Q2 2019 Earnings Call
Good day, everyone and welcome to Erode your resources second quarter 2019, earning results conference call.
As a reminder, this call is being recorded.
At this time for opening remarks, and introductions I would like to turn the call over to Chief Financial Officer of Energy Resources Mr., Tim Driggers. Please go ahead Sir.
Good morning, and thanks for joining us we hope everyone has seen the press release announcing second quarter 2019 earnings and operational results.
This conference call includes forward looking statements the risks associated with forward looking statements have been outlined in the earnings release and the energies FCC filings and we incorporate those by reference for this call.
This conference call also contains 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 EOG resources Dot com.
Some of the reserve estimates on this conference call and any accompanying investor presentation slides may include estimated resource potential and other estimates of potential reserves not necessarily calculated in accordance with the Fccs reserve reporting guidelines.
We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday.
Participating on the call. This morning are Bill Thomas Chairman and CEO .
Billy Helms Chief operating officer.
Ken that occur EVP exploration and production.
As organic exploration and production.
Lance Terveen senior VP marketing and David strike, VP, Investor and public relations.
Here's Bill Thomas.
Thanks, Tim and good morning, everyone.
UGI does not need high oil prices to create significant value for our shareholders. During the second quarter. Despite a 12% decline at WD oil prices yohji generated more than $350 million or free cash flow.
Lowered our long term debt by $900 million and paid a substantially larger dividend than last year, all while organically growing us all production by 20%.
The UGI culture consistently.
Making improvements throughout the company year after year has propelled LG to compete financially with the very best in the S&P 500.
All with oil prices, averaging below $60 per barrel.
We are now capable of delivering double digit return on capital employed and double digit growth, while generating substantial free cash flow through the commodity price cycles.
Our commitment to strong free cash flow is enabling us to rapidly grow the dividend.
We've increased the dividend 72% in the last two years and our ambition is to target the yield that is competitive in the S&P 500, which stands around 2%.
EOG and never stops improving we are one of the lowest cost producers in the global oil market and we continued to lower the cost of our business. In fact, we have strong visibility and high confidence in our ability to lower our costs. So that by 2022, we can earn at least 10% return on capital employed at oil prices below $50 per barrel.
Our first half results confirm that EOG is stronger than ever and we are delivering a banner year and operational performance.
For two quarters in a row, we delivered more oil for less capital with efficiency gains and new technology, we are achieving strong capital and operating cost reductions while at the same time delivering excellent well performance.
In addition, the company as leasing acreage and testing new geologic play concepts that we believe could lower our decline rate and continue to reduce our cost to produce oil.
At LG, we have always believed and being a good corporate citizen goes hand in hand, with delivering long term value for our shareholders.
And the same spirit of innovation that drives our excellence in operations is aimed at ensuring the business is sustainable in the long run.
We are excited about several new environmental social and governance initiatives that will both reduce our environmental footprint, while helping to lower cost and earn strong returns.
We are a leader in water reuse in the Permian Basin currently sourcing 90% of our water needs from recycled production water.
We are busy transferring.
Our reuse technology to other basins.
UGI is also a first mover and we believe the largest user of electric powered frac fleets.
Later this year, we will be testing the use of solar power to generate electricity for natural gas compression.
Our expanding implement plantation of water reuse electric frac fleets and solar power or just a few of the many things we're doing to reduce our environmental footprint.
Our goal is to be the leader in DSG performance by delivering high returns with responsibly focused operations. We will have more details in our data is sustainability report to be published later this year.
EOG culture is more than three decades in the making and the foundation of our competitive advantage.
Our ability to continuously improve the company is accelerating over time.
It's not just a few items that we work on its every nut and bolt and every process in the company.
Our culture of innovation leverage through the application of real time data analysis with our advanced information technology systems enables everyone in the company to create value.
EOG is business is better than ever.
And our insatiable desire to improve has us excited about our future.
Next up is Billy to review, our second quarter operational performance and outlook for the remainder of 2019.
Thanks Bill.
For the second quarter consecutive and for the second consecutive quarter oil production beat the high end of our forecasted range, while the capital expenditures were below the low end.
The performance in the first half of the year demonstrates our focus on continuous improvement.
As evidenced by our higher capital efficiency.
Lower operating costs and ongoing integration of operating practices to minimize our environmental footprint.
There are several factors that drive these outstanding results.
First our production beat this quarter is due to improved well performance.
Our new completion designs, including the use of Diverters, along with a continued focus on target selection.
Are the main reasons for the improvement.
Beyond the completion design itself. We are also developed proprietary technology that allows us to make real time adjustments during the execution of the Frac.
To minimize the impact on nearby producing wells.
Thus reducing shut in volumes.
Ken will expand on this technology in a moment.
Second we continue to reduce capital costs and see line of sight to reach our goal of reducing total well costs by 5% this year.
Through the first half we have realized about a 4% reduction compared to 2018.
As a result of improved operational execution.
Design enhanced design enhancements and efficiency improvements not service cost reductions are delivering consistently better results across each of our active areas areas.
Third our operating cost performance has been outstanding.
As a result, we are lowering our full year unit cost forecast for elderly and transportation.
Cash operating costs, which include LNG transportation and DNA.
Are expected to be under $9 a barrel for the full year 2019 compared to nearly $13 a barrel as recently as 2014.
Fourth as Bill mentioned in his opening remarks.
We are committed to sustainability.
Our decision to embrace electric Frac fleets is an example of how we continue to find innovative solutions.
To both reduce our environmental footprint.
And to improve the profitability of our business.
We began piloting this new technology last year in the Eagle Ford and have since utilize them in the Delaware Basin.
Electric Black Frac fleets currently make up more than a quarter of the EOG fleet.
We believe LG is using about a third of the electric frac fleets available in the market.
And we are looking to expand their use in our operations going forward.
Our experience with this new technology has been very positive.
We estimate electric fleets save up to $200000 per well and reduced combustion emissions from completion operations by 35% to 40%.
UGI continues to expand its use of in water reuse program and the Delaware basin, nearly 90% of our water needs are currently sourced from recycled produced water.
We are increasing our water reuse efforts in both the Eagle Ford and Woodford plays and are beginning to install reuse infrastructure in the emerging powder River basin.
In the second half of this year.
We plan to initiate a pilot project, the combined solar and natural gas to power compressor stations.
While this first of its kind system is still in the design phase early indications point to positive economics, reduce deli and the potential to significantly reduce our combustion emissions.
Finally.
Looking ahead to the remainder of 2019, we modestly increased OFFO, our full year us oil production guidance as a result of better well performance.
There is no change to our activity level in 2019.
We will remain disciplined and still expect capital expenditures to be within the original range of 6.1% to $6.5 billion.
Capital is trending to the low side of expectations.
So assuming that trend continues any realized savings if spent.
We'll likely be directed to two areas.
Water oil and gas infrastructure to lower our operating expenses.
And leasehold to support our ongoing exploration efforts.
For 2020, we are beginning to evaluate multiple scenarios, but suffice it to say.
It is too early to provide any color or commentary on our plans at this time.
In summary, our operating teams are executing the 2019 program and generating excellent results.
I could not be more proud of them.
Now I would like to provide some color on our powder River basin activity.
In the first half of the year, we initiated a handful of delineation and completion technology test.
To better define our future program.
As a reminder, we announced premium inventory of more than 1500 locations with reserve potential of 1.9 billion barrels of oil equivalent exactly one year ago.
We are deliberately developed in the play at a very modest pace to allow time to integrate both the build out of infrastructure as well as incorporate that data and knowledge from our delineation wells.
In addition.
Our diverse portfolio of 11 different plays gives us the luxury of pace in the development of the powder River basin.
To maximize returns and net present value of the entire asset.
During the second quarter, we completed five gross Niobrara wells with average 30 day IP of 1000 barrels of oil per day.
100 barrels per day of Ngls, and 2.1 million cubic feet of gas per day.
The Tiburon Twofifty, one well had an IP 30 of 1300 barrels of oil per day 63 barrels per day of Ngls and 2 million cubic feet per day of natural gas.
Also our operating teams are making tremendous progress towards.
Reaching our stated well cost goals.
In the memory, we completed two gross wells in the second quarter.
The flat Boa 70, well had an IP 30 of 910 barrels of oil per day.
64 barrels per day of Ngls was 6.3 million cubic feet per day of natural gas.
We also completed six gross Turner wells.
With an average IP 30 of 700 barrels of oil per day 150 barrels per day of Ngls and 2.7 million cubic feet per day of natural gas.
Our program in the Powder River Basin continues to deliver strong results.
And we will continue to develop at a modest pace as infrastructure is installed.
In the Wyoming DJ Basin.
It is continuing to deliver solid production results with improving operational execution.
We completed 18 gross wells in the second quarter was six wells, having an average lateral length exceeding 14000 feet.
In all the Codell wells delivered an average IP 30 of 800 barrels of oil per day.
Next step is Ken to review highlights from our Eagle Ford and Woodford plays.
Thanks, Billy the Eagle Ford continues to deliver consistent performance quarter after quarter. This world class oil asset is off to a great start in 2019, delivering low finding costs through ongoing cost reductions every measure of capital productivity is better in the first half of 2019 compared to full year 2018.
This quarter all highlight recent operational efficiencies driven by Rightsizing, our completion design and refining its execution.
The Wellbore stimulation process is aided by software developed in house.
Using our proprietary software and data on the nearby wells geology spacing lateral placement and production history. A unique completion design is prepared for each well on a pattern. The software allows EOG engineers to monitor real time completions data not only on the well we're stimulating but also won surrounding wells.
This enables the engineers to make real time adjustments to the stimulation on a stage by stage basis. The result is a customized stimulation that can reduce pump time by 10%.
The process also yields better well performance, both in the new well being completed and in the adjacent producing wells.
For the new well, we can realize the same or better well performance with less sand as a result, our completion costs are down 9% compared to last year, which is significant contributor to our overall lower finding costs.
Second for the nearby producing wells reduce sand loadings translates to reduced instances of sand, reaching these offset wells.
Ella we cost come down due to reduced workover expenses to clean out sand during production and the associated downtime due to shut ins as reduced increasing volumes.
In addition to completion cost reductions, we improve drilling speed inefficiency in the Eagle Ford, Thus far Weve note nearly realized our full year well cost reduction goal of 5%.
Now moving the discussion to Oklahoma Woodford oil play in the Anadarko Basin continues to gain operational momentum as we increase our activity level.
We've made tremendous improvements on total well cost drilling costs are down 10% in completion costs were down 19% with a total well cost reduction of 18% in the second quarter of 2019 compared to 2018.
As a result, we reduced our woodford well cost target by 14% to six and a half million dollars per well.
Finding cost for this newer premium oil play are now less than $10 per barrel of oil equivalent which is on par with our other more established premium assets.
We've completed 15 gross wells since the start of the year. A few notable recent wells include the three Galaxy 20, 536 wells the average more than 10000 feet in lateral length and produced an average of 1100 barrels of oil per day.
Each for the first 30 days.
Oil equivalents average more than 1400 barrels per day each.
In addition, these wells are exhibiting the characteristic shallower declines we've seen in prior wells.
We are pleased with our progress in this premium play and expect further operational gains in the second half of this year.
Now here's Ezra for an update on the Delaware Basin.
Thanks, Ken we placed 65 net wells to sales in the second quarter and continue to have an outstanding year in the Delaware Basin.
Our drilling performance continues to benefit from improved downhole motor designs and increased quality assurance year to date drilling days are down over 20% compared to 2018, and we continue to utilize proprietary software to balance our drilling speed and steering to stay within our precision targets.
Completions costs are also down 10% compared to 2018 due to ongoing improvements to execution application of our new completion techniques as well as lower sand and water costs.
Year over year sand costs are down, 35% and our all in water costs, including reuse have decreased by 30%.
The combined impact of improved drilling and completion efficiencies has resulted in a year to date total average well cost reduction of 5% compared to 2018.
Well productivity similar to operating efficiencies has also improved through the first half of 2019 across all five of our Delaware basin targets.
In our Delaware Basin, Wolfcamp play 30, 60, and 90 day rates have improved.
Our 2019 Wolfcamp program is outperforming 2018 performance by 10% and continues to exceed our forecasts.
Performance of our shallower reservoirs is also improving as we integrate geologic data collected as we develop the deeper targets.
Along with our new completion technology.
Year to date, we brought on 23 net wells in the Leonard and bone spring with both formations performance stronger than 2018 results.
In addition to tremendous progress lowering our finding and development costs through well productivity and capital cost improvements, we are benefiting from our strategic infrastructure investment.
Currently 99% of our water and over 80% of our oil is transferred by pipe rather than trucking and contributes to a 5% reduction in operating costs compared to 2018.
The impact of improved productivity and cost reductions have resulted in year to date, all in finding costs below $10 per barrel of oil equivalent and an average direct after tax rate of return in excess of 100% at the current strip prices.
Our progress throughout 2019 in the Delaware Basin highlights our focus on increasing capital efficiency through high return investment.
Irrs Lance to provide a marketing update thanks, Ezra during the second quarter, our marketing strategy paid dividends our execution as a result of a portfolio sales approach that is we work to ensure each of our asset teams has flexible takeaway and multiple end markets available, which provides security a flow assurance and access to optimal netback prices.
Our us crude oil price realizations averaged a $1.18 above WT.
Which was on the high end of our guidance issued at the beginning of the quarter.
With respect to natural gas despite significant volatility in Permian basin prices and softness in the Rockies and out west in California.
UGI is overall natural gas price realizations were only modestly affected.
Anticipating infrastructure and transportation capacity well in advance of our development plans has allowed us to have full flow assurance to one mitigate most of the effects so weak local premium pricing.
And to avoid long term high fixed cost transport contracts as we expect the wahab basis will improve significantly as new pipelines enter service later this year and 2021.
Downstream markets natural gas and oil basis differentials change very quickly.
Our portfolio approach provides flexibility to quickly pivot to the highest net back market.
For example in the Permian the mid Cush will differential has strengthened considerably since the end of last year.
Additionally, looking ahead to the end of this year and into 2020, the market is pricing in crude oil pipeline takeaway coming into service over the next several months as seen in the narrower Permian the Gulf coast spreads, our marketing arrangement or arrangements provide flexibility to sell our oil production and the local Midland market to take advantage of strength in the mid cush basis, or we can elect to utilize our low cost long haul capacity to the Gulf coast, the excess domestic refiners and export markets are forward looking portfolio approach has established access to medicine, Midland Cushing, Houston, and Corpus Christi, along with dock capacity to access export markets for our Permian Basin oil production. In addition access to all these markets by our diverse portfolio of transportation and sales markets options allows us to maintain direct control and keep our low cost transportation edge.
Ill now turn it over to Tim Driggers to discuss our financials and capital structure. Thanks Lance.
EOG leveraged its outstanding operation execution in the second quarter into superb financial performance.
During the quarter the company generated discretionary cash flow of $2.1 billion.
Invested $1.6 billion and capital expenditures before acquisitions at the low end of our guidance.
And paid $127 million in dividend.
This last $352 million in free cash flow.
In line with our objective of further strengthening our financial position, we repaid a $900 million bond in June with cash on hand.
This leaves $1.75 billion remaining in our 3 billion dollar for your debt reduction plan.
Which we expect to complete in 2021.
Cash on the balance sheet at June Thirtyth was $1.2 billion and total debt was $5.2 billion.
For a net debt to total capitalization ratio of 16%.
Significantly lower than 24% just one year ago.
In addition to the success of the debt reduction plan has had in improving our leverage metrics. It has also meaningfully reducing our cash costs.
Net interest expense was falling about a third to $185 million.
The midpoint of our full year 2018 guidance from $282 million in 2016.
The financial model for EOG is straightforward.
We can very efficiently generate double digit organic growth at high rates of return.
Leverage our scale to reduce operating expenses and continue to flow lowered the oil price required to earn a double digit RSC.
We believe EOG can accomplish this while supporting a growing dividend competitive with the S&P 500.
In generating a rising stream of free cash flow.
The combination of Energy's financial strength industry, leading cost structure and organic exploration edge can deliver a level of financial performance competitive not just with the best DMP companies, but competitive with the best companies in the industry in the S&P 500.
And we can deliver this performance at lower and lower commodity prices I'll now turn it back over to Bill for can close for closing remarks.
Thanks, Tim.
In conclusion EOG is executing at the highest level in company history and improving every quarter.
Our premium drilling strategy combined with our ability to achieve continuous efficiency gains and technology breakthroughs are producing record results. The company is delivering a strong return on capital employed production growth free cash flow debt reduction and strong dividend growth with oil in the fifties.
And we clearly are on a path to achieve strong performance with oil in the Fortys.
We are accomplishing our goal of achieving results that are competitive with the best companies across all sectors of the S&P 500.
Through the commodity price cycles.
In addition to financial returns eulogies mission to be a leader in SSG performance.
Our unique culture has embraced CSG with the same enthusiasm is everything else we do.
Innovation technology, and I'm pleased but not satisfied cultural view of LNG have a long history of producing outstanding results and we believe that our best days are still ahead of us.
Thanks for listening and now we'll go to culinary.
Thank you.
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We'll pause for just a moment to give everyone an opportunity to signal for questions.
In today's first question comes from a room Jay arm of JP Morgan. Please go ahead.
Yeah. Good morning, I was wondering if we could maybe start with your thoughts on well spacing in the Delaware Basin.
And how you guys are are managing the process to call it maximize resource recovery, while mitigating the impact from adverse communication.
Yes, good morning wearing arena. Thank you.
For the question just in general.
No.
Because we've been in the.
The shale business for two decades, you know weve.
We have a big big learning curve on the history of the company and the and we.
We recognize you know the parent child relationship and the importance of.
Proper spacing.
To develop this the.
Assets correctly.
And specifically you know in the in the Delaware Basin.
We attack that problem very aggressively back in 2017.
And the early part of 2018.
And and we really got.
The learning curve on that well behind us and the we can cinny continually are still making.
Progress going forward, but.
We really are well down the road on on.
On the maximizing the value of our asset and so I'd like to maybe let Ezra.
These really the expert on the Delaware basin to give you a little bit more color on that.
Yes or in the desert.
You know our resource estimate is based on a 660 foot spacing in the Wolfcamp oil window and 880 foot spacing in the in the combo side of that play and we're very confident in those numbers still as you know and as Bill mentioned, we've been drilling multiple targets.
Within the Wolfcamp and actually at tighter spacing on average than what our resource assessment is based on and so I think that you can see we've got.
A bit of upside we feel like not only really in our Delaware basin plays but across the portfolio of our plays and one way that we approach in some of the testing that we did as bill mentioned over a year ago is really to look at the number of targets on the quality of our high precision target that need to be co developed with one another.
And we combine our our high precision targeting with our completions technology.
To really optimize that balance between a low finding cost and optimizing the really the NPV per drilling unit and we think that thats, the best way to really deliver shareholder value in the long term through.
Increasing our corporate level returns, while still capturing the NPV.
Great and my follow up is the updated guide does assume call. It a deceleration in capex in Fourq versus Threeq Q.
I was wondering if you could maybe discuss the cadence of overall sales in the second half and just your general thoughts on for Q oil growth and sustaining some of the upper maintaining momentum into 2020.
Yes, So Ryan yes, we're on plan everything is going to us.
Almost perfectly this year is a great year in performance and capital is running according to plan and the.
And we are going to be really well set up heading into 2020, and I'm going to ask Billy Helms to give.
A little bit more detail on that.
Yes, good morning around this is Billy.
So as Bill mentioned were exactly on plan, where we wanted to be actually our well performance is exceeding the type curves that we laid out the year.
In our well cost is actually coming in lower.
So what's driving that really is just the continued efficiencies each of the operating teams continue to have.
So we're actually able to.
As we go into our second half of the year in both the Delaware Basin and the Eagle Ford.
Our two most active plays we'll see a slight reduction in rig count and Frac crews there.
Just because we don't need as many rigs and frac fleets to achieve our goals that we originally laid out at the beginning of the year.
The year excuse me.
Now also on top of that we have some seasonal programs like the Bakken.
Where you will see activity there mainly happens in the summer time and in the winter time, we pretty much slow activity there just because of the additional cost associated with winter operations.
You will see a slight reduction also in the powder River basin for the same reason.
So in general its.
We don't really see.
A dramatic change and the rig count frankly, count or the wells turned online a slight drop in the in the fourth quarter.
The big thing to takeaway.
Is that.
For 2020.
Well, it's really early to give you an indication of what we're going to do.
We don't see that will have a dramatic drop off in the first quarter of 2020, we're well positioned.
And well set up to to provide growth on a quarter to quarter basis as we enter 2020.
Great. Thanks, a lot for that commentary.
And our next question today comes from Brian singer of Goldman Sachs. Please go ahead.
Thank you good morning.
I wanted to see on the dividend how does how does your dividend goals that have shifted in terms of the focus at a 2% target yield how does that if at all impact your volume growth target do you still see growth in 2020 accelerating versus 2019, and how long can that growth be sustained while meeting.
Your dividend targets until the Eagle Ford and Delaware Basin move into a more mature phase as you call. It from the growth phase or until you depend more on that newer or newer plays organic exploration.
Yes, Brian good morning.
We don't see that the AR.
Projection of being competitive with the S&P 500.
On the yield.
As really slowing down our growth.
You know, we we believe that.
Our dividend.
We've shown a very strong commitment to the dividend weve increased it over 70% in the last two years.
And certainly our goal.
With reasonable oil prices like we've seen this year.
Is to continue to grow the dividend at least 20% per year to bring the yield in line with the S&P 500.
And of course, the board considers the macro outlook and our business plan every quarter concerning the dividend.
And then on growth at reasonable oil prices like we've seen this year, we do not envision our growth to be lower than our 14%.
That we're experiencing this year.
So.
We have a very I think robust business.
As Tim pointed out.
We are creating significant value to our disciplined reinvestment and the premium drilling.
And we're generating strong free cash flow.
We're having a substantial dividend growth.
And we've got and strengthening our balance sheet all at the same time so.
We believe our core business.
Is super strong and competitive really any business in any.
In any.
In any sector of the of the market. So we've got a lot of confidence that we're creating the huge amount of value for our shareholders and the and we're going to continue on that plan.
Great. Thank you and then my follow up is with regards to a exploration.
Realized that there was not a specific update here on the last call you talked about higher quality reservoirs that could lower lower decline rates in your supply cost and you referred in your opening comments to potentially lowering the decline rate and reducing the cost to produce oil can you just give us a general update on.
What you're seeing within that portfolio and how aspiration all that is versus how far you progress towards that in terms of reality as really having that confidence that the decline rate can come down and the supply cost can come down.
Brian word yes, that's it thank you.
We are very.
Excited about our exploration efforts. This year. This is the most robust.
Diverse exploration effort I think we've ever had in the company we're in multiple basins in multiple different plays.
Testing new ideas and the end they are rock quality.
Rock that would be able to deliver oil at lower cost and at lower decline rates.
Then.
Our current inventory.
The average of our current inventory. So we're really focused on corporate returns we want to drive can continue to drive down.
Finding cost that's a particularly strong focus so we're looking for plays that have low drilling costs low operating costs.
And we're working on we want to improve the decline rate of the company.
Also so.
Low decline will hi, a low funding costs is the direction that we're handing going in and Thats, what will help us continue to to generate higher corporate returns going forward. So we're really excited we're really encouraged we're in the process of drilling and testing a lot of new ideas. This year.
We're also leasing very.
Very strong acreage positions building very strong.
Acreage positions at low cost.
And.
And we will be giving updates on that as we get meaningful results.
It takes a little while we don't want to just drill one well you know and say we we've got all this we need to have multiple tests done certainly we want to before we start talking about specifically where these plays are we want to have the acreage captured.
And so it's going to take a little bit of time.
So we asked investors to be patient with us on the process, but.
We're very excited and very encouraged on where we're headed.
Great. Thank you.
And our next question today comes from Neal Dingmann with Suntrust. Please go ahead.
Good morning, all cushions, Kevin on the biggest start around the powder River when it seems like when it comes to incremental operational efficiencies and lower cost appears and kind of your conversations and prepared remarks on the powder River is seen may be the most in your portfolio and I'm wondering if this is in fact the case that the pattern is seeing some of the most improvement and then just wondering for overall portfolio can you continue to see just the remarkable efficiencies that you all talked about the last couple of quarters.
Yeah, Good morning, Neil.
Yeah, we're super excited about the powder, it's got a lot of obviously.
And we're in the learning curve and the and so we're testing as Billy talked about.
Different parts of the play, but particularly we're testing the targeting.
And the completion technology and so the the wells will vary a little bit as we go through that process.
But we're learning.
And that we're not we're not really in a hurry there.
We want to take advantage of the learning curve before we you know.
The increase activity there significantly we don't have a lot of acreage exploration issues there.
So we've got plenty of inventory in of all places in the company. So.
We can bring that on at the proper speed.
To Maxim.
The returns.
When the call.
And build the inventory correctly.
Okay, and then just one separate one if I could appears to me your exploration program remains a this year a bit more active than we've seen in the last year or two.
I'm just kind of curious if you all are focused here on more ramp in one potential area are you all looking at several potential plays when we looked at exploration area.
I'm going to ask the Neil Glynn asked as were to comment on that.
Yes, Neel. This is Andrew we have a multiple opportunities that are that we have this year that we're both leasing and testing a this year.
As Bill highlighted a few minutes ago really the goal of the exploration program. This year is to add.
Quality to our inventory not just quantity a warm and what we mean by that is you know it all starts with the rock quality and so we're looking at.
We basically the advantage of having an active activity in six different basins. This year is that as we drill. These wells, we collect a lot of data and were able to formulate that data and that's really the basis for what.
It has created our exploration effort this year I'm looking at this better rock quality.
We think that this rock quality, we're targeting will really benefit from our horizontal drilling and completion techniques and as Bill said should provide us an opportunity to add a lower finding costs and higher quality of inventory to our to our already robust portfolio.
Thank you so much guys.
And our next question today comes from Bob Brackett of Bernstein. Please go ahead.
I had a question on the electric Frac spreads you quoted the $2.200 million per well savings part of that is the the fuel arbitrage diesel versus gas and part of it is the cost you are paying the service provider sort of way I can think about how those two offset each other.
Yeah, Bob This is Billy Helms.
You have a $200000 savings I'd say the majority of that is simply in the fuel cost savings.
And the reason we're benefits us so much is we're using it in place where we have readily available.
The infrastructure to be able to access gas as a as a fuel source relative to diesel as a traditional frac fleet might use.
They also do provide us a great deal of a step up in efficiency gains to.
So our efficiency gains there provide that I'd say the balance of the year savings.
But the majority of it is based on the fuel savings alone.
So.
I wouldn't want to mislead you there the efficiency gains are really good but the majority is fuel savings.
Great. Thanks.
Follow on would be if we think about the 740 net planned completions for 2019 and wanting to hit that activity level, how would you balance that against the macro sell off in the commodity where.
Price fell in cash flow fell would you stick to the plan would you trim. The plan in order to hit cash flow, where does that balance play out.
Yeah. Bob This is bill certainly you know we are going to run the business with the balance.
Cash flow you know, we're not going to outspend cash flow so.
You know depending on our view of the.
Length of that.
Downturn in oil prices, we thought it was temporary.
You know we might not make much adjustments, but we thought it was a super long term, we would certainly readjust the company.
Our goal you know is is.
Is not.
Growth specifically our goal is returns we are focused on increasing corporate returns going forward.
Generating strong free cash flow.
Certainly we're committed to the dividend.
Very strongly as a company so those all have a super priority.
In the in the in the company.
And we're here for the long term, we're going to run our business right, we're going to generate maximum value for our shareholders.
Thank you.
And our next question today comes from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.
Thanks, Good morning, everyone.
Bill I I think you've kind of said to count amongst the pigeons by by talking about the uncertain outlook for 2020, I think we're all facing the same thing, but I wonder if I could speak to.
How you would see relative capital allocation.
In the event that we did have a downturn it's really.
Thinking more along the lines of sustaining capital and then beyond that how you would dollar key incremental.
Dollars, if I could just elaborate a little bit as to what I'm trying to get out the eye out ours are very competitive across your entire portfolio, but the productivity is obviously very different in different plays for the same return. So im just curious as to how.
And reallocate or allocating capital to your highest return plays would imply the relative productivity productivity outlook in a downturn unless again of a complicated issue, but that's what I'm trying to get up.
Yeah. It does I appreciate your question and good morning, Yeah, we have got tremendous flexibility to.
Allocate capital.
We have such an enormous lease strong premium inventory.
And it's across multiple plays so.
As we as I answered in the previous question you know, we're not interested in outspending cash flow not certainly not on a long term basis, we're gonna stay super disciplined.
And make sure that we generated free cash flow every year.
So you know if we had.
No. We don't believe we're going to have an extended downturn low downturn, but if you know an extreme case that we did that you know we would just tighten the belt all across the company.
We would focus you know our capital on.
You know the highest return plays.
And and we would allocate capital appropriately to the to the macro environment. So.
We're we're focused on returns.
And we believe we can generate the highest returns.
Of any company in the MP business.
At the lowest oil price scenarios, because we have the highest reinvestment.
Hurdle of any ERP company, we know.
And so our premium inventory.
It is good to go at $40 oil.
And that.
Laos UGI to be the low costs.
A provider of oil.
And gives us a tremendous competitive advantage.
I know it was not an easy question to answer so I'm going to follow up with an even worse question [laughter] I apologize you've also I don't know if the language was deliberate on your dividend.
Colm and nickel on on the press release, but targeting setting a target yield kind of starts to bring in considerations of how the market thinks about valuation some thinking about dividend discount models.
Which then begs a couple of all these questions is one what do you see is the appropriate.
Growth rates for the dividend. This is supported basically by what you said earlier about not less than 14% oil growth.
And then related to that there's implications for the payout ratio have you do you have parameters around thought that you could share with us when you're you've kind of laid out. This this this objective of 2% yield because it basically that.
We can we can all come up with a long term projections is what I could look like but some framework around that would be really helpful.
Yes, certainly.
Doug our goal you know is to continue to aggressively.
Increase the dividend.
Certainly at the 20%.
Right are better every year.
And that would be in consideration of you know reasonable oil prices like we've seen this year, we believe we can do that or better.
And so our focus is just to have a sustainable strong dividend growth every year.
And get the dividend up to the yield of the 2% level, we don't have.
A specific timeline to give you because we need to manage the business. According to our view of the business environment, obviously going forward, but directionally you know we want to be competitive with the S&P 500 companies and the dividend yield just like a we're going to be competitive.
In growth and in return on capital employed.
And then maybe could be a.
The dividend yield for the S&P is about five <unk> about 2%.
In so that's where we want to be long term in the company.
Sorry, Bill just to be clear the 2% does that also have an oil price drop it sort of like a.
Obviously premier locations are premier inventories at $40 oil.
2% yield is on what commodity price.
Well no it's not really based on that you know the speed of which we can get the yield to that level of course would be you know.
Have oil price considerations, but we're lowering the price of the company to be very successful as we said in the in the opening remarks were we can do it very well at 50 to in that with all of the Fiftys right now, but we're really hitting the company to where we can be successful with all of the fortys. So.
Over time, you know, we believe we can be competitive on the dividend returns.
And growth you know with oil and the Fortyf.
Understood. Thanks for taking the question.
And our next question today comes from Jeffrey Campbell of Tuohy Brothers investment Research. Please go ahead.
Good morning.
I've been listening to the lower decline stuff with great interest and I just wanted to ask you. If we if we think of a typical first year.
Conventional decline is 60%.
Can you roughly quantify how much the decline rates could be modified with these new exploration plays that you've been discussing.
I don't mean, the corporate decline I mean.
Oh, well decline in one of these new plays.
Yeah. Jeffrey this is a this is bill you know.
We're really in the early process of testing. These plays and so we just need to get some well results behind us too.
To give you you know specific numbers on that and some some history.
But these are plays that have.
Better matrix permeability than a typical shale play.
It's not we're not looking for rock that has Nana Darcy firm.
This is really more micro Darcy and maybe even middle Darcy from kind of rocks.
And and they're also rocks that would respond really well to the horizontal completion technology.
So were you can get a complex fracture pattern.
Where you can drill long laterals.
Et cetera, and you can contact a lot of this better permeability rock to the Wellbore.
And so that combination.
And just in general will give you a very a high recovery for that not all in place, but it also gives you a lower decline rates than the than the current shale place.
That's really interesting we look forward to hearing more about that in the future.
I think my other question is I believe last quarter, you said that the Eagle for DDR program was completed or more or less complete I. Just wondered do you have any other programs going on anywhere else in the portfolio, that's experimenting with or seeking to.
I tried to capture more resource total resource from the wells than what we typically expect.
Vishal resource.
I'm going to ask Ken to comment on that.
Yeah.
This is a this is Ken we have about 150 wells in our enhanced oil recovery process in the Eagle Ford and we really are seeing premium results in line with our our 30% to 70% add in our in our primary recovery, we're really watching that program and refining our processes. We go the process that you want to do after your primary drilling is complete.
So we're going to evaluate expanding that that you are footprint in that area as we as we finish primary drilling in the surrounding units as far as expanding that into other areas. We're constantly evaluating that but but we are not expanding that process into any of the other formations at this time.
Okay, great. Thank you.
And our next question today comes from.
Tony of Keybanc. Please go ahead.
Hey, guys very impressive progress and the cost reduction initiatives I guess basically you're sort of in 80% of your targets here.
By mid year on the well cost.
Just wanted to get a sense I know, it's probably a difficult question of course, no one can predict the future here, but just based on efficiencies.
Do you guys think did it's realistic that you might be able to knock another say, 5% off those cost again in 2020 or 2021.
Good morning, Lee I'm going to ask Billy to comment on that.
Yeah, Leo I'm first of all let me just say works extremely proud of the efforts that our operational teams have made to get to the 4% hurdle halfway through the year.
When we set our 5% goal out at the start of the year I think.
You know we had no idea exactly how quickly they would get there, but confidence that they would and they've excel just tremendously.
You know being able to accomplish another 5% next year, it's a little hard to say, where that's going to come from but I do have confidence that we'll be able to continue to lower cost I mean, there's no doubt in my mind.
That we can continue to push well cost down and not just well cost, but also our unit cost.
We're making tremendous progress there so I don't want to.
Go without given those guys the kudos as well because they've done a great job and I guess, we just have some mention so much confidence in our teams that.
Yeah, I know, we can achieve continued cost reductions across the board.
Okay, that's great.
And I guess just.
One quick question on some of the business the guidance here. So just looking at your third quarter, a U.S. oil production guidance versus the last few quarters, just noticing that your your kind of rate of growth in the U.S. oil slows a little bit in the third quarter just wanted to get a sense. If there's anything to read into that or is that just kind of timing sort of on well tie ins here.
Yeah, Yeah. Leo this ability is Billy again, yeah that the rate of growth certainly slowed a little bit in the third quarter, but really it falls directly in line with what our plan was laid out started the year and a as you know most of our activity.
And capital expenditure was in the first half so that's where you're going to see most of your production growth. So it will modestly decrease the rate of growth will modestly decrease a little bit in the third and fourth but we're still on pace to really stay within our plan and then we're not concerned at all about how that sets us up for the following year, we're still in great shape as we go into the next year as well.
Okay, that's very helpful and I guess just any.
Our thoughts on U.S. exports, obviously, you guys unveiled incremental volumes that you'd be shipping out.
Last quarter and in certainly made endpoints, putting your slides as you kind of look at the marketing side over the next couple of years do you guys think did you ask oil export is going to become even more important for you and is that an area you're going be looking to expand going forward.
Well, let me, let lance comment on that.
Hey, Leo Good morning. This is lance how are you.
Great.
Yeah. Good hey, yeah on exports is a it's definitely exciting you know as we've talked about in the past. We've got our you know today, we've got our existing Houston capacity you know, we're taking advantage of that that we get more excited about next year with our expanding our capacity growing in corpus. So I think one of the things that really you know to think about us from an energy standpoint, what really differentiates US is when you think about the corpus capacity, we're going to have the capability to really show you know our segregated wtf. All you know that we're gonna be able to show across the dock and we're also going to be able to show our Eagle Ford as well. So I think you know when you like a lot of the peers and you look at a lot of our you know the competition that's out there to our capability with our transportation transportation capacity or the stores tankage that we have the ability to deliver segregations you know into the market. You know, we're going to be able to show you know multiple grades across the market and yes, absolutely I think you're seeing.
You know spreads tighten up and I think we don't see any concerns there as it relates to export capacity at least in the short term, but I think one of the more important points to make is you know if you call export capacity right at four and a half million barrels per day of export capacity. What we felt was very important is that we secured existing brownfield capacity. So that way. If you do see price dislocations that do occur maybe at the dock you know were advantage there because we're not waiting on permitting we're not waiting on dock expansion. So our capacity is going to ramp up as we move into next year and I think that's going to be key because you know we can really take advantage of the values. If there is a dislocation and again, we've got the flexibility that we can pivot our barrels and we can supply are great customers. Our domestic refiners, but then we can also supply the international markets as well. So we've got a full range you know in our portfolio there Leo.
Okay, well, that's great color and maybe just.
On that point do you think there's a decent chance there could be dislocations over the next couple of years just wanted to get a sense. How are you thinking about that piece.
Yeah, I'm not going to speculate you know I think when you Youve definitely seen you know when you look at the forward curves you can see kind of the Brent MGH spreads and that's right around $3. So it definitely shows that the export Arb is open you know, but I think for US you've seen we talked about in the opening comments too about the Permian kind of the Gulf coast spreads have definitely narrow so.
I think really where you could possibly see their price dislocation is that you've got a lot of oil that's going to show up at corpus and there's going to be some players that aren't gonna have secured dock capacity and so there could be a dislocation that occur there, but as it relates to UGI and what we've done. We've we went ahead and kind of take that we took that variable kind of out of play as we think about our growth and in our capacity ramping up and then how we're going to place barrels into the export market.
And our next question today comes from passing through you Mizuho Securities. Please go ahead.
Wonderful [laughter] I'm, just kind of brings together everything that you've talked about this morning.
Bill I was wondering.
Just in terms of your comp Pester acquisition again, the oil industry as opposed to the whole market.
Where do you think you'll furthest ahead.
If the industry.
And where do you think this could go and obviously you're talking about the various components of your.
As your business, whether it's your crews the exploration drilling fracking cooperating.
Transport and even decline rate.
Thanks.
Yeah, Good morning, Paul.
Clearly the competitive advantage that EOG has is our culture.
Our culture is just amazing it it really drive all the success of the company.
We have tremendous assets because the culture is built out over the years through our exploration efforts.
And we have tremendous cost reduction continue with sustainable cost reduction because our culture never is satisfied it's just continually innovative.
It continues to figure out better ways to to run our business.
So our.
Really the confidence that we have about the direction of the company to be able to be very successful even with oil prices in the fortys is really due to our culture and of course, that's supported by a lot of different things we have it.
No we have a core competency of obviously the exploration we've got a core competency competency.
Operations, you know we drill the wells.
The fastest in the U.S. and the lowest cost.
Lead and completion technology, we have.
By far the most advance information technology system to where we can make real time decisions.
Continuously across the company.
In the in the real value of the company is coming from every person in the company the value of UGI is not top down driven it's really from every person in the company. So that's our that's our.
That's where we have the lead and that is not easily duplicated it's taken us three decades.
To build a culture, where it is right now and we believe our culture is improving as we go forward. So.
We're super excited about where LG is and where we're headed.
[laughter], Thanks, if I could.
Make it much more specific could you just talk a bit more about ER you correctly, the seems to be very interesting.
Yeah, Paul I'm going to let the ask Billy to comment on that.
Yeah, Paul as far as the fracking goes you know we got into the into the.
Idea of either a utilizing the electric frac fleets, mainly because we were attracted by the efficiency gains.
As well as the cost reduction the efficiency gains is what really we view as being sustainable to help lower our cost long term and that has continued to get better with continued use we've got a four of those frac fleets.
Operating today in the Eagle Ford and the Delaware Basin, and we're always looking for ways to continue to utilize our infrastructure to enable that to be spread into other plays. So I think as you look forward, we will look for opportunities to continue to put those in new plays.
It's unique in that the fuel savings.
Our mainly achieved through not only the cost of the gas, but really our ability the ability of our facility teams to get ahead of the completions and come up with innovative solutions to get the gas readily available to the frac fleets and without that infrastructure and those teams enable them to do that we wouldn't be able to take advantage of it to the extent that we are so.
Just super proud of that effort and where it's taken us.
Yeah, just a quick follow up could you talk about the capacity.
And.
You mentioned, how big you were in the market could you just repeat.
How much of it youre going it could vary.
Yeah, I think what we were hearing and certainly this number might move a little bit but there is currently about 11 frac fleets available in the market today.
We're using about four of those and in our Frac fleet Count varies you know a week to week, but typically running about 16 frac fleets.
15, or 16, so it's about a quarter of our Frac fleet in the company.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to Mr. Thomas for any final remarks.
In closing I first want to say, thank you to everyone to do g. for their tremendous contribution to our performance in the first half of 2019.
We're proud and honored to be on the same team.
The company is performing at the highest level in history, and we continue to improve every quarter.
We're excited about the second half of the year.
And the years beyond.
We're focused on returns and creating significant long term value.
So thanks for listening and thanks for your support.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.