Q2 2020 EOG Resources Inc Earnings Call
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Good day, everyone and welcome to the E. L. G resources second quarter 2020 earnings results Conference call. As a reminder, this call is being recorded at this time for opening remarks, an introduction I would like to turn the call over to Chief Financial Officer of he O.G. resource It Mr. Tim Driggers. Please go ahead Sir.
Thank you and good morning, we hope everyone has seen the press release announcing second quarter 2020 earnings and operational results.
This conference call includes forward looking statements the risk associated with forward looking statements have been outlined in the earnings release Energy's FCC filings and when incorporate those by reference for this call.
This conference call also contain certain non-GAAP financial measures.
Definitions as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www Dot Yohji resources Dot com.
Some of the reserve estimates on this conference call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the Fccs reserve reporting guidelines.
We incorporate my referenced the cautionary note to us investors that appears at the bottom of our earnings release issued yesterday.
Participating on the call. This morning, our Bill Thomas Chairman and CEO.
Holmes Chief operating officer.
Ken that occurred exploration and production.
Yes.
Exploration and production.
Lance Terveen senior VP marketing and David stripe, VP, Investor and public relations Here's Bill Thomas.
Thank you, Tim and good morning, everyone.
The second quarter results demonstrate the company's ability to quickly adapt to an unprecedented drop in commodity prices, we exceeded our own expectations by delivering more oil for less capital and lower operating costs, allowing the company to generate significant free cash flow during the quarter.
In May we published our revised plan, which are aggressively reduced our full year capital more than 45% and Lee more than 20%.
EOG is ROE UGI employees rose to the challenge not only achieving the incredible reduction targets, we said that beating them.
Compared to our aggressive plan and guidance for the second quarter, we produced 7% more oil spin a whopping, 26% less capital and our cash operating costs, which includes elouise transportation and gathering and processing or 10% lower.
With a rapid reduction in capital and operating costs. The company generated nearly $200 million, our free cash flow, while oil prices averaged less than $28 per barrel.
Our second quarter results are a testament to the return focused culture of LG employees and our ability to pivot quickly in response to the unprecedented level of market volatility and industry conditions.
Last quarter, we laid out seven strategic focus points for the remainder of 2020, Here's a quick progress report.
Our first strategic point is only to invest capital if it generates a premium rate of return.
Premium return as defined as a 30% or higher direct after tax rate of return using up price deck, a $40 flat oil.
And this downturn, we have raised a return bar, even higher by using $30 oil instead of 40 to calculate our 30% right of return.
Our second focus point this year is to exercise operational flexibility to quickly reduce costs with capital 26 below target.
And cash operating costs, 10% below target, our second quarter results demonstrate our ability to move quickly and a volatile environment.
Our third focus fallen is to accelerate our technical innovation across the company.
This is an area. We're most excited about while we anticipated some additional opportunity for innovation because of the slowdown in our pace of development our employees ability to accelerate innovation, even while working remotely has exceeded our expectations. We recently completed our yearly technical congresses across.
Each disciplined all deal video conferencing, we are amazed that the volume of new innovative ideas presented some creative ways to cut costs, a new tools to identify and evaluate prospects I'm confident that the tremendous progress. We made this year will accelerate yields cheese lead as the sustainable.
Prudent start paying dividends in the future.
Driving down the price of all required to generate double digit returns and extend EOG industry leadership and return on capital employed.
Our fourth focus point.
This to exit 2020 with momentum into next year by increasing production into the price recovery.
As Billy will cover in a few minutes, we've increased our quarterly and full year production volume estimates. In addition, with the cost reductions were making this year, we've improved our maintenance capital outlook for 2021.
We now expect we will be able to maintaining higher volumes for the same capital and cover both capital and the dividend with cash flow at less than $40 oil.
Our improvements in volume coupled with reductions in well and operating costs are setting us up for strong performance next year.
Our fifth focal point this year is to remain hyper vigilant villages about maintaining our financial strength.
Our goal each year is identical to spend within cash flow and maintain an impeccable balance sheet to support operations and protect our dividend.
This downturn has demonstrated the value vlgcs historically strong balance sheet more than ever.
With this goal in mind, we reduce capex more than 45% to 3.5 billion. So that full year cash flow funds capex and the low thirtys.
If oil prices averaged $40 for the year full year cash flow also funds the dividend and generates free cash flow.
Six our focus is to continue to invest in the long term value as a business in fact once again this break in our pace of development has actually accelerated our progress.
Creating more time to fine tune, our quality exploration Mark.
We continue to drill on prospects that we believe will further improve company performance you will hear from Ezra in a moment regarding recent exploration progress.
The seven focus point this year is the most important.
Protecting and enhancing Iot cheese culture is the key to our continued success.
We have a highly skilled employees who are focused on constantly improving every every the company.
We right we remain committed to our employees as they are the ones, who are making EOG much better company during this downturn.
Armed with extensive data.
Proprietary apps and information technology, EOG employees or overcoming the challenging conditions by continuing not only to innovate but to accelerate innovation.
We believe we're in the process on making another significant improvement in EOG is performance similar to the last downturn when we initiated our premium drilling program in 2016.
As a reminder, with premium standards in place from 2017 to 2019.
Org delivered an industry, leading average return on capital.
Employed a 14%.
Generated 4.6 billion in free cash flow increased the dividend by 72% and reduced net debt 2.2 billion, an increase proved reserves by 55%.
The EOG culture is rising to the challenge again with innovation that is significantly improving the company's current and future performance.
EOG is long term game plan has not changed we remain focused on high return reinvestment disciplined organic growth and generating substantial free cash flow to fund a sustainable growing dividend and maintain a strong balance sheet.
Gee will emerge from the downturn, a much better company and our commitment to creating long term value for our shareholders has never been stronger.
Before I turn it over to Tim and Billy I want to note. How excited we are to continue our progress towards reducing GHG emissions. We are near the startup of our eight megawatt solar and natural gas hybrid electric power compressor station.
In addition, we recently formed a sustainable power group within the company.
This group will support our innovative culture to bring return focused low emissions technology and projects forward quickly.
EOG has committed to being an innovative leader and sustainability and the long term and energy solution.
Next up is Tim.
Thanks Bill.
Oh Gee proved to be exceptionally resilient during one of the most severe quarters for the industry and our memory.
I'd like to review the high level changes in AG is cash position during the second quarter.
Oh Gee had $2.9 billion of cash at the end of the first quarter.
During the second quarter, the company generated discretionary cash flow of $672 million and after deducting capex of $478 million, we generated $194 million of free cash flow that nearly covered dividend payments of $217 million.
Over time, EOG is working capital position tends to be fairly balanced between current assets and liabilities.
However, during periods of market volatility, our working capital balance can fluctuate significantly from quarter to quarter.
Changes in working capital on the second quarter represented a net cash outflow of $1 billion.
Which was more than offset by net cash inflow from working capital in the first quarter of $1.2 billion.
We expect changes in working capital will be approximately neutral for the full year 2020 based on the current outlook for commodity prices.
Moving onto the financing side of the ledger.
The issued $1.5 billion of new doubt and paid off a total of $1 billion a maturing notes during the quarter.
That's not the company with $2.4 billion of cash on hand at the end of the second quarter.
Considering total debt of $5.7 billion. This result yields a net debt to total cap ratio a 14%.
In addition to cash on hand, our very strong liquidity position is further supported my 2 billion dollar unsecured revolving line of credit which has no borrowings against it.
Looking ahead, we expect discretionary cash flow to the exceed capex and dividend payments for the remainder of 2020 and oil prices in the mid Thirtys.
In late April in early May we elected to close out most of our hedge positions for the remainder of the year as the volatility in commodity markets had abated and prices seem to have more upside downside.
We affected this primarily by entering into offsetting contracts for those hedge positions, we elected to close.
Therefore, the timing of cash received are paid for settlement of these with closed out hedges will remain in the periods of for which they are effective.
We expect to receive $360 million and net cash payments in the second half of 2020 from these hedge positions that have been closed.
As 2021 comes into focus we will be opportunistic about hedged, adding hedges at prices look attractive relative to our assessment of market fundamentals.
Next up is believed to review our operational performance.
Thanks, Tim.
Last quarter, we made the decision to shut in existing production and deferred new wells rather than sales into an uncertain and low priced market.
Our intent was that our lowest activity levels lowest capital expenditures and lowest production volumes would coincide with the lowest point of the commodity price curve.
In doing so well.
And we enhanced the cash flow and margins for each barrel produced and maximize the rate of return for our investments.
Our employees execution of our challenging new plan during the second quarter was stellar.
They answered the challenged by beating by wide margin.
The average capital expanse in production go we targeted under the new plan.
After rapidly reducing our full year capital plan by nearly half.
Second quarter capital came in an additional 26% below target.
We also reduced our cash operating expenses, a total of 10% compared to the target.
One of the hallmarks of LNG is striving for continuous improvements, but the downturn brought a new intensity to this effort.
Our employees delivered even more by continuing to innovate capital and expense reductions that will benefit future operations.
For example, we increased our full year total well cost reduction target to 12%.
Up from 8% just a few months ago.
Our operating teams continue to drive efficiency in every aspect of our business.
Drilling times are consistently improving the completion cost of seeing the most improvement during the quarter down more than 15%.
About half the capital savings can be attributed to cost efficiencies and the other half to service cost reductions.
Our drilling rigs and Frac fleets are largely under existing term contracts. So service cost savings have been more from ancillary services.
As rig and Frac fleet contracts expire, we expect to see further cost reductions. Therefore, we believe most of these savings to be sustainable.
Our cash operating cost were down more than $50 million or 10% relative to our second quarter guidance.
Our operating teams went into high gear to identify opportunities to reduce expenses during the second quarter with a focus on every category.
Some of the largest cost reductions are reduced workover expenses water disposal and lease maintenance and repairs.
These reduced expenses played a major role in helping to generate free cash flow during the second quarter.
It is also important to note that we have reduced our full year cash operating cost guidance by almost $20 million or 6% on a per unit basis.
On the production side, we also beat our forecast.
This is mainly due to bringing the shut in volumes back on sooner than anticipated.
One observation from our production data revealed that almost every well exhibited some level of plus production before returning to its previous decline profile.
Further evidenced that the well sustain no damage from the shutting period.
In addition, the decline observed from the base production was less than previously forecasted.
Also contributing to the production beat.
As a result, we have raised our full year oil production guidance by 16000 barrels of oil per day or 4%.
Our dramatically reduced activity and the temporary shut in production.
Combined with the expense reductions generated positive net cash flow and deferred a large amount of production into a higher price quarter.
Slide 12 of our presentation this quarter illustrates the updated shut in volumes and the corresponding product price.
While we have slowed our overall spending we have maintained our commitment to reducing GHG emissions by continuing to invest and innovative new technologies and initiatives.
Our focus on reducing flaring continues with our gas capture rate now exceeding 99.5%.
To further minimize flaring, particularly when caused by unpredictable downstream market interruptions we.
We tested a new EOG innovation, we have named close loop gas capture.
Closed loop gas capture is an automated process developed in house to reroute natural gas back into existing wells when a downstream interruption occurs.
Initial results were successful in indicate that our close loop gas capture process.
As the potential to both reduced flaring.
And returned a majority of the captured gas from the well back to production.
In late 2019, we initiated a pilot project in new Mexico.
To combine solar and natural gas to power electric motor driven compressors.
Compressors typically use natural gas to power the engines and our source of GHG emissions from stationary combustion.
Since solar power is only available during the day.
Were designed to hybrid power plant to supplement daytime solar power generation with reliable natural gas generation at night.
During the day, the solar panels should produce eight megawatts of power with no combustion emissions.
Impaired to the traditional natural gas powered compression.
We believe our hybrid power compression will result in lower operating expenses and a meaningful reduction in emissions.
This facility will become operational later this month.
Both of these projects demonstrate that we approach ISG.
Like every aspect of our business.
Focusing on sound economic decisions and continuously improving our operations.
EOG has a long history of adapting to changing industry conditions and using technology to improve the company.
As Bill noted earlier to further enhance our efforts to be a leader in GST reduction, we recently announced a new strategic initiative to identify and implement returns focused low emissions power generation within AG.
We are confident that this initiative led by our sustainable power group.
We will be another area in which yields will lead the way and finding more cost effective methods to generate power, while reducing our impact on the environment and generating a healthy rate of return.
And finally.
I'm extremely proud of how all of our employees have responded to this year's challenges and doing so while adapting to remote.
Working conditions.
Here's as refer an update on recent exploration success in Trinidad.
Thanks Bill.
Gee is that a very successful business in Trinidad for 27 years about 20% of EOG has natural gas production comes from shallow water offshore fields in the Columbus basin of Trinidad.
Most of the gas is sold as feedstock into a sizable petrochemical industry on the island, primarily producing ammonia and methanol.
Trinidad has had a positive financial profile with any UGI due to our competitive advantages in the country has a low cost operator, and our long track record of exploration success.
While our capital investments in Trinidad typically make up a small percentage of our overall capex budget. The returns on that capital our competitive with the is domestic portfolio and consistently generate free cash flow and net income.
The latest round of exploration and development in Trinidad kicked off in the spring of 2018 with the acquisition of a set of modern seismic images. The combination of new seismic an updated geologic model is provided a deep inventory of prospects to develop our exploration plant.
This plan included farming into new acreage held by another operator, where we could apply our low cost structure to improve the economics on these high potential exploration blocks.
Drilling began in July 2019, and we have recorded for initial discoveries with estimated natural gas potential of one Tcf gross and 500 Bcf net to Yohji.
The discoveries are located in shallow water off the south east coast of Trinidad.
Our two open water exploration wells support the installation of new production platforms beginning in 2021.
And the final two wells in the current drilling campaign or in process and should be completed by year end.
Production from this drilling campaign will more than offset natural declines from existing wells and provide a foundation of growth for UGI is total production in Trinidad.
Lastly, the initial success of this latest exploration program sets up the potential for additional delineation and exploration drilling in Trinidad in future years.
I would also like to take a moment to discuss our own ongoing domestic exploration effort. We've made good progress moving multiple prospects forward during 2020, despite a reduction to our initial capital plan.
We've seen across multiple basins is going well and we're capturing contiguous positions and what we feel or the sweet spots of these plays.
We have initiated drilling and some projects and are currently incorporating modern well logs and core data into our geologic models. We look forward to providing updates regarding the testing of these prospects at an appropriate time.
Next up is built to provide concluding remarks.
Thanks, Ezra in conclusion, I would like to note. The following important takeaways first our second quarter operational results were outstanding we rapidly reduced capital and operating costs, while increasing volumes. This resulted in significant free cash flow.
Second we have improved our full year 2020 guidance by increasing volumes and further reducing costs.
Third our 2021 maintenance outlook has improved to include more oil with no increase in capital, we can maintain higher volumes and cover both capital and the dividend with cash flow at less than $40 oil.
Fourth as demonstrated by our results the LG culture continues to rapidly and sustainably improve the company.
During this downturn, we believe we're in the process of making another step change to improve further profitability.
And finally, UGC fundamentals have not changed our focus on returns disciplined growth and generation of significant free cash flow to fund a growing sustainable dividend and strong balance sheet of not wavered.
Our commitment to creating long term shareholder value has never been stronger.
Thanks for listening and now we'll voted unite.
Thank you. The question answer session will be conducted electronically if you like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone phone.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
And our limited to one question and one follow up question, who will take as many questions as time permits once again. Please press star one on your Touchstone telephone to ask a question.
You find out your question has been answered you may remove yourself by pressing star then too well pause for just a moment ticket everyone an opportunity to signal for questions.
And our first question will come from Leo Mariani with Keybanc. Please go ahead.
Hey, guys I was hoping to get maybe a little bit more color on some of the cost reductions on the well side. Some capital perspective. This year I'm just looking through the slides any it looks like maybe it's a little bit lore.
Concentrated in the Permian in terms of your expectations, I know thats, where a lot of your activity.
He is occurring but are you seeing tiny outsized gains there I need you relative to the Eagle Ford in terms your expectations throughout the year.
Yes. Thank you Leo we're going to ask ability to.
Comment on that.
Yeah, Good morning Leo.
Yes, you're right most of our Capex is is generally directed towards the Delaware basin. So certainly are on a dollar basis, that's where most of the savings are as well.
Just to give you a little more color on the capital savings about a third of the capital savings are from efficiency gains.
A third of from pricing improvements and a third is really just delaying facilities and infrastructure from the second quarter into the future third and fourth quarter Im sorry.
So.
From that.
We were able to see.
Most of the cost savings probably on the completion side of our business as I mentioned during the notes on the call and you have to remember we're still under some long term contracts for drilling rigs and frac fleets. So as those roll off we expect to be able to capture some of the market rate savings on those in the future.
But we're seeing savings on some other ancillary services that I mentioned.
Largely.
Things like maybe chemicals being down 20% to 25% some of the equipment rentals being down 20% to 30%.
In things like that so you're seeing some savings on some of the other aspects of the business.
Not necessarily on the Frac fleets and drilling rigs.
Okay. That's helpful color for sure.
I guess I was hoping you could talk little about on the potential issue surrounding federal acreage here certainly sop on the slide you guys are kind of sand roughly half your premium inventory is located on on federal lands. Obviously the election is clearly uncertain, but you guys have any thoughts as to kind of when.
Got you might be any limitations going board non EUV and have a binding victory.
Yes. So this is bill.
And then we've got a lot of experience.
Drilling on federal land for decades, and we've been able to successfully navigate all the changes in the past we've had so many.
Changes over the years and so I'm confident we're well positioned to can continue to to adapt and.
Not let those changes a significantly affect that there's two reasons why I'm confident in and then I'll ask ability to add some additional color.
The first is we've got a large amount of premium quality drilling potential non federal land, we have a tremendous inventory.
That's really not affected.
Federal changes that provides significant operational flexibility on top of that our exploration program.
That as Ron mentioned.
We believe is going to provide some outstanding opportunities to continue to improve our inventory with better rock.
And most of that is located on non federal lands and we've got a lot of confidence that we can continue to generate and add non federal potential this even better while we have.
And then we've got a very strong growing backlog of approve drilling permits on federal land and I think Bill has got some numbers on that and then number two.
Our our government the has the system of checks and balances that allow the voices of many stakeholders to be hurt.
And as a part of these checks and balances.
Any changes would take time and have to consider all those stakeholder interest and so the the success of our responsible development is aligned with many important.
States in communities, where we operate.
For example from federal lands.
They are shared the revenues are shared with the states and in 2019 over $2 billion or revenue was paid out over 35 states.
So it's not the.
An easy thing.
To change significantly.
The federal drilling potential some I'll ask ability to add some more color.
Yes, Thanks Bill.
As Bill mentioned, we're starting with a lot of flexibility with our decentralized culture multi basin approach, we have the ability to move activity around quite extensively the on top of that.
Our exploration program, which is in basins really outside of our current operating areas.
Has the opportunity to further add to our non federal drilling inventory.
As Bill mentioned to you know we have quite a few.
Premium locations that we've announced and.
About half of those are all non federal lands. In addition, almost half of our premium locations that work at $30 are also non federal lands and you can look at slide 10 of our deck.
That illustrates that so the the part of those that meet their rate of return hurdle at $30 about half of those are nonfederal, so pretty good distribution.
Both federal and Nonfederal makeup that entire inventory list.
And the Nonfederal inventory is just as high quality is our federal so.
The impact of our Nonfederal inventory it supports at least eight years of drilling with similar capital efficiency as we're experiencing our 2020 plan.
And Bill mentioned, we have quite a few federal permits we have about 2500 federal permits that are approved or in progress and which is certainly more than four years of inventory.
And in the per also in the Permian basin over 90% of our federal Acreages is held by production.
Our government also provides as bill mentioned into an porton system of checks and balances which provides for due process before any regulatory changes.
And these changes have to consider the interest of all stakeholders ultimately.
Regulatory and legislative changes that denies access to current property rights could amount to government taking.
So there are certainly be some legal consequences of going through the process.
And then.
Just to point out too we have a very close alignment with the our stakeholders, including the communities work in this and new Mexico is a great example of that.
We recently conducted a very successful partnership with the state content to complete our closed loop gas capture project that I mentioned earlier.
And on a day to day basis.
I'm very proud of that close working relationship we have built with regulatory agencies really to have we're responsible development open communication paying attention to their needs.
Also enables us to meet our goals and operate in a timely.
Efficient manner.
And our success in turn has helped support a better quality of life for the people of New Mexico for example.
In 2019, the state received nearly 40% of its overall revenue from the oil and gas industry.
And that's certainly supports the initiatives to increase funding for public health education infrastructure improvements and so on.
On top of that oil and gas development supports a 100000 jobs in new Mexico, along with the associated economic activity and benefits.
A significant amount of that revenue from oil and gas activities on federal lands is also dispersed and the state governments to support local communities.
And of course, the two states that benefited the most our new Mexico in Wyoming, New Mexico received $1.2 billion and Wyoming $641 million in 2019 alone.
And the BLM estimates that oil and gas activity on federal lands provided about $70 billion of economic uplift nationally and supported about 300000 jobs. So there's a lot of important considerations and state goes stakeholders involved in any of these decisions.
To consider when changing the rules on federal land.
So for these reasons, along with our diverse and really growing inventory.
We remain extremely confident that he would you be able to continue to navigate through any changing regulatory landscape just as we have in the past.
And our next question will come from Bob Brackett with Bernstein Research. Please go ahead.
Yes, good morning, I'm intrigued by the comment that bringing back shut ins led to flush production and lower than expected decline there were learning there to apply to future development and is the mechanism understood.
Bill you want to comment on that.
Our can NFV, Kevin can Bob.
The majority of our welders or single zone wells under primary depletion.
So as we shut those wells in they continue to build bottom hole pressure and then return them on those wells will will show flush production until about bottom hole pressure is has gone down to what it was prior to that so it's it's a mechanism as well understood for the horizontal wells that we have that are under that we don't.
And have any wells, but are under water floods or multiple zones, where you can have one zone damaging and others. So it is well understood in the end. It's following exactly what we expected on the flush production profiles.
And then what about the lower than expected decline.
On the base decline.
In terms of the base decline, we will see the though the lower base decline was just that we saw those wells. We had we had forecasted them conservatively and the wells are performing better than what we thought they would.
Okay. That's great. Thank you.
Our next question will come from Paul Chang with Scotia Bank. Please go ahead.
Thanks, Good morning.
Well I guess two at 71 of their commitments that with the slow with volume.
Yes.
Sensible welcome again.
The efficiency because yes more upon thats a work on so if we extrapolate that I mean, even when Barry multiply job, we piling into a higher level.
Yes, it back well for the company will make we closed standpoint, I'll get to slow activity level and offline to grow as well.
Yes, Paul.
Thank you.
The efficiencies.
You know we've seen.
It's a substantial amount of.
Innovative ideas that have been generated I think when people have more time to think.
Instead of doing things, they think through and able to look at the data and analyze it.
They are able to come up but more ideas and and a lot of creative ideas one of the basis of our disciplined growth strategy is to grow at a pace that we can get better we don't ever want to grow.
So fast and have so much activity that we cannot get.
We cannot get better at the same time. So it really is a balance you can only allocate capital.
Certain speed.
You go too fast you know you out run your learning curve et cetera et cetera. So.
There is there is a benefit to.
To a proper pace and and we have been able to benefit from this slowdown every downturn that we're in.
And we.
We experienced multiple multiple multiple ones over my 40 years.
Every downturn, we make the biggest improvements in the company it's a challenge.
The the times are challenging.
This has been no different than any of the others other than.
We're working more remotely than we ever have.
And we're very fortunate to have in place are very extensive information technology system and our database.
And all of our apps.
And that we've leveraged all that technology.
Two.
To the two to analyze and too.
To to make changes and that come up of ideas how to try to continue to improve the company. So so we're super excited about where we're headed I think we're going to.
Exit this downturn a much much better company.
Able to generate even higher returns than we have in the past and really do all of our business better than we have in the past. So it's very exciting time for us.
I can.
Follow up on bad debt slightly differently, one up you all major competitor.
Also at level seen in growth will be company.
Well off the Colby shape, yeah business model and taken a more balanced growth in cash return and wealthy fight.
Cash flow.
Okay. So it's appears in the polls and one of the argument that they also make it back while closing thoughts on May on paper, Yes, hi on net present value again, the knowledge that.
At the most okay, and I think that behaving well MPS and teams, but we've done time, so that that may no longer happy.
Reliable tool depend on so I mean.
With that Ryan Goodman, and I guess, not why not I mean, we're trying to understand why is that a premium operate like yields.
We'll not one.
Perhaps that to happen more problems globe and cash, we turn business model and and trying to grow at a slower pace what typically has been.
And when the commodity price, it's getting much higher.
Paul Yes, that's a.
An excellent observation and we and we are.
Fundamentally a return focused company and Thats, what weve been doing for a number of years.
No.
If you look back at the last three years, we gave out these numbers other all our slide deck and I've talked about it in the opening we've been a leader in the industry return on capital employed so we're focused on improving returns every year.
And we've also minimal a leader in generating free cash flow, we generated one and a half billion.
Dollars or free cash flow. The last three years every year for $4.6 billion and that funded a very sustainable growing dividend, we increased the dividend by 72%.
And we reduced our debt our net debt over $2 billion. So we've been a very disciplined company.
And we did all that at a spending level that was our cash.
Capex the cash flow ratio.
Was about 80% so really what you're hearing from really the rest of the industry is are now moving into the model.
That EOG has been working.
Really for the last three years and we're thrilled about that that is fantastic.
For for the industry for investors and certainly it's very positive for oil prices as we move forward. So.
We agree.
Where they're doing the right thing and that's the thing that we've been doing foot for a number of years.
And we fully support their move.
Our next question will come from Neal Dingmann with Suntrust. Please go ahead.
Good morning, I'd like to see that continued diversified approach. My first question is around in his comments in your release about improved 2021 basis, Thats capex, leading to a higher fourq you exit rate and really I guess my comments on this.
Based on this could you speak to what this means for the trajectory for next year as well as.
What this potentially could mean for even 22.
Bill you want to.
Address that.
Yes, good morning, Neal this is Billy.
So I'm 2021 maintenance capital.
Previously in previous quarter, we outlined.
Same capital number for about 420000 barrels a day, which was believed to be at that time water exit rate would be for that for 2020.
Certainly, bringing on a bunch of extra production this year.
But also incorporating the cost savings were achieving this year. We believe we can do the same capital dollars number $3.4 billion, but maintain the exit rate. We're seeing this year of 300 or 440000 barrels a day.
Which is a significant improvement again in our capital efficiency number.
So.
We believe we can maintain that as we go forward that is not just meant to be.
Single snapshot I think one thing it doesn't bake into it and make sure everybody understands this is forecasted on what we're achieving today it doesn't bake in any improvements in and well performance that we expect to be able to continue to see as well as cost reductions that if things stay where they are and where stay in this.
Environment.
We're extremely confident we'll still continue to see cost improvements that will drive our maintenance capital number.
Improvements in the future. So yeah I'm extremely confident we can have a ongoing maintenance capital program. In this same kind of area that we're talking about today.
Very good my second question just around your technical innovations given given the strength and I think you all have really about anybody else on the on the upstream side with this ever lead you to consider broadening the business by considering any sort of clean Packer energy related investment.
Yeah.
Neil.
Yes, our focus.
On.
Ghd rejects and is.
In this.
Following this sustainable power group within our company.
Is to really focus on technology, bringing technology forward more quickly.
Inside the company and his ruling another organic effort.
Like we do everything else inside the company to really improve our emissions, but also make sure that we can do it at a at a very.
Hi rate of return and so it's really to facilitate our ongoing culture. We have tons of ideas that are coming from our divisions and our folks in the involved in the field operations and the and so we.
So we're really excited about.
The tech technology, and the innovation Thats coming forward and we're really excited about.
Continuing to reduce our admissions and certainly.
Any any kind of technology in this area.
So we believe will will not only benefit LG, but it could benefit the industry and so were opened with that.
It's not proprietary thing is something we're doing to really.
Continued to improve our environment.
Our next question will come from Phillips Johnston with capital One Securities. Please go ahead.
Hey, guys. Thank you.
A follow up on Paul's question.
Really stands out because unlike all your peers you never cut the dividend over the last six years and.
You also resisted all the pressure to buyback your stock over the last few years, while most of your competitors destroyed a lot of doing that.
The company the call thoughts about laid out plans to start paying variable dividends or special dividends on top of the regular base dividend.
I realize you guys want to continue to grow the base dividend at a healthy clip, but my question is is there any appetite at the board level to supplement a regular.
Dividend recurring variable dividend and if not what kind of flaws do you see with that type of payout strategy that would prevent you guys going down that road.
Yeah Phil.
Yes. Your observation is right you know, we believe a sustainable growing dividend back then and impeccable balance sheet is certainly the best way.
To return cash to shareholders and we're very committed to that and we don't want to take any anything away from that.
Having said that you know, we're certainly open to consider other additional options and so.
We we.
We certainly welcome any shareholder.
Input on that.
And we remain open in flexible to do what's best for.
Everybody.
Okay are there any flaws or drawbacks, you got it seems that type of variable dividend strategy.
Well I think the biggest one is it's kind of unknown.
And.
Inconsistent.
And the you know the feedback we've we've received from from many folks as they they would rather us focus on a more consistent the growing dividend and certainly as you pointed out we've never ever cut the dividend and we want to make sure. It's a it's sustainable and certainly backing it up with an impeccable dollar.
And so that with the mix we've had over the last several years as we as we talked about we believe is a really good mix and we believe.
No that that will create.
Very very significant shareholder value going forward.
And our next question will come from Doug look eight.
Of America. Please go ahead.
Thanks, Good morning, everyone hope everyone's doing well out there on bill I'm afraid I'm going to be helpful and not on Paul's question of EBIT.
I'll call chains question I am just play a couple of things back to you. If I may that's not long ago that you guys talked about 15% to 25% oil growth.
Between 50 and $60 oil.
On the 58, both oil price you refer to was subsidized by 70, who ultimately send a bunch of color goes to the you asked presumably to TC you asked a lesson.
My question is.
When you walk through all the things that you're leaning reinvestment rates and so on the feedback from your peers is that shareholders are telling them. They don't want as much oil growth. So I guess my question to you is what are your shareholders, telling you and asking you to do on why is it not right top oil growth in a more.
Got it just doesnt need.
Yes, Doug you know I think as we stated in the opening remarks, you know fundamentally.
We believe we've got a very very strong game plan and we've got a tremendous track record to back that up.
Being the leader and return on capital employed in the industry.
While generating very significant free cash flow.
And giving it back in a very strong dividend increase and strengthening our balance sheet.
And we believe that was the right strategy before the downturn. It certainly has put the company had a tremendous position where we are right now.
And the going forward.
We believe that Surat strategy going forward to continue to create significant shareholder value going forward. So.
We believe our game plan is really solid our growth is always been very disciplined again, we've only allocated about 80%.
Our cash.
Capex and the [noise].
And so.
We've been able to.
Grow the company at a very disciplined pace and as we go into 2021 and the future you know obviously.
We need to keep our eye on the macro view of oil.
We need to be aware of the market conditions.
You know we're not interested in.
Growing all oil volumes that up at a strong pace and an oversupplied market.
Certainly that's not the right thing to do.
But we want to continue.
When the time is right we want to continue to grow grow the company at a disciplined plate pace.
At the at the at a pace to where we can continue to improve our returns.
And improve and improve our performance.
Go, but as a footnote to the question I think people would really appreciate your leadership as a company here because you are one of the bigger companies.
Capital discipline needs to be defining and other here to try and do though my follow up is maybe a.
On the choose way of asking the same question, you're running 10 to 11 rigs right now you've got the potential clearly to run three times Adam.
So I guess, what I'm really trying to get out is are you planning to retain the same wolf operational capability.
The words, the risk that you'd move back to that level or is like someone the other companies is that an opportunity here to address the cost base at the company by right sizing to perhaps a lower level of activity and I'll leave it there. Thanks.
Yes the.
No. We are really committed to our employees. They are the ones that are making our company better they're the most valuable.
Asset we have in the company.
And so we have a lean we run lane, we actually peaked on employment.
About four or five years ago.
Even though we've gotten a much bigger company our employee base is really not grown so they're very highly productive there are highly motivated.
And there certainly.
The part of the company that we want to keep INTECH and take care of.
And encouraged so we believe there were at the right size.
To be effective.
To be ready.
As the downturn.
Is over.
So so we're focused on continuing to two to maintain and.
Actually increase our culture, our ability as we go forward. So we're very committed to two keeping the company.
In great shape.
Going forward.
And our next question will come from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Well Scott.
Oh good morning can you hear me.
Yes, Sir we can hear you.
Yeah, I think you're really count today, I think is around half a dozen rigs.
Correct me, if I'm wrong on that number.
And your continued efficiency gains that you guys.
Can you do achieve what is the new level maintenance rig activity and frac activity.
Bill you want to answer that one sure Scott disability. So yes, you're right we have actually seven rigs counting the one in offshore Trinidad so six domestically one offshore.
And.
Our maintenance capital plan would require about 20 rigs and 10 Frac fleets and were generally running.
As I mentioned seven rigs in five or six frac fleets today. So.
We are well under it when we pulled back our activity, we dropped to a level well below our maintenance capital level and that's that's important to note. So the planned certainly going into the third and fourth quarter as be looking at.
Whether or not we want to add a rig or two going into the next year to get to that maintenance level or not.
Got it and then you had mentioned also that you had the most your rigs in Frac crews under long term contracts I imagine those were the.
When you get just given the cost of.
Vending those contracts.
These generally multiyear contracts in support of new E. Frac fleet or did the majority roll off over the next 12 months of trying to ascertain the when those savings manifest I imagine.
The the rigs in factories today, given the deflation on other services. These rigs in Frac crews, maybe pushing towards 40 or 50% of your direct well cost.
To give my head about when you could see those savings will too.
Yeah sure Scott.
They are multiyear contracts and I'd say, there you know various terminal.
Various terms on the contracts, but in general they are starting to roll off in the next 12 to 18 months.
I think one thing that's important to note is you know we build what we think our valuable relationships with our most trusted service providers and we work through this in partnership with them to make sure we retain.
Not only the performance in the high performing equipment and personnel, but the ability to ramp back up when we need to so it gives us a lot of flexibility as we work through the us and I think certainly are we build a lot by building that relationship. It's a very trusted relationship. We have it allows us to may to capture some cost savings.
Been able to capture rates at below market rates in current times, but also maintain the high performing levels of activity that we need to sustain our business. So we're very proud of our relationships, we have with them but.
Now they typically roll off in the next 12 or 18 months and Wolf kind of reassess, where we need to be working with those trusted partners.
Our next question will come from one to raw.
<unk> Securities. Please go ahead.
Yes, thanks, guys and thanks for squeezing in congrats on the exploration success in Trinidad I did want to follow up.
Bid on your onshore exploration efforts, saying I know this easier said than done but can you comment on any other exploration efforts you consider pursuing outside of the lower 48 and would that Canada comes to mind and as you know one of your peers recently announced a.
Adding it position.
To their montney in Canada. So just curious on that note I'll stop there.
As Rob.
Yes. Thanks, Thanks, Juan this is as Rob.
As you know we've got a you mentioned, our Trinidad exploration effort.
And then our domestic exploration effort and so when we think about anything else outside of the lower 48, I. It really comes down to how competitive can it be with our are pretty existing domestic portfolio.
And that's the main driver on it when we talk about any of our new exploration ideas, whether its trinidad or the new domestic portfolio you know, we're exploring for prospects and rock quality.
That will be additive to the front end of our pre existing inventory.
At 10500 premium locations I'm not sure if we necessarily just need more to continue to backfill that that deep inventory. What we're really trying to do is add to the front end of it and that's what the exploration efforts focused on.
Had to ask but thanks for your time.
The next question will come from Bryan singer with Goldman Sachs. Please go ahead.
Thank you good morning.
You mentioned in the 10-Q that you expect to see replace impetus to 750 million of debt coming due next year with other long term debt and I thought that was interesting because you've been talking while I think about paying down debt and having the cash on the balance sheet to do so until I wondered if you could add a bit more color on a how you're thinking about the write less.
Well of free cash flow to pursue and then if not allocated to paying down debt, where you see the best areas of allocation between incremental drilling returning it to shareholders.
Or keeping high amount of cash on the balance sheet or deploying it elsewhere like M&A.
Tim.
Yes. So the reason we chose to keep the debt and long term debt at June 30 was just the uncertainty or the market going forward between now in February when her next debt is due.
Certainly the goal has not changed that goal is to pay down debt. So.
If market conditions.
Play out is such that where you have the cash sufficient cash then we will pay down that debt but.
To be conservative we lifted in long term.
Just because of the uncertainty in the market and I guess Bill will address the capital allocation portion of your question.
Yes, the right level, a free cash flow, Brian you know is really a function of it's it's obviously variable every year number one based on the oil price.
We normally we have and we will continue to kind of.
Use a conservative view, our macro conservative view of what oil prices will be that year.
And then we certainly have a goal every year to to generate significant amount of free cash flow is example, the last three years, we we generated about one and half a billion dollars per year on average to free cash flow.
And we want to use that you know to continue.
Two as Tim said.
Consider.
Paying our debt down our goal is beginning to paying our debt down more.
Certainly continue to work on our dividend.
When the.
Environment is healthy.
And then after that.
You know.
We will allocate the capital.
Continuing to allocate it at a very disciplined level just like we have in the past.
And the discipline the means that we're not going to allocate the capital at a speed.
That's too fast.
To where.
We cannot learn and grow and get better we want to always be increasing our capital efficiency and lowering our funding costs.
Continuing to lowering our operating costs.
And those kind of things into and so you have to go at the proper speed to do that.
Every year and that's that's really the governor on allocating the capital.
And whatever free cash flow is left over you know.
After all those things will are done you know, obviously that will be variable by year by year. According to the commodity prices.
We will.
Continued to be committed to.
So using that capital.
It to continue to create shareholder value.
And making sure we get to the highest return.
Possible Avenue on using that cash.
Great. Thank you and then my follow up that goes back to the exploration program I think as there you mentioned a couple of comments that that was interesting one was that the exploration you're pursuing an even better than what you have and in that it's in basins outside the current at the current operating area and largely not on federal land and I wondered if you could add a bit more color.
On what type of impact.
The onshore exploration you're pursuing could have on your potential that production or capital investment.
One or two years out how what the proximity is to being able to really move these plays into development and how to a level of materiality on now on your production and then whether there are above ground issues that need to be worked out with the with the areas from a midstream or their perspective.
Yes, Brian this is as right.
Let me try to unpack that one by one here.
First I'd say, our AR as we've talked about in the past our domestic exploration effort.
These aren't really in frontier Wildcat basins are these are in basins, where there is establish legacy oil and gas production and so if if these prospects work out the way that we think they will and they are additive to the the front end quality of our inventory we show.
Would be able to move them.
Into a active development basis pretty quickly obviously pending results.
The second part of that.
Going back to just the quality of what we're looking for this is it's a better rock quality as we've talked about before a lot of what we're looking at is tied to what we think we can develop with our horizontal completions technology.
What I mean by that is just exactly how does the rock how's it going to respond how's it going to actually be stimulated and fracture.
In combination with our our stimulation designs and so those are the two things that we think are really we're focused on.
It is definitely not traditional unconventional types of rocks that have been focused on in the past and so as we continue to kind of push these prospects forward and get data on them. We will we will update you guys with our results on the testing, but we're feeling very confident a everything that we're seeing.
And to date that that they are going to continue to be.
As I said earlier additive to the front end of of our of what really is a is a pretty deep inventory to begin with.
This concludes our question and answer session I will like to turn the conference back over to Mr. Thomas for any closing remarks. Please go ahead Sir.
In closing first we want to thank all LNG of all EOG employees for the outstanding job you're doing to improve the company. During his this historic inch housing downturn.
As we said the company is improving very rapidly.
And we're going to emerge from this downturn, a better and stronger company.
So we're eager to extend our leadership in return on capital employed disciplined growth fleet free cash flow generation and sustainability. Thanks for listening and thanks for your support.
The conference has now concluded. Thank you for attending todays presentation you may now disconnect.
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