.
Now, there’s been a lot of discussion about CapEx and inflation in our business. So, I just want to go ahead and throw this up here. This is how we rolled out our $4.5 billion CapEx program this year. And as we came into the year, we certainly understood that we were going to see inflation in the business. I think everybody understood that at the time, but we also had very clear line of sight on a number of operational efficiencies and improvements that we can make to offset inflation.
Now, we did not predict that Russia would invade Ukraine and the additional inflation we’re seeing as a result of that. So, we’re doubling down. We’re focusing very hard to still maintain our goal of keeping well costs flat. Nevertheless, we’re very confident. We’re going to be able to deliver our volumes and our stated objectives with the $4.5 billion CapEx program we have stated.
We have a number of operational efficiencies. We continue work on and explore and we maintain that commitment going forward. And this is how we do that. So, this next slide really talks about the number of objectives that we’re doing to try to combat inflation. One, so this is not – so let me first say, this is not just a result of our contracting strategy. We have a lot of our services secured through multi-year contracts and they’re staggered, so they’re meant to roll off at different times.
So, we’re not always subject to inflationary cost. We don’t necessarily benefit from the low points of [their new cycle] [ph], but we also don’t get hammered when the prices go up a lot. So that helps us – that contracting strategy helps us. How we offset inflation is by focusing on getting better.
So, we reduced the number of days to drill this as an example out of [one play] [ph] in the Permian, the Wolfcamp Play where we’ve – over the last several years, we’ve reduced our drilling time by 42%. At the same time, we’ve increased the amount of lateral feet were completely [steady by] [ph] 85%. So, you can imagine that just minimizes the time you spend on location and it lowers your cost. And part of that example is, we took ownership of our sand and water logistics and we’ve reduced that cost by 46%.
So, you can see these are the things we work on to try to offset inflation. We still see opportunities to continue to improve that. We also focus on improving our margins by reducing our cash operating cost. We’ve had a good track record of that. You can see here, lowered that by 24% in the last several years. I talked a minute ago about our inventory that helps drive high returns, but it also drives a lower finding and development cost, which rose into your DD&A of the company.
Overtime, you’ve seen that come down 42% and that improves your margins, helps generate more net income and drives the value of the company. And that translates into our cash return strategy. We, first of all are committed to a minimum of 60% of our free cash flow going back to the shareholders and I’d emphasize that’s a minimum. And the first priority has always been a sustainable and growing dividend.
We’ve had a good history of growing that dividend overtime and we feel like that dividend is certainly competitive across the space today. We also view our pristine balance sheet as a competitive advantage in today’s market. And that’s really a strength of any company that’s in a volatile commodity business. You need to have a very low – a very pristine balance sheet.
We look at other forms of returning cash to the shareholders, mainly through one of two methods, either a special dividend in times where commodity prices are higher, and then opportunistic share repurchases during downturns. So, that’s the way we’re thinking about that. Remaining cash, we look for additional opportunities to continue to add to our inventory through low cost property acquisitions.
So, just talking a minute about the regular dividend. Certainly, since we shifted to the premium strategy back in 2016, you’ve seen a 28% compounded annual growth rate in our dividend rate, a pretty healthy return going back to the shareholders, and we feel like that’s designed to be sustainable through the cycles and we stress test that down to low oil prices. So, we feel like that it’s a very competitive dividend rate in across the sectors.
One of the last things we’ll talk about here is our ESG ambitions and strategy. We feel like that’s a very important part of the ongoing business, the future of the business of the company. And it’s designed to be part of the long-term energy solution. As we see today, oil and gas is still highly needed in the environment today.
So, we want to be part of that solution. So, we’ve set some near term targets as you can see there that are very ambitious and we’re very confident we can do that. Along with some long-term ambitions of being net zero, Scope 1 & 2 emissions by 2040. And we’re doing that in really three categories: One, the strategy is to reduce our emissions everywhere we can as much as possible. And we’ve done things like, right now we’re capturing over 99.8% of the gas we produce. So, we flare very, very little gas. And we have an initiative to meet the World Bank initiative by 2025 of zero routine flaring.
So that’s a good ambition. We’re also piloting a lot of other technologies to continue to find ways to reduce further. What we can’t reduce, we’re going to try to capture. We’re going to start our first CCS project later this year. And we’ll learn from that and see how we can apply that across the rest of the company. And then the things that fall outside of those categories, mainly in Scope 2, we’ll look at ways to offset in further ways.
So, just moving to our last slide, all this is made possible really through the culture of the company. I know a lot of companies talked about the culture, but we’re a very decentralized organization and we push decision making an authority down to the lowest level. That inspires innovation and entrepreneurship that leads to solutions to all these different problems we’re trying to tackle. That’s a very unique environment and we feel like that’s a competitive advantage for the company.
So, maybe with that Arun, we’ll jump into the Q&A.
Q – Arun Jayaram
Great. Again, we welcome your questions. If you have one, please feel free to raise your hand. So, Billy, let me start with inflation. One of the surprises from the buy side is the fact that you can reiterate your guidance at a time when nearly 50% of your peers have already raised kind of CapEx this year. So, I was wondering if you could delve around how you’re able to deliver that CapEx budget relative to your peers? And does this provide any headwinds as we think about 2023 given your contracting strategy?
Yeah. I talked a minute about that just a second ago with the slides, but it does involve a couple of different things. One is our contracting strategy. As I mentioned, we have multi-year contracts for a lot of our services, drilling rigs, frac fleets, and other things. We also secure a lot of our tubulars directly from the steel mills and we keep a large inventory of products across our asset basis to be able to manage some of the – offset some of the inflation we see there. But it’s not just a matter of managing contracts, the efficiency gains we see in our business, as I mentioned earlier, we started the year with a clear line of sight of things we could achieve to offset inflation we saw at that time. And we’re well on our way to do that.
The things that inflation is hitting us the most is, of course, everybody sees it’s still tubular goods, fuel. We certainly benefit from the revenue side on the increases in oil and gas prices, but we also pay for that on the cost side and then labor. Labor is a challenge these days across the sector and really across the entire economy and we’re certainly subject to that. The things we try to control though is through our efficiency gains and our operations by drilling wells faster.
We took ownership of a lot of the downhole tools that are necessary to drill these wells. So, we internally manage that and to come up with new designs to build these rather than rely solely on the vendors to supply that. On the frac side, we have our technique, we call Super Zipper, it’s very similar to the [sample frac] [ph] technique. And we are pioneering and moving that full forward.
Last year, we completed about a third of our wells with that technique. And this year, it’s going to be about 60% of our well count. So that alone reduces our well cost by about 5%. So that’s a big impact across the company when you roll up the number of wells we’re using. And then we have another – a lot of other initiatives like we’ve been managing our own sand for a long-time since the Barnett days, 15 or 20 years ago. And by taking ownership of that and actually moving that source closer and closer to the Wellhead helps reduce both the cost of the sand, but also transportation to the well.
So, just a number of initiatives like that that we take ownership of, helps us offset that inflation and drive, keep a well cost flat. Now, going into 2023, answer the last part of your question there, we’ll benefit some by the contracting strategy we have in place. We have these contracts are staggered, so they don’t all expire at the same time. So, we’ll roll some of those into the future.
Some of them we’ll have to renegotiate and work with our vendors to secure those services going forward. We anticipate that, but we also see clear things that we can do to continue to improve the business. So, I wouldn’t subject us to the fact that we are going to see more inflation than anybody else in the industry. As a matter of fact, I’m almost confident we can still maintain our lead on well cost going forward.
Okay, great, great. The next thoughts or question would be around 2023, I know you haven’t provided any outlook comments in 2023, but if you’re going to pivot to high single digits oil growth, can you give us a sense of how much capital do you think that that could take relative to the 4.5 that you’re spending this year?
Yes. You’re right, Arun, and it’s really early to be talking about 2023 when we are dealing with such a volatile market as we’re seeing today. I think oil prices are down another 5% today. So, it’s difficult to think about what 2023 is going to look like halfway through 2022. I think the – what I can say about 2023, we’re going to remain disciplined in the way we run our business.
So, discipline to us means more than just operating within cash flow. It means operating at a pace where we continue to improve the company. So, we don’t want to run too fast and see our operational efficiencies get worse or cost go up tremendously. So that’s the focus. That’s the internal discipline that we apply to ourselves. And we feel like we can continue to do that through the innovation we’ve talked about, taking ownership of some of the more challenging parts of our business. And we’ll stay committed to that going forward.
So, would we return to those high single digits that we’ve talked about in the past? It’s too early to say what that market’s going to look like. I think the other challenge we have going forward just as an industry is, I think there’s a lot of bottlenecks and industry being able to leverage and grow more than they currently are.
We’re all seeing it today and the lack of services, the lack of tubulars to get the wells drilled, the lack of frac sand to get things done, the service providers to be able to provide the services they need. So, there’s a lot of bottlenecks in the industry in trying to grow any more than they currently are.
Great. I want to shift gears a little bit, talk a little bit about EOG’s unveiling of a formal capital returns kind of framework. Obviously, you had a very kind of industry leading dividend that’s grown a lot over time, but could you give some of the generals in the audience a view of what that means for investors?
Sure. We announced the cash return strategy, the 60% of free cash flow just a few months ago. And really that was out of just listening to our large shareholders. I think our large shareholders were very pleased with our strategy and what we were doing, but they also saw the need to provide more clarity around that, more transparency about how we were thinking about the business. And so that’s why we came out with that strategy.
I would emphasize that’s a minimum of 60% and we stress tested that through the commodity cycles. We feel like with our dividend, regular dividend [at the point it is] [ph] that that’s sustainable through the low points of a cycle, and still be able to meet the 60% return threshold. So, we stress test all those things and feel confident we can deliver that going forward. It’s also in keeping with what we’ve done in the past.
Last year in 2021, we returned about 49% through dividends and paid off a $750 million bond, which together is about 60%. So, it’s just in keeping with how we’ve been actually doing the business and it provides a little more transparency about how we think about it.
Certainly, at this point in time, with the higher commodity prices, we feel like the special dividend is a better answer today. And then when we see the disconnect, in the commodity market and we see an opportunity to buy back the shares in a lower commodity environment will stay poised to be able to do that. So that means we might build up a little bit more cash on the balance sheet going forward, but that’s the plan long-term.
And could you give the audience a little bit of a sense of how much per share or how much cash you could return assuming 60%?
Well, I think we’ve modeled – these numbers probably aren’t exactly right, but I think we’ve modeled about maybe [$8.5 billion] [ph] this year with – through specials and regular dividends that we returned to the shareholders, given the commodity the strip at the present time.
We have a question in the back.
Just following up on that. What’s the right level of cash on the balance sheet? [You see you even grow cash?] [ph] What’s the right level above the business? So, we have some sense for [Technical Difficulty]
So, we typically like to have about $2 billion of cash on the balance sheet just in viewing the commodity cycles, the change in working capital as you go through each month, but then also, we do have a bond due in the first quarter of next year. We want to pay off, I think about $1.2 billion we want to pay off, but then beyond that, as we return the 60%, we’re going to – with the commodity prices, kind of where they are, we’ll probably build up some more cash on the balance sheet.
As a company, we want to have that little extra cash to be able to buy shares back if we see a dip in the commodity prices. So, you would expect us to maybe carry a little bit more cash than that on the balance sheet on a go forward basis. There’s no pre-set targets, I might say.
There are some questions.
Just to clarify, does this 60% include bond paybacks and debt payback or is it in addition to that?
It’s in addition. Yes. Yes, sir.
Just longer-term on the oil production volumes, like, if you look five, six years out, what’s the right way to think about where you’ll be similar to today or do you expect on a multi-year basis to be higher?
Well, naturally, I think depending on the macro environment, we’ve committed not to push barrels into a market that doesn’t signal that it needs it. I think clearly today the market’s signaling, they need the barrels. So, this year, we’re kind of returning back to the pre-pandemic level that we had before, the downturn. And so beyond that, we’ll just look at that market, but we clearly have the ability to be able to grow into the market that needs the barrels. The pace of that growth will vary depending on what the macro environment looks like.
So, I can’t really give you a set number. It will vary year-to-year based on what the macro environment is telling us, but I think you can also see that when the signals are there that the market needs the barrels. We have the ability to add some really low cost barrels and generate significant growth in our margins and cash flow per share. And that’s really the goal of the company.
I’ll ask another. Just, apologize for the [general’s question] [ph], but in terms of the life cycle of the company, so, I get to sort of the [indiscernible] years where you got into unconventional and then the [Bill Thomas years] [ph], so when you think about where you and Ezra want to drive the company over the next few years, could you talk a little bit about that and, sort of the life cycle of the company?
Sure. I’ll just remind everybody, you know, our first CEO, Forrest Hoglund, kind of set out the guiding principles for the company and that’s to focus on returns. And that’s always been the guiding principle of the company and it’s probably more accentuated today with our premium and double premium strategy. So, you can see the clear quality of the inventory is very clear, I guess, today. And what we’re investing in is generating significant high returns.
These wells pay out in just a matter of months. So, you’re generating a lot of cash on top of just returning cash from the payout. So, then with Mark, you saw the shift from gas to oil and that focus again was a returns based decision because we could see the commodity environment changing. And now we continue to look for ways to add to the quality of the inventory, whether it’s oil or gas.
And you see our latest example of that through our Dorado South Texas gas property, which will remind everybody that’s 21 Tcf of net gas in South Texas, very close to the demand that’s in the market. So, we’re going to stay focused on that. I think the change – there won’t be a change really in that underlying principle of focused on returns generating high quality inventory.
With Bill, we focused a lot on exploration and growing the inventory through our exploration effort, beefing that up. Ezra will continue that in his tenure. So, that’s kind of how we view the company. It’s a little set apart from maybe strategies from other companies. We feel like there’s ample opportunities to continue to grow the company through exploration efforts and we’re chasing in a lot of a number of high quality plays today that we think will be additive to the company in the future.
So, we think about building the base of the company with the inventory we have today, layering on these other things on top of that for the future of the company. So, it’s building a long-term strategy really for the company. Yes, sir.
You all have signed some long-term sale agreements with Cheniere, some of them have come on overtime. Can you talk about those, but – and also include, do you have any infrastructure needs and takeaway needs that you will have to build out prior to when Corpus Christi Stage 3 is fully operational?
Sure. Yes, we’re very excited about partnering with Cheniere on the Corporate Christie Train. We currently have 140 million a day that we’re providing to Cheniere and it’s indexed on a JKM Asian market and certainly that’s very advantageous today. That continues to grow overtime and really grows with the startup of Stage 3, Corpus Christi Stage 3 and that will be in 2025 or 2026 whenever that comes online. And we’ll sell a total of 720 million a day. 420 million a day will be indexed to JKM prices, 300 million a day will be indexed to Henry Hub.
So, that’s kind of how the agreement works. And I think it’s a 15-year term. So, part of that strategy has always been, it’s a similar strategy we do to all of our plays. We try to have multiple markets available to every play to give us ability to reach out and touch the best market at any given time. So that optionality and diversified portfolio mix helps us manage through the commodity cycles by exposing us to all the markets that are out there.
We export gas now. We also export oil to – so we get brand exposure and we get WTI exposure. So, that’s kind of the overall marketing strategy. Now, the infrastructure question, that’s more specific to any given play. Every play has to go through a growth phase. So, you start out by testing and then delineating a play, and then as you start to grow, you have to build out some infrastructure.
We did that in Eagle Ford many years ago, and then we had to do it in the Delaware Basin and certainly it’s going through more of a growth phase now than the Eagle Ford did a few years ago. Delaware Basin is today. Dorado is another example. We just started that play. We’ll drill about 30 wells this year. As that play develops, we’ll have to build out some infrastructure to get that to the market.
So, every one of these plays is in an area that’s close proximity to takeaway, but they were going to acquire some amount of infrastructure. And it’ll be staged in with the development of the play. So, you won’t have any large capital expenditures in a given year, it’ll be staged in overtime.
Just your thoughts on where differentials, you know, for [indiscernible] pricing might go next year and how it might affect how you either spend capital or produce?
Yes, I think everybody sees there’s going to have to be more takeaway eventually in the Permian. So, [indiscernible] could come under some stress in the next year or so. There’s a number of projects that have been initiated or discussed and those will help alleviate that problem overtime, but it’s going to take a little bit of time to get those up and going.
So, we’ve managed through that. We already have quite a bit of takeaway available to the company. A lot of our gas from the Permian, [actually] [ph] can get to the Gulf Coast and we can take advantage of the LNG markets there from our Permian gas. So, we have, as I mentioned before, a lot of optionality for that.
So we – best part of our longer-term strategy every asset is making sure we secure takeaway, but I think [Waha] [ph] in general is going to come under some pressure as capacity grows there in the future.
How are you managing your investors consistent for a few years now demand to return capital via dividends or your buyback strategy versus the Biden administrations, I guess propagate [all-in] [ph] put pressure in, not just you, but all on the gas to put every dollar back into the ground?
Sure. First part of that is, we are definitely committed to our shareholders and you see that commitment through our cash return strategies. So, that’s first and foremost in our mind. And then on the growth, I think us and probably industry is doing about everything that can at the moment with what capacity is available in the industry today.
There’s not a lot of extra capacity out there to do more. And as I mentioned earlier in my remarks, we’re getting back to the pre-pandemic levels we were at back in 2019. So, we’re actually in a growth mode. So, we’re growing oil production about 4% this year. BOE is somewhere between 8% and 10% this year.
So, from that standpoint, I think we’re doing our part and I think industry in general is doing their part. So, I think it’s an educational thing. We need to spend time working together with our policy makers to make sure they understand the challenges we have and what we’re doing to correct the problem and try to be part of the solution.
Maybe this is our last question, Arun.
Could you maybe – you mentioned organic growth and the depth of your inventory, could you mention maybe for your company or for the industry in general, the M&A landscape and especially delineating between public and private producers?
Yes. And I’m sorry, I missed part of your question. Is it how we compare with other operators’ efforts? Is that what you’re saying?
Is M&A part of [Multiple Speakers], and if not, or if it’s yes, how does that also relate to the industry as a whole?
Okay. Sure. Yes, the M&A question, for us, we always look at every deal that’s out there. We always have, but we also compare to everything we’re doing internally to generate organic exploration efforts. For us, it’s always a return based decision. We aren’t against doing M&A. We gravitate more towards the lower cost bolt-on acquisitions, property additions, and mainly our exploration effort that supplement our acreage position in those plays.
We have done a large one before we did the Yates acquisition back in 2016, which was largely a little bit of production about 30,000 BOEs per day, but 1.4 million acres of undeveloped [lease sold] [ph]. So, those are the kind of things that we’d actually like to do again if we could find another, but we haven’t found another one yet, but we’re constantly looking.
So, we’re not against that. I think we just see our ability to find low cost barrels and bring to the market better done through our exploration effort than just expensive corporate M&As.
Great. Billy, thanks again for supporting the conference and leading us off this morning. Thanks again.
Thank you, and thank you for your support.