Q4 2020 EOG Resources Inc Earnings Call

[music].

Good day and welcome to the EOG resources fourth quarter and full year 2020 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star keep all day zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one. Please note that this event is being recorded I would now like to turn the conference over Tim Driggers, Chief Financial Officer. Please go ahead Sir.

Good morning, and thanks for joining us we hope everyone has seen the press release announcing fourth quarter and full year 2020 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 Eog's SEC filings and we incorporate those by reference for this call.

This conference call also contains certain non-GAAP financial measures.

Munitions 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.

On 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 SEC reserve reporting guidelines when Inc.

Cooperate my reference to 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, as Jacob President Kim <unk>, EVP exploration and production Lance <unk> senior VP marketing and David Streit, VP Investor and public relations.

Here's Bill Thomas.

Thanks, Tim and good morning, everyone last year was historic and we were tested like never before in a challenging environment I am proud to say, our EOG employees, who personify our unique culture responded exceptionally without a beat I'd like to thank our employees for delivering such outstanding performance.

We generated $1 6 billion on free cash flow and adjusted net income of $850 million and ended the year with $3 3 billion of cash on the balance sheet, we increased our sustainable dividend rate by 30% and short up what was already on industry, leading balance sheet to a low 11% net debt to cap ratio.

We lowered our finding and development cost improved our capital efficiency and on to a direct after tax rate of return on more than 50% with an all in after tax rate of return of 25% based on our premium price deck of $40 oil and $2 50 natural gas.

That's extraordinary results in a $39 oil price environment were made possible by our shelf five years ago to our premium strategy was to establish an investment hurdle rate of 30% direct after tax rate of return using flat $40 oil and $2 50 natural gas process using such a stringent hurdle rate shields accompany from cyclically.

Oil and gas process 2020 was a true test of that shield.

As a testament to the power of our premium strategy.

Bill on beyond delivering stellar financial results last year, we continue to invest in long term value of the company. There are low cost organic efforts. We added 500 net premium locations to our inventory, including 250 from the newest addition to our portfolio day.

Rado, South, Texas natural gas play with 21, Tcf of net resource potential and a breakeven price of less than $1 25 per Mcf. We believe Dorado is one of the lowest cost and lowest emissions natural gas deals in the U S and expands eog's portfolio of assets that we believe will play a significant role.

<unk> and our long term goal global energy solution.

We also completed two pilots of infield technology to reduce emissions, our hybrid solar and natural gas powered compressor station that reduces combustion emissions in a closed loop gas capture system to reduce force flaring as a result of downstream market interruptions, reducing flaring is an industry wide priority and we plan to.

Publish our closed loop gas capture technology for others to replicate.

We entered the next phase of the cycle, a much improved company with a countless creative and innovative ideas. We implemented in 2020, we're in the process of making significant improvements to eog's future performance.

Looking forward.

The following six steps summarized the foundation for our 2021 plan and outlook for the next three years number one maintain fourth quarter 2020 production. There is no reason to consider growth until the market rebalancing signs on an earlier recovery will not change our $3 9 billion 2020.

One on capital plan.

Number two shift to a double premium drilling program, our focus on increasing returns to never waivers and this year is no exception, we're raising the investment standard again double premium wells on 60% direct after tax rate of return at $40 oil and $2 50 natural gas and makeup.

The top half of our 23 year drilling inventory shifting to double premium will make another step change in our future performance on delivering higher returns lower decline rates and more free cash flow potential.

We have more than 10 years of double premium inventory and are optimistic we will replace double premium locations faster than we drill on.

Number three accelerate new exploration projects last year, our exploration program focused on technical evaluations across numerous new prospects. We're excited to resume a more robust leasing and testing effort. This year, we're evaluating a large number of double premium oil plays in the U S and <unk>.

Nationally.

With the potential to deliver low finding cost and development cost.

And low production decline rates the focus of our exploration program is to continue to improve the quality of our inventory and Eog's total shareholder value.

Number four raised the bar again on our ESG performance and ambitions after achieving significant improvements in safety emissions and water performance in 2020, we have announced our ambition to reach net zero scope, one and scope two GHT emissions by 2040.

As one of the steps along the way we expect to eliminate routine flaring by 2025. We believe this is possible using creative applications of current and future technology where cash.

Currently implementing internally developed technology with the goal of measuring granular real time conditions data for all facilities in the company. This will encourage innovation and development of unique solutions to achieve our net zero ambition.

Number five resume moderate production growth only when the market is balanced assuming a balanced market by year end, we're positioned to grow oil, 8% to 10% in 2022 and 2023.

We forecast that are shifting well mix towards double premium on lower our base decline rate to less than 25% within five years from 34% last year. This optimal growth rate delivers the most long term total value by delivering higher returns lower decline rates and more free cash flow.

Over the long term.

Number six.

<unk> generate significant free cash flow.

All cash allocation decisions are focused on enhancing total long term shareholder value are top priorities for free cash flow or to sustainably grow the dividend and reduce debt.

Beyond these priorities when excess cash materializes, we will evaluate other options opportunistically, such as supplemental dividends share repurchases and low cost property additions with our deep inventory of double premium locations moderating decline rates and sustainable cost reductions EOG is.

Free cash flow potential is improving significantly.

Before I turn it over to Billy I want to address our thoughts on federal acreage from.

Statements made by the current administration, we believe that our current existing federal leases and corresponding federal drilling inventory can be fully developed EOG.

<unk> is well prepared to manage through any regulatory changes that can impact the pace of development on federal acreage. The combination of our large number of federal permits in hand, our flexibility to pivot within our deep inventory of double premium locations and our ability to ability to add new inventory through organic exploration.

<unk> gives us the confidence that the future performance of the company will not be affected.

Now here's Billy.

Thanks Bill.

Let me start by expressing my warmest appreciation to all of our employees.

I am truly amazed by their talent commitment and resiliency as demonstrated by the dramatic improvements achieved in 2020.

Within weeks of publishing our initial 2020 capital plan.

We quickly cut capital by scaling back activity by nearly half.

To protect the company's financial strength on.

Our employees responded with urgency and purpose finding.

Finding new ways to sustainably reduce our well cost structure further.

What stands out the most to me is how the EOG culture of innovation and multi disciplinary collaboration and teamwork increased at a time when everyone was working remotely to protect themselves their families and their communities.

The results of that innovation and teamwork can be seen clearly in our 2020 operational performance.

We significantly improved our capital efficiency by reducing total well cost, 15% and per unit cash operating cost 4%.

With respect to our year end reserves and a floating that low impact of low commodity prices.

We reduced finding and development cost, 15% to a low of $6 98 per barrel of oil equivalent and replace nearly 160% of our 2020 production.

The speed with which we spread technical innovations directed at lowering costs and improving well performance throughout the company has increased.

We believe the communication challenge presented by remote work and the teamwork required between individual operational areas to execute our significantly revised plan last year.

<unk>, what we believe will be a permanent improvement in how we integrate new learnings and innovations companywide.

Our operational execution fired on all cylinders during 2020, reaching our stretch goal to reduce well cost 15% last year with about three quarters of that coming from sustainable efficiency improvements.

We expect to maintain this momentum and reduce well cost another 5% this year.

We also expect to carry a sustainable operating cost reductions into 2021.

Our reductions to low during 'twenty 'twenty remarkably outpaced the volume reductions and shut in production as a result of exceptional low commodity pricing.

We reduced low 22% on a total dollar basis.

<unk>, 8% decline in production volume share.

Heading in volumes afforded us the opportunity to take a closer look at our maintenance and workover programs and streamline our lease upkeep practices, resulting in sustainable cost reductions.

We finished the year with fourth quarter oil production at a little over 440000 barrels of oil per day, and having spent $3 5 billion of capital.

<unk>, what we forecasted back in May when we revised our plan in response to the downturn in oil prices.

We increased our rig count from a low of five rigs last summer and are now running about 24 rigs to support a 2021 program that will maintain essentially flat oil volumes.

The rig count is currently at the high point and it will drift down throughout the year to an average of about 22 rigs.

Looking back to when we introduced the premium strategy in 2016.

Our per unit cash operating costs have declined by 18% and our per foot well costs are down about 40%.

This operational excellence has enabled EOG to raise the bar further and target double premium as our new investment standard.

With such significant progress of the past five years and the momentum we are carrying.

I am convinced we are only just getting started it being one of the lowest cost energy suppliers.

We also made significant strides in our ESG performance in 2020.

First on the safety side, our total recordable incident rate the primary safety metric improved more than 25%.

Safety is always our first priority and will continue to focus on ways to enhance our safety culture, even further.

On the environmental side.

We increased the percent of reused water used in our operations to about 45% of our supply.

And significantly reduced total barrels of freshwater used.

And we increased our already strong wellhead gas capture rate from 98, 8% in 2019.

To an astounding 99, 6% in 2020.

Our ambitions for the future.

Flexion of that performance.

We have set a goal to raise the wellhead gas capture rate to 99, 8% in 2021 and achieved zero zero routine flaring by 2025.

We're literally fighting for the last remaining tenths of a percentage points now.

Longer term.

We have set an ambition to be net zero in scope, one and scope two GST emissions by 2040.

Ultimately it is our highly creative and passionate employees that gives me confidence in this aspiration in.

In the past five years, we have achieved a number of technical innovations and operational advancements that have enabled us to generate significant reductions in methane and overall GHT intensity rates to date.

Our approach to emissions reductions remains operationally focused investing with returns in mind and seeking achievable and scalable results.

Our investments in projects, such as closed loop gas capture and solar powered compression pay off in two ways.

<unk> emissions and function as learning mechanisms for future innovation.

We know that to be part of the long term energy solution.

Not only have to be low cost we have to do it with one of the lowest environmental footprint.

Our newly formed <unk>.

Sustainable power group is working to identify low emissions power generation solutions and accelerate innovations to support our emissions goals and ambitions.

I am excited by all the innovation occurring in the company and that gives me confidence we can achieve our goals and ambitions.

Finally, I want to take a minute to express my sincere gratitude for the tireless efforts of our production and marketing teams in the wake of the severe winter weather event last week.

The teams worked in difficult conditions without any safety incidents to manage the production interruptions caused by extensive freezing weather and deliver as much critical production to our downstream customers as possible.

All of our production is now back online.

We expect our average daily production in the first quarter to be reduced by about 4%.

Beginning with the onset of the storm.

Production staff also work in close coordination with our marketing team who.

Who communicated with our downstream customers to redirect natural gas production in Texas.

Two local distribution companies that deliver natural gas to heat homes into utilities for electric power generation.

These efforts supported by critical these efforts supported critical human needs throughout the Dallas Fort Worth San Antonio Austin, Houston, and other central and East, Texas communities.

Further in line with our core values at EOG, we sold sold these redirected gas shipments at prices consistent with those received prior to the winter weather event, rather than high and volatile daily spot prices.

Through it all day.

<unk> culture of inter disciplinary team work and non bureaucratic decision, making technology leadership and commitment to do the right thing shown through.

And I couldnt be more proud of everyone involved.

Here's Ezra for an update on our exploration efforts.

Thanks, Billy our organic exploration focus has always been the driver behind successfully replacing what we drill every year with better inventory. Our current effort is built around adding plays with shallower decline rates that also meet our double premium hurdle rate ultimately offering higher capital efficiency than our existing inventory.

Dorado, the South Texas natural gas play, we announced late last year as the most recent example of EOG, creating shareholder value through low cost organic exploration.

Early entry and capture of a high quality reservoir across our contiguous acreage position with access to low cost services and proximity to multiple markets is the recipe for a high return on investment opportunity and is exactly the type of prospect we're looking for.

Our strong financial position combined with our proprietary database of unconventional plays has positioned us to capitalized counter cyclically and capture exploration opportunities with little to no competition.

We are focused on oil and we are in the process of drilling and testing high potential prospects. We are optimistic we can prove up a number of them and capture additional acreage at competitive pricing that will further improve the quality of what we believe is already one of the best portfolios of assets in the industry.

Our vision is to develop double premium oil plays and each operating area, including international this.

This is highly efficient and allows us to allocate capital across a wide array of plays to optimize returns and capital efficiency.

This decentralized multi basin approach is a hallmark of EOG well on that Leverages, our competitive advantages and exploration technology and low cost operations, all benefiting from knowledge transfer between the basins.

The results. If we are successful will flow through our financials with higher return on capital employed lower operating costs higher capital efficiency shallower declines and even more free cash flow.

When we look back at this time several years from now I'm confident we will recognize 2021 is a step change in Eog's performance and financial profile much like we look back on our shift to premium drilling in 2016.

Here's Tim to review our financial position.

Eog's.

<unk> financial performance in 2020 demonstrates the resiliency of our business model and portfolio of high return on assets.

In response to the lower oil prices caused by the price war in pandemic, we elected to utilize our operational flexibility to quickly cut activity.

By the sustainable cost reductions that Billy discussed, we reduced capex in 2020 by 44% to $3 5 billion.

The result was $1 $6 billion of free cash flow a great performance on what we certainly hope will prove to be the bottom of the cycle year.

The board of directors voted to increase the dividend by 10% to an annual rate of $1 65 per share.

EOG is dividend has grown at a compounded annual rate of 20% over the last 21 years.

This reflects the continued improvement in the profitability on cost structure of the company and our confidence in EOG has long term resiliency.

I am pleased to say, we've never cut the dividend and never issued equity to support it.

We analyzed numerous stress down cycle scenarios to evaluate the size of the dividend and to ensure it can be sustained over the long run.

The regular dividend represents our first priority for returning cash free cash flow to shareholders.

Beyond that we have set a target to reduce debt outstanding by $2 billion from the level at the end of last year.

We have made a down payment on that goal paying off with cash on hand of $750 million bar on inventory February one.

There are no additional debt maturities until 2023, one on $1 billion to $5 billion bond is scheduled to mature.

Beyond that we have no plans to further reduce debt.

Our goal is to maintain about $2 billion of cash on the balance sheet on average through cycles.

There's not a hard and fast rule the actual amount of cash on the balance sheet at the end of each quarter will vary depending on business conditions at the time.

But this should give you some rough idea of what to expect going forward.

EOG is firmly committed to generating significant free cash flow.

Our top priorities for free cash flow remains sustained from a remains sustainable dividend growth and debt reduction.

As cash materializes, and we have more visibility into the future. We will opportunistically consider other options such as a supplemental dividend during the up cycles, our share repurchases during market lows, along with low cost property additions with potential to improve eog's performance.

Now, let me turn the call back to Bill Thanks.

Thanks, Tim in conclusion, I would like to note. The following important takeaways first due to market conditions EOG will not accelerate production in 2021.

Second after this year once the market rebalance is developing our current drilling inventory at a moderate growth rate of 8% to 10%.

Optimizing returns and free cash flow potential over time.

Third our shift to double premium investment metrics paves the way for another step change in Eog's returns in future performance.

Fourth our domestic and international exploration portfolio is stronger in both quality and quantity than it's ever been.

This year, we are accelerating accelerating the testing and leasing efforts on many of those prospects that have the potential to significantly.

Enhance total shareholder value of the company.

Our exploration projects have the potential for higher returns lower cost and lower decline rates than our current.

Inventory.

And finally, we are passionate and excited about the innovation and technology. They continues to manifest itself in EOG. It gives us confidence that we will continue to lower well costs and operating costs and reduce our environmental footprint.

Our goal for EOG has to be one of the lowest cost highest return and lowest emissions producers playing a significant role in the long term future of energy.

Thanks for listening now we'll go to Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Draw. Your question. Please press Star then two.

Net interest of time, we kindly ask you please limit yourself to one question and one follow up.

We will pause momentarily to assemble the roster.

Okay.

Yeah.

Our first question today will come from Arun Jairam with J P. Morgan. Please go ahead.

Yes. Good morning, Bill My first one is for you.

In 2021, Youre going to hold a call the maintenance program and based on your 'twenty, two and 'twenty three outlooks you could have some growth.

Call it 8% to 10% I guess my question is given typical sales cycle times would you have to spend any incremental capital in 2021 to prepare you to.

Beat that 8% to 10% growth in 'twenty two.

Yeah, Hi, Arun I'm on to ask Billy to comment on that.

Yeah Arun.

No we don't anticipate.

That we would have to spend any additional capital.

This year to be able to accommodate growth in the future.

And beyond this year I would add that.

With only add activity once we see a more balanced market as bill described.

Fair enough fair enough.

Tim I got one for you in the guide we did note a step change lower in the tax deferral with the company's current text mix now above 90% can you talk about the drivers of the higher cash tax mix in 2021.

And as we would have thought some of your <unk> would have.

Led to a lower.

Cash tax rate and could you just talk about is this a one year phenomena are indicative of the go forward tax rate.

Brian This is Tim.

So yes.

As we become more and more profitable obviously it was lowered the price that we have to make a tax taxable income. So that's that's the first thing we have an extremely profitable company now and if you go back and look to the.

The 2020 for sure and at $39 oil there wasn't much tax profit there. So in a $50 environment. We have significant taxable income and we have no net operating losses left to offset that with so it's a.

It's a simple math of being a very profitable company and paying taxes. So.

Beyond that I could clarify more offline, if you'd like but thats the general answer.

And our next question will come from <unk> with Barclays. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question.

I'm sorry.

Question on arena.

But in terms of 22 and 23 on the desk.

Third tax.

Is it possible.

On the deferred guidance might improve a little bit next year as you get back to growth.

So on because you'll be spending more money on the strip.

Laura.

That is for that.

Yeah.

You've got a lot of gas.

Syed.

On the here that maybe.

Next materialize next year, so maybe just further question.

Zero to 15 per cent could be something different in 'twenty two.

I'll get back to growth.

That's exactly right as we spend more capital in a growth mode. Obviously, we will have more IDC to deduct to lower our cash taxes. So in a backward dated environment, where we've got lower.

Oil prices, then, yes, it would lower that that deferred ratio.

Okay, great. Thank you for the clarification on my second.

Question is just on.

On cash returns.

Gross problem.

Adjusted free cash flow.

The total.

Target to $3 7 billion.

With no plans to further reduce debt.

Minimum operating cash balance that you are comfortable on I guess, it's a factor.

Yeah.

Formalize that target.

Why that you plan on excess free cash flow on a year after dividend and after.

Towards low.

Low cost property acquisitions are.

Yeah.

Okay.

Yes Jeanine.

I'll, let Tim talk about the cash needed to operate the company.

So what we have said is that.

Around $2 billion is a number we feel comfortable with through the cycles that doesn't mean as a hard and fast rule that we will have $2 billion on the balance sheet some quarters it'll be more some quarters it'll be less.

Especially during the quarter based on how.

<unk> comes in and out of the company. So that's the level that we're comfortable with for now.

Yes on gene and the second part of the question is and I think it's important to know that.

Our board is very very committed to returning cash to shareholders and we I think we've demonstrated that certainly over the last 20 years of 20% compounded annual.

Increase in the dividend the last four years on 146% increase in than last year, even in a down here, we increased the dividend and sustained it by 30% so.

We're very committed to giving cash back.

At the same time.

We think it's important to be flexible and opportunistic which means we want to be able to give the cash back in.

And the way that it creates the most return on the most total shareholder return.

So that will be different in different situations in an up cycle.

It certainly could be.

We want to continue to work on the regular dividend that is the primary way, we want to give cash back and so we are going to continue to work that really really hard.

And then on top of that we will consider other things opportunistically as the company continues to improve and get better and.

Improve our free cash flow potential, which we think we're going to be able to do.

Very consistently over time.

We'll consider other options as Tim mentioned potentially a supplemental dividend potentially in certain situations.

Stock buybacks and then we are always looking at opportunistic.

Low cost high return bolt on property acquisitions, and we did a number of those last year.

Some of those were in our exploration plays some of those and really in the Delaware Basin, where.

We're actually drilling bolt on acquisitions. So so we're always looking to improve the drilling potential of the company through those kind of things. So we've got a lot of great options.

So we're very excited about having a lot of free cash flow and continuing to build on that that's not a problem. That's a great opportunity and we're just looking for the right way to to redistribute that and generate the highest returns for the shareholders.

And our next question will come from Bob Brackett. Please go ahead.

Hey, good morning.

Comparing the net expected well completions for this year by play versus last year and am I over interpreting it but I see a decrease in non federal areas call. It Texas Eagle Ford I see a rise in the <unk> in the Delaware.

That program predicated on federal lease concerns or desires or am I over interpreting.

Hey, Bob This is bill I'm going to ask Billy to to answer that one.

Yes, good morning, Bob.

I would say.

We.

In the past 10 years, a lot of our growth previously came from the Eagle Ford and that is a more mature play at this point and going forward.

Still have quite a bit of inventory on a lot of that is still double premium, but we see a lot of the growth coming from.

The Delaware Basin, and the Powder River Basin as you mentioned part of that is that in the last couple of years, even last year, we built out some infrastructure on federal land and just as a natural progression of our development program and we start moving activity into those areas. That's true both on the Delaware and the powder River basin, but that's kind of where are we.

See.

Activity moving and that will also help in the decline rate that build on as we've talked about earlier in the call.

Thank you for that.

And our next question will come from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning.

I wanted to continue on the line.

Your line of questioning Im thinking more about this year, you'll have about two $5 billion of cash on the balance sheet post bond repayment.

And you mentioned retaining 2 billion over the long term, but you also have day to 23 maturity.

And then you'll you'll generate $1 billion of.

Half of free cash at 50 this year.

Even more another 1 billion or 60.

How do you think about use of cash this year, especially if capex is not going to flex how do you think about building cash from the 'twenty three maturity of that.

On the $2 billion, you mentioned that how do you balance that against returning cash this year if the strip is right.

Tammy you want to take that one sure. So we've already committed to two spending $1 7 billion of the free cash flow through the.

Payment of the bond that matured and in on a regular dividend. So that's the first thing.

And then at the end of each quarter, we will review with the board what our cash position is and we will look at.

Site into the future and see what the conditions on the industry looked like and make decisions based on where we are at that point in time. So there's no hard and fast rule on what that answer will be.

It's a long term.

Outlook not a short term outlook. So that's the way we are.

Building on this model.

Is it 2 billion kind of how youre thinking about the right cash balance for this year does it.

Is that a little bit higher given the 'twenty three maturity how does that come into consideration no. The 2 billion is two pieces to the 2 billion on one is normal operating conditions and one is.

Surplus for abnormal operating conditions. So they are both built into that number and thats the number that Tim driggers feel comfortable with so.

That's how that number was derived having lived through a lot of these cycles and knowing the size of our company I know, what I feel comfortable with to not be stressed.

Stressful situation on the cash side, so that's how we derive that number.

Okay.

And our next question will come from Leo Mariani with Keybanc. Please go ahead.

Hey, guys just wanted to delve a little bit into the Capex here in 2021.

Certainly noticing from the slides that you guys are spending an extra $500 million kind of above.

I wanted to get a sense of.

How much of that is devoted to some of these new exploration plays.

Discussing here and then ultimately it sounds like there's quite a bit of testing.

The drill bit in 'twenty, one versus last year you can see this this year is really having a potential it's kind of a breakout year for exploration success for EOG given the higher spend.

Yeah, Leo let me start that they don't want to ask Ezra to give some color on it but the important thing to consider on our exploration.

Program is where we're investing in plays that we believe will make a significant step change in the performance of the company and when I talk about that that's in addition to the double premium change we're making this year. So it's above and beyond that we're really looking for plays.

That are really the new.

Technology.

We see for the future of horizontal drilling for the most part these are much much better rock.

And have the potential to be much better than.

And deliver results like.

Lower decline rates to help us to generate even more free cash flow and higher returns than ever before so we're investing in very significant potential.

Potential future potential for the company.

The breakdown.

On behalf of the $500 million is $300 million in exploration.

And $100 million in international and $100 million in ESG projects and I'm on I'm on it.

As a comment just in general on our exploration efforts.

Give it a little bit more color.

Yes. Thank you for the question Leo.

So as bill highlighted we pulled back in 2020, a little bit on our on our exploration budget commensurate with with reducing our capital spend across the board and so we're excited this year to be able to return.

2020 levels to kind of a pre pandemic level or more of a more of a historic balanced level for the exploration side.

While we can't promise a spa.

Specifics on timing or anything like that I can't give you a little bit of color on how the process goes and obviously, we like to capture leasehold and we prefer not to talk into greater detail about our exploration plays until we get the leasehold captured and especially what we think is not only the tier one areas. The sweet spot of these plays but also on a.

Our position and then as you can see from the last few announcements Dorado, the powder River basin, and the Wolfcamp M and third bone spring and we'd like to have a handful of wells tested not only testing the geologic concepts on the produce ability of the of the of the play but also just testing the repeat ability on it.

So those things are different from each of these plays each of the rock types are giving us the confidence on the transparency to start talking about those publicly as bill said.

Highlighted we are leasing and testing across multiple plays this year.

We're very excited about the potential that that they will dramatically increase the quality of the the already robust inventory that we have and as we shifted from <unk>.

Premium in 2016 to focus on double premium. This year, we really think these exploration plays have the potential to deliver another significant step change for EOG is performance in the future.

Last thing I'd highlight is we are doing this at a time when <unk>.

Much of the industry has really pulled back on on any new exploration at all.

That leaves us in kind of a counter cyclic opportunity here.

Where we're excited that we've been able to put together these prospects in and get them get them drilled and tested and provide a little a little additional cover color for you guys. When we have the information.

That's great color I really appreciate that.

My follow up question I, just wanted to ask a little about.

Production cadence here on the oil side in 2021.

Obviously the goal is to kind of keep things roughly flat with the $40 20 levels of 442 kind of on.

Obviously, starting at a lower point in <unk> because of a lot of the storm downtime does that imply that we're going to see.

A bit of a gradual ramp on those volumes to kind of get to the average as we work our way into mid year and second half 'twenty one for the U S. All volume.

Yeah.

Yes.

Sure Leo.

No the production and each quarter it will be about the same.

Targeting around that 440000 barrels a day, which really was our target here in the us.

In the first quarter, obviously, the storm affected basically a one week of production and that came largely in the Delaware basin on an Eagle Ford areas all of that production back on now and that downtime is going to result in about a 4% decrease in the fourth first quarter production.

And we've stated we've not we're not going to grow production in an oversupplied market. So basically once we kind of get this production now that the production is back on we will maintain this rate at around the 440000 barrels a day in each of the remaining three quarters.

Yeah.

Okay.

And our next question will come from Neal Dingmann with true Securities. Thank you.

Go ahead.

Good morning, guys Bill just a quick easy question for you or Tim just wondering about hedging. These days your thoughts you.

You did pretty well with it in 2000 and you know when you had some on you took up realized the gains on that so I'm just wondering with the.

<unk>, we've seen in oil prices here, although word on obviously steep backwardation on how you all think about that.

Yeah Neal were.

We remain opportunistic on our hedging.

Obviously, the price has moved up very dramatically here in the first.

The quarter of the year are faster than really we had thought we added a few hedges there at the beginning of the year just to lock in above $50 55.

But we're currently.

And the market and watching it move up in and.

And we will be opportunistic in.

I'll add hedges as we feel.

It will.

Be beneficial and we have no.

We have no hedges in natural gas at this time.

Okay and then just you guys have been successful on your organic exploration you've talked about.

I'm just kind of curious.

With the plan. This year as you have I guess my question is do you have a set plan on sort of regardless what happens to either pricing or the success of these plays throughout this year and then Ted.

The 'twenty two what you would do activity and sort of spending wise on that is it pretty set or is that.

Thats still on ebb and flow I'm going to let Andrew talk about that.

Yes, Neal thanks for the question.

We have kind of a base plan setup for our exploration, but what I would say as much of it is going to be dependent on what we see how do we get these leases put together on what we see on the on the early results of these plays so we remain fairly flexible on on how quickly we think we could start.

To start to allocate capital to these what I would say just a little more color as well.

All of our domestic exploration plays as we've highlighted in the past or are in areas of P.

Pre existing oil and gas operations, so theyre not frontier basins or anything like that there is some form of infrastructure, albeit maybe legacy.

And so we would be able to get these things kind of produced in and up and moving once we have the results on a on the repeatability of the plays and have the acreage tied up.

And our next question will come from Brian singer with Goldman Sachs. Please go ahead.

Great. Thank you and good morning.

First question is two part question with regards to the decline rate impact from the shift to double premium locations.

What characterizes either the underlying geology or what youre doing in your completion techniques to achieve these lower decline rates or is it just a shift away from the Eagle Ford and then if this represents a new capital efficient shift for the company why would it not pushed down maintenance capital below the $3 4 billion.

Yeah, Billy will you want to.

Talk about that.

Sure Brian Good morning.

So as far as the.

Decline rates shift, that's coming mostly from focusing our areas on better rock to be honest.

As we mature the Eagle Ford play as we mentioned earlier and more of our capital is going towards the Delaware basin and even the powder River basin. In general those are plays that have essentially better rock and capability up a lower decline. So that's a large part of that and then on the new.

With the shift in the capital efficiency on the maintenance capital I would remind you the $3 4 billion.

We set that gas a year or so ago.

That was at a production rate of about 420000 barrels a day and that was also pretty dorado. So we're maintaining the $3 $4 billion at a higher oil production rate of 440000 barrels a day and we've also added in the capital on Dorado because that is part of our announced plays going forward.

Great. Thanks, and my follow up actually it does involve Dorado, because you mentioned that a couple of times in your prepared remarks, as a potential global energy solution and I Wonder how you monetize that is there an LNG contract or partnership with a global player or are you, taking a more bullish view on medium or longer term U S. Natural.

Gas prices.

Yeah.

Yes.

Brian I'm going to ask Lance to talk about the LNG potential for Dorado, Hey, Brian Good morning, It's Lance.

I think as we've talked about in the past that that's what makes it so exciting about the Dorado play it's just.

When you think about the proximity to market.

We're so close.

The proximity to the both all our domestic customers, but then also the LNG markets as well so I think the biggest thing.

Again, it's just the proximity it's the location. It all is very complementary with what we've done in the past and a lot of our plays you know moving gas downstream to obviously try to capture the highest prices. So.

We will just continue to stay very opportunistic there, but the big thing I want to focus on is just the proximity and what's in place today.

And our next question will come from Doug look out day with Bank of America. Please go ahead.

Hi, good morning, it's.

Actually from Bank of America.

Guys. Thank you for taking my question on.

I'm afraid that I'm, just going to focus on one issue.

You have to forgive me it's on David.

The growth plan post 2021 on.

No.

On the soft a little bit and then my question really is volume.

Percentage number on how you define a balanced market nine oil come through some of this before but I just wanted to set up here a little bit.

Basically just about everybody has dropped their breakeven price.

On I think so obviously EBITDA argue that Dino optimal production rate is a little higher than where it is today. So when you talk about come on.

<unk>.

You talked about a $53 on average oil price in the last four years will be northern subsidizing.

So on <unk> question, I had number of years ago, which is.

Why.

When you represent half a percentage of global supply.

Okay two grew at 10%.

5% of global demand.

Does that puts you back to being part of the problem.

See what im going with this because everyone else.

The U S on slide 10 million barrels a day in the price of oil call me My last comment.

I would just offer a little different perspective on Saturday.

72 million barrels a day on the market in April on the <unk>.

<unk> incentive to do that.

What was the price of oil was Russia.

Russia price war.

U S oil price war.

My question to you is why 10%, Okay. How do you define the bonds market on.

We will revisit this at some point in the future because it puts us back and you see in place your production.

Yeah, Doug Yes. Thank you for the question.

First of all we've been really clear we're not good at the push of oil in an oversupplied market, we're very very cognizant of that.

The fragile recovery that we're in and it's important that we don't put any more pressure on that and allow the market to recover and we're going to watch that.

The rest of this year, obviously, we're not going on we made a commitment we're not going to be.

Increasing production this year and we'll watch it be next year before we set our plan so.

We're not we're not in.

We are not interested in growing oil in an oversupplied market period.

And when the market is right and.

We began growth again.

Isn't that.

8% to 10% is the right number because it really optimizes all the metrics and the company returns and free cash flow potential over time.

Got a great chart that we put together in slide number 10.

And at <unk>.

Really shows that.

Uh huh.

It's the operating efficiency the operating.

<unk>.

Cost.

On the.

The earnings and cash flow per share growth.

Turn on capital employed.

Three year cumulative free cash flow on the long term free cash flow all are at an optimal level and at a 10% growth rate. If we go slower some of those.

Our non optimal they're worse, if we grow faster than that on the same thing some of those are non optimal they're worse. So the 8% to 10% really optimize its a balance growth rate a moderate growth rate there where the company can continue to get better very very fast and optimize.

Returns.

Our earnings potential on a cash flow potential.

In on long term free cash flow.

Maybe just a quick follow up on bill on the same topic so on the.

The point of optimal optimal.

Cause of what the strategy.

So for example, you don't need to spend a couple million dollars.

From $1 billion on exploration. If you do you could high grade you would never right size the company with a slower growth rate on your still despite taking 5% of global demand as well do it. So I guess my question is between 2017 in 2019 $72 million being held off the market before COVID-19.

Is your definition of a balance market.

The lowest cost producers don't subsidize from the business.

And production.

That by definition is subsidizing your business so optimal.

Just on the tough time understanding widened bulk loading any lessons from growing 90 times.

With very little free cash flow on your share price response, obviously.

Hello there.

So why is 5% of global demand growth from a company that half a percent global decline okay.

Yes, I think there's two elements that we look at it really closely obviously to to determine whether the market is relatively balanced or not.

One of them is the inventories we want to see them get down.

The five year average or lower.

And keep heading lower.

Then the other is spare capacity worldwide spare capacity, so we're watching spare capacity and assets.

At the moment, it's still 10 million barrels a day and we need we need to we need to have some work. So we want to get spare capacity down in the world to a kind of a historic normal level and so we'll be watching both of those in and we're very definitely committed to not over pressuring the market.

And working with the market, we have to work with and staying disciplined.

And not not trying to push oil or grow oil into an oversupplied market, we're making that commitment we've always done that and we did it in 2015 and 2016, we didnt grow.

Obviously shut in production last year.

We're staying we're maintaining that.

Exit rate this year. So we're very disciplined and we're very cognizant of that beyond that when the market's available we want to run the company to generate the highest total return for the shareholder value that is on.

Job, we want to generate value business value really core business value.

That's what that's what we're about and that's what we're going to stay focused on.

And our next question will come from Charles Meade with Johnson Rice. Please go ahead.

Moving to be able to you on your whole team there.

I wanted to ask a question about your total premium inventory and really the rate of change there.

If you took that definition of double premium and applied that to your 19 program and your 'twenty program, what percentage of that 19 program and the 'twenty program would've would have fit would have qualified for that double premium bucket and what's it going to be in 'twenty one.

Yes, Charles Yes.

Yes, the double premium we've been building more double premium every year as we get our costs down and improve our well productivity last year. It was about 50% in 2019, it was less than that.

So last year it was about 50% this year.

Our goal is to get it up to 75, maybe maybe even higher percentage is that in the next year.

It will even be higher than that.

We're focused on.

On improving the wells not only with the cost, but theres a slide slide number seven I think it is it shows that these double premium wells are much much more productive in fact over the first two years, they came 39% more oil than the wells we've been drilling in.

In the last several years. So they are better wells, obviously, we're lowering our costs at the same time and I think that's really a differentiator for EOG.

As the industry data shows most of the industry well productivity is flattening out.

We're at EOG, the well productivity is continuing to increase so we're not through.

We're going to get better every year.

We figure out how to target better rock our completion technology continues to increase.

Obviously, our well costs are going down significantly.

All of that is sustainable.

As from really the EOG culture, and our methodology of not really getting into.

A maintenance mode.

And.

Just doing.

Routine every well the same we are in the learning process, we gather tremendous amount of data and technology. We are learning the geology as we drill the wells we're learning the pay quality.

And we're figuring out just continuously on a real time basis, how to get better in every aspect of the company.

We're excited about our future and continuing to increase returns on capital efficiency and free cash flow potential as we go forward.

Thank you Bill that's helpful insight into your into your thinking process, and perhaps picking up that that one thread on on better rock.

Interpreting that the right way that that is that.

Is that essentially the shift from these.

The resource shale plays more towards these.

Combo classic kind of plays in is that is that a is that just a kind of a coincidence or is that more of a fundamental arrow for you guys.

Well, it's not a coincidence on them on as you talk about that.

Yes, Charles Thanks, that's P.

Perfect you kind of hit the nail on the head as you move away from these.

Actual true shale plays themselves or some of the tightest rock and so as we've moved into not only different basins in different formations.

But especially targeting the specific landing zones, we've developed.

Some of our Petro physical some of our geologic models to really understand the specific landing zones and rocks like the Austin chalk per se.

You fundamentally have a higher porosity and permeability just better all around rock quality that adds to not only the returns but also as bill was highlighting to the shallower decline profile.

And our next question will come from Paul Cheng with Scotiabank. Please go ahead.

Thank you.

Morning, guys.

Two question piece last year, you signed to gas supply agreement that seems to be well.

The decline given the top line.

J P M price.

Can you tell us that what is that one day before this year.

And how quickly you went to a 440 million cubic feet per day.

How many yet, but we'll get there and also that seamless link to both J P. <unk> and Henry hub can you tell us at what percentage is on J P M and what percentage you had seen Henry hub.

Question.

Second question.

I think this is probably for you.

Some of your competitors.

Alright, Thats a formal night.

On excess cash return.

David but.

That one is that they have excess free cash after capex and base.

David then they would pay that out.

Just a kid with that why from deal.

On Yoki standpoint, you don't think that will be a.

Maybe what the pole pole Glenn for you because I think the market what not cash returned but that they also loved transparency and so on the understanding that on.

Under what circumstances, they can get what so just to with that why that we do not believe that will feed into the EOG model. Thank you.

Yes, Paul on ask Lance to talk about the J P M.

Paul Good morning. This is lance how are you.

Very good. Thank you hey, yeah. Good thanks for your question, especially related to LNG.

Say you know it.

It was a fairly bearish last year right related to <unk> on just global LNG pricing with.

The warm weather and obviously, the oversupply and things have changed haven't quite drastically to layer on a go forward it looks very constructive.

Definitely as you look at global prices. So yes, just as a reminder, there Paul we've got 140 million a day.

That goes into that agreement that we have with Cheniere.

Like you said, we're excited for the benefit there that we've seen especially on a go forward, we kind of had that view going into before and finalizing our agreement. We're definitely constructive kind of long term related to global prices and obviously have an exposure to JM and being very correlated with oil two and having the upsell.

Syed.

That's where we kind of wanted to be positioned from an LNG pricing standpoint. So yes, we've been very pleased here in the first quarter with that pricing and constructive from a long term standpoint, as well and yes. Your second question was there was just kind of how it ramps up and Youre right. Its the $1 40, as the J km and there is an additional 300 that'll be tied to Henry hub.

And for that day.

Is that a one to one or that would affect us.

Paul could you ask that one more time please sir.

For the link to that J P M yesterday.

You get that J P M on yesterday.

Yes.

Or anything like that.

It's I'm not going to go on to the specifics contractually, but it's very.

It's very familiar from what you've heard from Cheniere is well on their IPM model and so that's how we structured that.

And this will conclude our question and answer session I would like to turn the conference back over to Bill Thomas for any closing remarks.

Yeah.

2020 was a year with many challenges and I am so very proud of the employees of EOG. They've responded with an excellent exceptional performance and an exceptional year.

We entered 2021 and this next up cycle with lower cost and more potential than ever in the history of the company our organization and culture are focused on improving returns playing a significant role in the future of energy and delivering substantial long term shareholder value. So thanks for listening and thanks for your support.

The conference has now concluded. Thank you for attending today's presentation and at this time you may now disconnect your lines.

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