Q1 2021 EOG Resources Inc Earnings Call
[music].
Good day, everyone and welcome to EOG resources first quarter 2021 the earnings results conference call.
As a reminder of this call is being recorded at.
At this time for opening remarks, and introductions I would like to turn the call over to Chief Financial Officer of EOG resources, Mr. Tim Driggers. Please go ahead.
Good morning, and thanks for joining us we hope everyone has seen the press release announcing first quarter 2021 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.
Finishing 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 dotcom.
Some of the reserve estimates on this conference call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC reserve reporting guidelines.
We incorporate by reference to the cautionary note to U S. Investors that appears of 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.
Jacob President, Ken Baker, 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 EOG is delivering on our free cash flow priorities and our strategy to maximize long term shareholder value yesterday, we declared a $1 per share of special dividend to demonstrate our commitment to returning cash to shareholders combined with the regular dividend, we expect to return $1 five.
Billion to our shareholders through dividends in 2021.
Double premium well productivity and cost reductions are substantially improving our returns and increasing our ability to generate significant free cash flow and.
In order to maximize long term shareholder value, we will remain flexible as we carry out our free cash flow priorities in the future by.
By doubling our reinvestment standard the future potential of our earnings and cash flow performance on the best they've ever been this quarter, we generated a quarterly record $1 1 billion of free cash flow and owner of dollars 62 per share of adjusted net income the second highest quarterly earnings in company history.
In addition, our balance sheet is in superior shape with a peer leading low net debt to cap ratio.
Next as I will review our capital allocation strategy in more detail Billy will go over our operational performance and Tim will cover our financial performance before I'll make a few closing remarks now here's Ezra.
Thanks, Bill yesterday, the dividend announcement is just the latest on a long line of achievements that demonstrate the value of EOG is fundamental strategy of returns driven capital allocation, including the impact of permanently raising our investment return hurdle rate for the second time in five years.
In 2016 during the last downturn, we established our premium investment strategy, which requires a 30% direct after tax rate of return of $40 oil and $2 50 natural gas.
The premium of investment strategy drove a step change in our capital efficiency and resulting financial performance.
It is the reason we entered 2020 in a position of operational and financial strength, which enabled us to generate positive adjusted net income and free cash flow in a year of unprecedented the oil volatility.
And prices that average just $39.
This year, we increased the return hurdle once again doubling at the 60% at $40 oil and $2 50 natural gas sustainable improvements in our inventory of drilling locations and continued progress on exploration have paved the transition of double premium.
The day to driving our confidence to make this move as illustrated on slide six of our Investor presentation, which details. The return profile of every drilling location half of our current inventory earns at least two times. The premium return hurdle rate. We established back in 2016 5700 double of premium locations is more than 10 years' worth of inventory.
At our current pace of drilling.
And is more than we had when we made the transition of premium five years ago.
Just like we did with our premium inventory, we're confident we can replace our double premium locations faster than we drill them through line of sight into additional cost reductions that will increase the returns of existing inventory and through exploration.
A number of innovations, which Billy will discuss in a moment are being piloted across our operating areas and will sustainably drive down both well costs and operating costs as we implement them throughout the company.
Our exploration program is focused exclusively on prospects that will improve on that 60% median return in fact, our anticipated return on the current slate of new exploration plays as more than 80%.
To see the impact of our premium returns focused capital allocation strategy, a closer look at our corporate financial performance as required.
As we replace our production base by drilling locations with higher well level returns the price required to earn 10% return on capital employed continues to fall prior to establishing premium EOG required oil prices upwards of $80 to earn a 10% <unk>.
As the premium strategy of matured the oil price needed to earn 10% RSC. He came down and average just $58 of the last four years.
This trend is illustrated on slide nine of our Investor presentation.
For 2021 that price is just $50 and we're not stopping there we expect it will continue to fall as our well level returns improve the.
The impact of reinvesting at higher returns is also showing up on our free cash flow performance, we more than doubled the dividend over the last four years and improved our balance sheet, reducing net debt by nearly $3 billion.
As a result net debt to total capital at the end of last year was just 11%.
But our future financial performance potential is the real price our first quarter results of our preview of what we are aiming for over the coming years, we expect to reinvesting in our current inventory of high return wells will continue to lower the corporate decline rate and compound the value of our low cost operating structure. The result leads to higher margins and generates even more free cash.
<unk> flow of providing us tremendous opportunity to create long term shareholder value. We believe when we look back in a few years it will be viewed as the catalyst for another step change improvement in Eog's financial performance.
Our fundamental strategy of returns driven capital allocation remains consistent.
And consistency is key prioritizing reinvestment in high return projects is the driver behind the steady improvements we've made year after year. As a result, we are now in a position to follow through on our commitment to return additional free cash flow to shareholders. Looking ahead, you can expect our priority is to remain consistent investing in higher.
Returns generating significant free cash flow to support of sustainable and growing dividend, while maintaining a strong balance sheet, followed by opportunistic return of additional free cash flow to investors and bolt on acquisitions now here's Billy.
Thanks, Andrew.
The first quarters of the year was about execution.
We exceeded our oil target producing more than the high end of our guidance range, because wells that were offline and due to the winter storm Yuri recovered a bit faster than expected.
As a result, our first quarter daily production declined just 3% compared to the fourth quarter last year.
Our capital for the quarter came in under our forecasted target by 6%.
Mainly due to improvements in well cost across the company.
The savings realized during the first quarter on in addition to the tremendous 15% reduction last year.
EOG is on track to reduce well cost and of the 5% this year.
Got some potential inflationary pressure as industry activity resumes.
Similar to previous quarters. These results are driven through innovation and efficiency gains in each phase of our operation.
A closer look at our operations will help explain why we are confident we can once again lower well cost.
Our drilling teams are consistently achieving targeted depths faster with lower cost the.
Constant focus on daily performance and reliability of the tools and technical procedures.
Creating this continual drive towards lower cost.
Some of the benefits this year stemmed from larger groups of wells per pad simply requiring less rig move cost per well and increasing efficiencies locked offline cementing.
The larger well pads also complement our completion operations through the increase the ability to utilize the technique would call Super zipper.
We began our initial experiments with this technique back in 2019 and it has since the advanced to consistently deliver the expected well results at lower cost.
We have also learned that Super zipper is particularly well suited to optimize the efficiencies of our five electric frac fleets.
However, conventional spreads gain efficiencies as well.
This practice involves using a single spread of pressure pumping equipment the.
Complete four more wells on a single pad.
We split the equipments capacity and a half.
Simultaneously pumping on two wells, while conducting wireline operations on the remaining wells.
We piloted and perfected of supers differently logistics in our Eagle Ford play and the collaboration between operating areas has accelerated its adoption throughout the company.
And in cases, where a minimum of four wells cannot be physically the located on a single pad. The engineering teams are working to develop new techniques, where we can still utilize.
This improved completion practice.
Completion costs are also benefiting from reduced sand and water costs through our integrated self sourcing efforts the savings we realized by installing water reuse pipelines and facilities saves.
Saves about 7% of well cost compared to third party sourcing and disposal.
Longer term, we expect water reuse and disposal of infrastructure, we will continue to lower lease operating expense in each area as well.
Lease operating expense has also benefited from lessons learned through the pandemic this last year.
The number of wells one lease operator can maintain has increased by as much as 80%.
The optimizing the use of the innovative software designed and built by EOG.
The software prioritize the lease operator activity throughout the day using our mobile in real time software infrastructure.
Our experienced last year inspired of number of new ideas to further high grade of lease operators work activity throughout the day, which we believe may continue to expand productivity in the.
In day to day field operations.
Slide 35 of our Investor presentation illustrates the consistent progress we have made year after year on productivity all powered by innovative ideas generated bottom up by employees.
Each of our operating active operating areas functions as an individual incubator to test out new ideas. Many of which have are of homegrown innovation from EOG employees and rollout companywide if successful.
That's one of the primary reasons of our well cost improvements every year are never one silver bullet, but the list of small to medium sized individual improvements across all elements of total well costs that result in sustainable cost reduction.
As a result of the innovation spreading throughout the company to reduce capital and operating cost I have strong confidence that the cost structure and capital efficiency of the company, we will continue to improve here.
Here's Tim to review our financial position.
Thanks Billy.
Yesterday, the special dividend announcement marks another milestone in the growth of EOG is profitability and cash flow.
We achieved this milestone through the disciplined execution of consistent long term returns focused strategy for capital allocation supported by a strong balance sheet.
Over time the strategy has produced the increasing amounts of free cash flow.
The top priorities for the allocation of that free cash flow remains sustainable dividend growth and debt reduction.
The shift of premium in 2016 drove a significant improvement in returns profit margins and cost, enabling the significant increase in the dividend over the last four years.
Since 2017, the dividend has grown from <unk> 67 per share to $1 65 per share.
Now an annual commitment of almost $1 billion go on.
Going forward. Our goal is to continue growing the regular dividend, we've never cut or suspended the dividend and we remain committed to sustainability.
With the shift of double premium were now focused on making another step change improvement.
And the results of those efforts will guide future common dividend increases and the potential for special dividends.
Since the shift of premium we have also retired bond maturities totaling about $2 billion.
With plans to retire another 125 billion in 2023, when the bond matures.
Net debt to total capitalization was 8% at the end of the first quarter.
Our strong balance sheet with low debt has been at the heart of EOG strategy throughout our existence.
It's not just conservatism is about creating a strategic advantage.
Our superior balance sheet enables us to acquire high return assets at bottom of cycle prices.
Where their exploration acreage like the Eagle Ford or for the new players. We're working on today bolt on acquisitions are companies like the Yates acquisition five years ago.
Our strong balance sheet also gives us the financial strength to be of partner of choice on our operations.
Whether it is with marketing our export agreements service providers or even other companies in other countries and locking unlocking new plays.
The strong balance sheet extends to ensuring ample liquidity, which we have also secured with no near term debt maturities $3 $4 billion of cash on hand and of $2 billion unsecured line of credit.
Now EOG is positioned to address other free cash flow priorities by returning additional cash to shareholders.
The $1 per share special dividend falls through on of these consistent long tailed priorities.
That $600 million the special dividend is a meaningful amount while also aligning with our other priorities.
After paying the special dividend, we will have $2 8 billion of cash on hand.
$800 million above our minimum cash target.
This is a healthy downpayment on the $1 billion to $5 billion bond maturing in two years.
Going forward, our free cash flow priorities remain unchanged.
We will continue to monitor the cash position of the company oil and gas prices and of course are on financial performance.
As the excess cash becomes available in the future. We will evaluate further special dividends are at the right time opportunistic share repurchases or low cost bolt on property acquisitions.
It goes without saying you should expect us to avoid expensive corporate M&A.
You can count on EOG to continue following our consistent strategy to maximize long term shareholder value now here is bill to wrap up.
Thanks, Tim in conclusion, I would like to note. The following important takeaways first true to the EOG culture, our employees have fully embraced doubling our investment hurdle rate as we drill more double premium oils. We expect our performance will continue to improve our decline rate will flatten on breakeven oil price will decline.
Our margins will expand and the potential for free cash flow will increase substantially.
Second while our new double premium of hurdle rate alone will drive significant improvement. It represents just one source, we never quit coming up with new ways to increase productivity and lower costs and on.
<unk> of new ideas and improved technology are developing throughout the company at a rapid pace and we will continue to result in even higher returns in the future.
And finally, our special dividend this quarter.
Our demonstrating our commitment to generating significant free cash flow and using that free cash to improve total shareholder returns. We are more excited than ever about the future of EOG and our ability to deliver and maximize long term shareholder value.
For listening and now we'll go to Q&A.
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We'll pause for just a moment to give everyone an opportunity to signal for a question.
On the first question comes from Scott Gruber of Citigroup. Please go ahead.
Yes, good morning.
No Scott.
Some of the most kind of the questions we've received.
Touched on it a bad day.
<unk> remarks.
The whole war.
You guys use the determined that the $1 special dividend as the right of malt.
That was the right.
Can you just elaborate on that a little bit more.
The around the framework and the timing, obviously folks are trying to get a sense of.
The weather, whether the special dividend Timothy than the future.
Yes, Scott.
Certainly, we're demonstrating our commitment to our shareholders by.
Returning exhibits the significant amount of cash back to them.
The the $1 per share you know I think as the very significant number and the large enough to be very meaningful.
And I'm going to ask Tim the kind of go through some of the.
Some of the numbers.
To give you a little bit of the background on the on the reason that we that we pick this number.
Thanks, Bill so going back to our priorities over time.
It's consistent with our priorities if you.
Look back to our regular dividend has increased 146% since 2017, that's one of our highest priorities, we reduced debt by $2 1 billion.
So that set us up to be in a position to now return more cash to the shareholders. When we looked at our cash position we were sitting in the $3 4 billion of cash. So returning 600 million at this point in time as Bill pointed out is the significant amount in the follows through on our long her long.
<unk> planned to returns.
Cash to the shareholders. So it is simply following through on what we have been committed to.
For a long time.
I'm going to add Scott going forward.
Free cash flow priorities and framework haven't changed and so you have to put the special dividend in the context with our total framework and just a reminder, we've already said this but our first priority is a sustainable dividend growth. We believe the regular dividend is the absolute best way to give.
Give cash back to shareholders and we certainly.
Our working on that and have worked we got a great history of doing that.
And then the next one is debt reduction and we've got a little work left to do that as Tim noted in his opening remarks, our next options on the special dividend and certainly in favorable times like we have right now those of the things that we are.
We are doing.
And then we'll also we want to keep in mind.
The potential for opportunistic share repurchases in downturns counter cyclic opportunities in share repurchases and then after that you know we also.
I want to be able to consider high return bolt on acquisitions.
These are acquisitions that go in our best operating areas, obviously, where we've got a lot of synergy.
And a lot of the ability to move quickly and drill wells and some of them could be in our new exploration plays where we can capture of very high potential acreage at very low costs and so we will just continue to evaluate.
All of these options and work with this framework and the.
We will evaluate the best use of cash on a quarter to quarter basis.
We're in a dynamic of dynamic business environment. All the time, so it's important to have the flexibility to use of cash.
In a way that creates the most shareholder value.
Got it and then my follow up relates to the the growth strategy in 'twenty two and beyond.
It's all of markets have healed next year on you guys is the very explicit around the fact of Youre looking at.
And you laid out the 8% to 10% growth case.
On your last call, but there seems to be some discussion around now around the potential for.
The middle ground, if you will.
<unk>.
Growth case below that 8% to 10 per se. So just wanted to hear your latest thoughts.
2022, yeah, if the oil markets have yield and started to grow again, what is the right growth cadence. What factors are you looking at the determine that that rate of growth.
If the markets of field.
Is there a middle ground of somewhere between zero and 10%.
Yes, yes on the growth, we're going to grow day to 10%.
Yeah. Thanks, Thanks, Scott for that question, we want to make sure we're really clear on that and I think we have.
We're not gonna grow until the demand.
Has recovered to pre COVID-19 levels of which is it's on the way to do that I think everybody can see that and we want to make sure that obviously the world inventories U S inventories are below the five year average.
And then we're looking for spare capacity.
To be certainly a lot lower than it is right now on that just means you know.
Not a lot of oil shut in.
Two.
The match supply and demand and every year the.
The market factors that you are going into that year will determine on plants and so we want to be flexible.
And we want to be able to and we will modify our growth plans to fit those market conditions.
If we need to grow at a lower rate or.
Or no growth at all like we're doing this year whatever that.
Right growth plan is whatever fits of the market conditions, that's what we wanted to do.
Above all of everything else, we are committed to staying very disciplined and not forcing oil into a market that's not ready.
Got it thank.
Thank you I appreciate the color.
Okay.
The next question comes from Jr.
Of Jpmorgan. Please go ahead.
Yeah.
I guess my first question is kind of to dovetail on the on the special dividend talk.
All of this year, you've guided the $3 4 billion in free cash flow.
$1 5 billion for dividends another $7 50 for that you've already paid down so that lead.
A little bit more than one one.
The $1 billion of free cash flow.
And I know you're above your minimum cash target. So I guess the question is how are you gauging the market for bolt ons versus potentially if the oil per.
Price holds up here in terms of looking.
Looking at more cash return this year.
Yeah. Thanks Arun.
We take the.
We evaluate where we are every quarter I can't give you any any specific on anything.
But we evaluate where we are every quarter and we're constantly looking at bolt on potential.
In evaluating that.
We want to make sure we leave room to fully consider that something that would make a very significant difference in the future of the company.
Upgrade R R.
Our high quality premium double premium inventory, we want to do that so.
We're very fortunate on we've got a lot of cash.
And we've got a lot of hopefully all of whom we believe the lot of cash coming so that's a lot of great opportunities for us to consider additional special dividends of bolt on acquisitions et cetera.
Keeping in mind, you know as Tim talked about we want to keep in mind, our debt reduction targets.
And a year and then in the excuse me in 2023 and it also be able to continue to think about.
The growing.
Our regular dividend. So we'll just keep all of those in the proper framework and the.
You just need to know that we're committed to doing the right thing at the right time for the shareholders.
You know the maximize total shareholder value.
Great and then my follow up Bill you cited this as being the companies.
The best free cash flow quarter.
And the history, but I wanted to see if you could provide a little bit more detail on how the unique pricing conditions for natural gas given winter storm Yuri some of your leverage to JK on how that contributed.
Did the free cash flow.
Would you call that out I know, there's sort of an incremental cost per well is the puts and take on on the gas price this quarter.
Yeah, I'm going to ask Tim to give some details on that but just the before turn it over to Tim on everybody needs to know the.
The special dividend has nothing to do with the with the storm and the natural gas process of Tim the only give some detail sure. When you when you boil everything down the effects of youri was about $40 million to cash flow of net income.
In the quarter, obviously, there are big components in there, but that's the bottom line. It was very immaterial to our cash flow or net income.
Okay, great. Thanks, a lot.
The next question comes from Scott Hanold of RBC capital markets. Please go ahead.
I think the first and foremost I wonder I appreciate your very direct commentary on on your desire not to grow on.
The plan is to hopefully that does clear the era of bit.
What I am wondering if strategically if if we do stay in the sort of the current environment.
Whether it's 22 or even beyond you you all do build a lot of free cash flow I mean.
We're talking what something around $3 billion, even after your base dividend annually.
Do you all see if theres a benefit into setting up a more predictable return to cash Richard cash returned to shareholders.
Some of the Euro the peers did do you think there is a benefit to that predictability or would you rather see that more opportunistic.
Yes, Scott you know we.
We're always on a very dynamic business environment. So it is important you know we believe to have the flexibility to use of cash in a way the.
That creates the most shareholder value.
The.
The one of the reasons we draw on the biggest reason, we don't want to get into a strict formula.
Because we don't want to be put into position.
So where we're growing oil say at 5% when the market clearly does not need more oil.
So we want to be.
On a position where we can do the right thing at the right time.
And to maximize the use of the.
Of the cash in our plan.
To maximize shareholder value.
Got it thank you for that and the my next question maybe this one's for Azure.
You know you all talked about.
Shifting the double premium that's generated.
<unk> increases to two EUR Zig page eight shows just the just a massive uptick you're all of any color on on how much of that is organic versus mix shift that would assume the shift to relatively more Permian has relative to say Eagle Ford has his buys that upward, but do you have a sense.
On on.
How much is mix shift versus the organic.
Yes, Scott Thanks for the question this is Ezra.
Yeah definitely in the Permian, we have a higher percentage of those 5700, the double premium locations are located on the in the Permian, but part of that is simply just because we have so many targets captured there in the Delaware basin.
What I would say is we have a of a.
Fairly wide variety and fairly distribute variety of double premium wells across our entire portfolio.
Including the Eagle Ford, the recently announced Austin Chalk Dorado play.
And in the powder River basin as well.
The next question comes from Doug Leggate of Bank of America. Please go ahead.
Alright, Thank you and good morning, everyone and I apologize I was just taking you off of my headset.
Bill or Rob I Wonder if I could the kras on Scott's point I'm afraid I'm not quite where Scott is thinking this towards the land under the growth story. So my question is real simple you currently have one of the lowest free cash flow yields in the sector.
Arguably a reflection of your share price.
My point is the everyone's got the capacity to spend more money.
What happens to your 10% return at $50 of oil. This is the hold on industry full as you were leading goes by two of 10% close rate.
Yeah, Doug one of them make it really clear we're not stuck on.
10% growth rate or 8% growth rate we are.
Totally focused on making.
Making sure we do.
Do the right thing at the right time, so we the oil price does not.
Guide how much we're going to grow it's the market fundamentals and so we're really focused on that and we've laid out of I think of strong.
Net of fundamentals that we're focused on and the and we will adjust.
Our our plan each year, which means our growth plan each year.
Two to those market fundamentals and it may be certainly.
Next year that we don't grow at all or we may grow at four of 5%.
We will just have to see what the market is fundamental show.
That's obviously a great on sort of build is not set in the store and that's kind of what I was really trying to get to my follow up as Ezra very quickly 10 years of inventory double premium on the current pace.
Do choose to go back to growth.
One assumes on 10 years shrink some so can you talk about the sustainability and hold on please into again, the how you think about that activity level and I'll leave it there. Thanks.
Yes, Doug that's a good question.
Similarly, as we've done over the past few years you know we are consistently focused on getting better year after year, and so by driving down our well costs through sustainable well cost reductions.
Of which Billy spoke to in the opening remarks, but also through applying technology and innovations to increase the well price productivity gains we're able to convert some of our existing inventory every year into that double premium metric. In addition of that we have two other avenues. The first which bill has touched on is bolt on.
Bolt on acreage acquisition.
Position opportunities in areas of preexisting development, but then also all of our our exploration effort.
And as I talked about in the opening comments our exploration effort is really focused on again, making another step change to our current inventory it's focused on adding low decline high impact plays that really increase the overall return profile of the company and again Eric.
Regardless of of of any growth rate when you're reinvesting in higher return opportunities on adding lower cost reserves to your company you really are driving down the cost base of the company year after year and that's essentially what translates into our corporate financials and allows us to lower that that price required.
For a for a double digit <unk> every year.
The next question comes from Neal Dingmann of true with Securities. Please go ahead.
Good morning, all.
The guys. My first question is around how you're looking at your reinvestment rate I'm. Just wondering number one could you talk about at sort of current strip, how you see the reinvestment and again, let's assume another $5 of so higher.
What would that do to that.
Yes, Neil Thanks for the question, we're going to.
As Billy the the comment on that.
Yeah. Thanks, Neal I think you know for the reinvestment rate. We're always looking at you know as Bill mentioned earlier, what's the market look like and whats the need for all in.
We're not certainly not going to grow into a market that doesn't need the oil as he pointed out there is trying to make sure of REIT reemphasize that point.
And then going forward each year, we'll do the same thing we always do we kind of see where the market is and what the prices are in.
And what our opportunities are the two to develop our assets and we balance that against the.
The cash needs of the company so.
So it's not really the straight formula it's more about where the market is at that current time.
Well I'm glad to hear that I wish more more of others would stay the same and then just the follow up could you talk about.
Call of this question more on sort of your regional allocation process I know Bill you talked about sort of the the new hurdles on the premium locations, but I'm just wondering how does that factor in when you have got some exciting.
Not quite as developed areas like the the <unk> that I think have high potential, but it just strictly looking at maybe what they produce immediately.
Not compete so I'm just wondering how do you factor in some of those high potential wells with this plant.
Yes, Neal this is Billy again.
Take a stab at that.
As we look at the all of our assets that's the beauty of having a decentralized culture, where we are focused on multiple plays across our portfolio. You have plays that are in different phases of of.
The life cycle as you might think about it as you just say it's like the Eagle Ford is a more mature play its head of growth for about 10 years is further down the maturity window than say the the power of the Delaware Basin.
And then the powder River Basin is certainly an early maturing early growth phase play so each one of those.
We certainly go in with the idea of delineating the playfirst, putting in the infrastructure to drive down our cost over time.
And maximize returns so each one of those have a different lifecycle that commands a different amount of EBITDA of.
Investment.
And overall, though the company is able to maintain a very steady pace of activity and future value creation through that.
The way we operate the company.
The next question is from Leo Mariani of Keybanc. Please go ahead.
The spending here certainly net.
The thing that just based on your guidance. Your Capex is picking up here in the second quarter I was wondering what was sort of driving that I wasn't sure.
What was causing that.
Yes, Leo this is Billy.
So the guidance on the Capex, it's up a little bit in the second quarter relative to the first quarter is simply the timing of when wells are available to be completed so we'll have a little bit more completion activity in the second quarter than we did in the first quarter that simply is I think in general we will have about 50% 52% of our capex spend.
On the first half of the.
The remaining to be spent more ratably through the rest of the year.
And the volumes will be really pretty much Keith.
Keeping with that 440000 barrels a day per quarter.
Average the rest of the year so it's a.
We will be maintaining 440000 barrels a day each quarter going forward.
Okay. That's helpful for sure and just wanted to ask on the exploration plays if I'm not wrong I think you guys are still.
Certainly devoting more capital there, particularly to the drill bit in 2020.
'twenty one here.
I just wanted to the Permian I was kind of drilling out.
Multiple plays.
At this point I think you'd get a little bit of that in the last couple of years as well.
As a result, maybe just kind of speak.
The high level.
On the competencies and being able to the.
Some of these op in the next year.
Yes, Leo this is Ezra I appreciate the question yeah on our exploration plays.
Youre right, where we've allocated about $300 million to the exploration.
This year over the last few years, we've done a little bit of drilling that was dominantly kind of leasing putting some of the acreage together and then of course, there was a pullback here in 2020 due to the reduction in capital allocation of associated with the downturn on prices and COVID-19, but this year, we are back to drilling multiple prospects.
We're at a point, where the prospects have started to move at different phases, I would say we're drilling.
The exploration wells.
Across some of the prospects across others were into more of what I'd call appraisal wells and we're feeling very confident with where we're at the results of we're seeing and we hope to be able to provide some results on that soon.
The next question comes from Jeanine Wai of bar.
Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question.
Maybe a question for Ed.
Following up on of the exploration.
Great.
I believe with all of last month.
Hi.
Sure.
No no.
Okay.
Australia.
Thank you.
Okay.
Yeah.
Yes, Jeanine that's of Great question. This is Ezra.
Yeah the the.
On the opportunity there in Australia as you mentioned, it's on the northwest shelf obviously.
Everyone knows the very prolific hydrocarbon.
Our region, it's a shallow water opportunity that we've stepped into there is as you mentioned for a very low upfront cost.
The exposing us to of prospect that we think has the opportunity the potential to be impactful to our company it.
We're forecasting it has the potential to really compete with our domestic returns and what we've what we've the opportunity that we have here in Australia is really an outgrowth of our experience in Trinidad.
Where for nearly 20 years, we've been operating in.
In the shallow waters offshore of Trinidad and really this is a geologic province.
Type of play where industry has really moved away from and so we found ourselves as kind of a niche operator, and we've developed the not only the operational procedures, but also some geologic techniques, where we think we can come in to some of the shallow water prospects and make very very good returns the <unk>.
The thing about Australia again is not only does it fit into our our experience level from the operations on the technical perspective, but it has many offtake.
The oilfield service the availability there and of course, the low cost of entry to an exciting amount of upside on the prospect.
Okay.
My second question.
Sure.
Again on the site.
On the special dividend the perception.
On the market.
Net.
Formulaic.
As in the valuation you don't get credit for it et cetera.
With that.
The business every quarter of frequently than that.
Typically when it comes to that.
The dividend.
Clarify is it really a matter.
<unk>.
$800 million.
The 1 billion maturity and then everything else kind of gets paid out.
Hi, David.
I know you on.
Hi.
Hi.
Also one of the priorities.
The kind of commentary.
Please.
That would be.
Thank you.
Yeah Jeanine.
Tim's given I think some answers for some of those on there, yes, we want to keep ample cash on the on the.
On the balance sheet too.
To run the business and Thats around $2 billion and then we have set aside.
Our looking at plans sort of reducing the.
The one on a quarter billion dollar bond in 2023. So that's all that's all fits in and that's part of our you know.
The.
The valuation of of of how we use the cash on when we use the cash but really the special dividend just fits into you know the framework that we've already laid out and our commitment of giving back cash of shareholder so.
We will look at our cash position.
Look at our bolt on potential opportunities that they can truly be any size you know from a very small we've done them in the past 2030.
Deal, but they could they could certainly be bigger than that too. So we'll take all of that and working into our framework and evaluate where the company is in and the outlook for the business and the.
Our goal is to.
<unk>.
The return cash to shareholders through that framework.
The next question comes from Charles Meade of Johnson Rice. Please go ahead.
Good morning, Bill to you and your whole team there I.
Really just have one question and it goes back to the some of your prepared comments bill and more specifically share repurchases.
Yeah, I recognize it that hasnt been your ammo in the past and they kind of have a.
A bad reputation maybe because usually of.
Share repurchases wind up being.
The pro cyclical in the way you talked about it you said.
For you you would look at it in an opportunistic ways of the word I remember you said in the downturn and I guess my question is.
It's easy to see a downturn in retrospect right you know six.
Six months ago, you guys had a three handle on your stock, but it's hard to recognize when you're in it. So is there any is there any.
The guideposts that you.
You can share about about how you would recognize when you're in one of those downturns of the time to be opportunistic opportunistic or is it just one of the things.
You know what when you see it.
Yeah, Charles I think you know it goes right along with the the.
Supply demand and market fundamentals analysis that we do.
And the way.
We've gotten more sophisticated we've got a very sophisticated model now developed through our information technology, and we're getting a lot of confidence in it.
On being able to kind of the on top of the oil market and where it's headed.
And the certainly the oil price is the biggest indicator.
But we are I think we will be able to determine.
When's the right time, when the opportunistic are counter cyclic time to to maybe consider share buybacks and of course now we have a lot of cash on the balance sheet and we.
We want to continue to to watch that and keep that who will have an opportunity. When we do have a downturn to have cash to do that if that happens.
Thank you Bill.
The next question comes from Neil Mehta of Goldman Sachs. Please go ahead.
Good morning team and congrats on a good quarter here. The first question is the bill of any updates on permitting on federal lands and how that process has been to apply for for new permits and in general in your conversations with Washington does it seem like some of the risks.
On the federal lands exposure in the Delaware has diminished.
Yes, Neal this is Billy Helms.
So on the permits the federal permits are certainly we were very active.
In obtaining permits prior to the administration change just to protect our activity levels has since the moratorium has been lifted we are receiving a steady stream of permits.
The permit.
Stream is coming very well.
We're receiving permits in all of our areas too so.
I think the working relationships, we've been able to maintain with the regulators.
And working through the process with them has benefited the.
We ended up that is real well so.
We're not really seeing any.
Restrictions, there and I think the body of administration clearly has said that.
Activity he wants to maintain activity on.
Valid leases so were very comforted by the fact that we will be able to continue that.
That's great guys and the follow up is just on the macro.
You guys talked a little bit about the tools that you have to evaluate.
Direction of oil price and the way things are trending would be curious if you can unpack what you're seeing real time on.
And how youre thinking about.
On the commodity price moving from here for both for oil and for natural gas.
Yeah.
Yes, Neil on the oil.
As we've already talked about the fundamentals are definitely improving the.
It's been a little bit.
See on the the.
COVID-19 recovery and oil demand.
But we're seeing very very steady improvements.
I think we're.
Up to maybe on 95 million barrel per day.
Demand right now and we think you know maybe maybe by the end of the year that will get the pre COVID-19 levels of somewhere around 100 million barrels a day.
We'll just have to watch it and see.
The inventories are dropping.
You know the.
Will be fairly consistent the draws on inventory from here on out, especially during the summer of pickup activity in.
So that's all looking really good and then the.
The spare capacity.
You know is going fine its been extended.
Rolling out a little bit further than what it started out to be at the beginning of the year, but we believe again as demand picks up that that spare capacity will be put back on line.
We don't want to give you. The you know are the date of when everything is okay. [laughter], we'll just have to watch and see it.
But certainly everything is going in the right direction on I think the market is.
Oil prices have responded to that I think it's the what we're saying and seeing is not different than what the consensus view is on.
On natural gas.
You know, we're a mildly bullish.
The inventories are low.
And the supply is less.
The demand is higher this year than supply so we're going to be entering the summer and the particularly.
Particularly the fall of the year.
And with pretty low inventories, so depending obviously as always depends on the weather on gas.
And so we'll just have to see see how all of that turns out but the.
We are we're optimistic on gas also.
The next question comes from Michael of the.
Paul Please go ahead.
Yes, good morning, everybody.
Highlighted for quite a long time in your ESG sustainability ambitions just wanted to see.
Where do you stand on the government on the price on carbon or of carbon tax.
See any economic opportunities in the energy transition for EOG.
Yes, Mike all of them on.
Asking a better.
That occurred to talk on that this the.
Before he starts or the.
The the carbon tax or issues like that we're going to leave those up to the the legislature's or not.
Come out with our opinions on that you know will work with the.
Whatever transpires on that so can you want to talk about other opportunities, we really have no interest in lower in a lower return business that this might lead to but we've really made excellent progress in reducing our emissions over the last four years and you can see that with our intensity rates coming down as indicated in the.
In the attached slides that we've got on the presentation there were.
We're focused on reducing our own emissions with projects that of competitive returns before we consider a second phase of applying technology, such as carbon capture to reduce our emissions and we do believe that we can use of 1% to 2% of our capital budget every year to make a substantial progress towards our goals of.
<unk> routine flaring by 2025.
I mean, that's been endorsed by the World Bank and our.
Ambition of scope, one and two net zero by 2040.
Okay. Thank you.
Bill you mentioned some of the things you're doing the lower well costs of the larger pads in the the Super Zippers.
Some of your competitors have talked about three mile lateral in the Permian.
I think you guys have done some of the two mile plus laterals in the Eagle Ford, but do you see the trend toward three mile lateral the particularly in the Permian or if not what are the issues that would prevent that.
Yes, Thanks, Michael.
Yes, Thanks, Michael.
So on the on the three mile laterals, you're right. We've done several I'd say between two and a half and three mile laterals on multiple plays where.
Where it makes sense and we do them.
The more predominantly in the Eagle Ford.
And then we've had some in the Bakken and also on the D. J.
So, but there are unique circumstances that allow that to happen for us in there more.
Driven by the geology in that particular area, but also the access issues on the surface.
Yeah, I think just as the general rule I am not sure that it always makes sense to go through two of three mile lateral I think you have to take into account.
The efficiencies of being able to complete that last mile of lateral economically compared to the.
Two mile lateral of those kind of things and in a lot of it does depend on the geology and as you know we spend a lot of detailed time working through.
The geology and how to best approach every single.
Well location, we have so.
There are some limitations on where you can do that effectively and so it's not of broadbrush approach.
Okay.
The next question comes from Vincent.
<unk> of Mizuho. Please go ahead.
Hey, guys. Thanks for having me on I wanted to ask on the double premium locations you might've touched on it last quarter, but if there was anything you need to the geology across east. Please.
That one's itself to higher productivity, but also the lower declines described on slide eight.
And if so how that might affect your pursuit of new opportunities that are double of premium.
You guys are differentiated in the pursuit and also on the development of those opportunities.
Yes, Ben this is Ezra yeah. That's a great question and you know what we're highlighting there are in the slide deck. It really comes down to what you touched on with the unique geology are these are the double of premium plays are usually in areas, where we've really refined our target down to get in our existing portfolio down to get.
Rock quality that is higher a better permeability and really the big step changes as we look forward end of the exploration prospects as we've talked about before we're looking for a.
New plays that historically, you haven't really been drilled.
Routinely with Horizontals, we're looking for a higher quality of rock that we can apply the horizontal drilling and completions technology to and really it's the it's the higher permeability higher porosity that lends itself to the shallower declines.
And we think that this is not only going to be a step change for our performance of the company going forward.
But really potentially those are going to be the new reservoirs are the industry. Eventually is looking at two to apply horizontal drilling too in the future.
Yeah.
Perfect. Thanks.
Maybe the second.
Any additional color that you can maybe gains on unconventional EUR, just where it stands on the Eagle Ford right now of thoughts on applicability across other please and then maybe how that could improve the environmental footprint going forward. Thanks.
Yes. This is this is Ken.
As far as <unk> goes in the Eagle Ford right now we've high graded our EUR process and we have some of our units that are that are in blowdown and other units that were continuing to inject into EUR is much more challenged in the higher gas price environment with our double premium returns. So we are evaluating it for.
The other areas based on that across the company.
The next question comes from Kumar <unk> of Wells Fargo. Please go ahead.
Hi, Good morning, gentlemen, in the first of all congratulations Mark.
Definitely a season of inspections.
Thank you Bill.
My question is.
Perhaps a little different from some of them together about the of net.
Over time I was wondering on slide nine migrated to this double premium strategy.
With the macro environment is favorable as it is.
What happens to the single premium on the lower half of your core inventory here is what I mentioned.
The exploration phase can have returned at as high of 80%.
So I'm just wondering is there an opportunity to with the A&D market opening to monetize some of those or how should we think about that.
Part of your inventory.
And that's the excellent.
Excellent question.
We appreciate it and I appreciate your compliments.
Yes, we are always evaluating property sales and I'm going to ask the can better kind of the two to comment on that.
In general for the company sure. Thanks Bill.
We're always high grading our portfolio and divesting of those properties with minimal double premium potential remaining and we.
We've actually sold about $7 billion in assets over the last 10 years.
And we will continue to high grade our assets as we see the market, giving them the fair value.
And certainly you know.
In the last few years it hasn't been a seller's market, but it is it will turn as people get short of inventory on.
We think that that the premium the single premium assets that we have you know even those are probably some of the best inventory on the in the industry.
So those certainly have a lot of value.
Okay and data on mid $60 oil and cost where they are today. They don't compete for capital within your program.
Yes, that's correct.
30% rate of return at 40 doesn't compete.
And our program right now it needs to be of 60% rate of return at 40 flat.
It's definitely.
A huge shift.
On a returns and.
That's what we've been talking about.
For the last several quarters interest.
In our script, our slides detail a lot of really good information, but certainly the shift of double premium.
As are we.
We believe by far the highest reinvestment standard in the industry and it is a clear separator for EOG.
It will drive exceptional performance for the company going forward.
This concludes our question and answer session I would like to turn the conference back over to Mr.
Thomas for any closing remarks.
Yeah.
In closing our excellent first quarter results are a testament to eog's ability to generate significant shareholder value.
We're proud of all of EOG employees and their outstanding contributions to continuously improve the company.
Our excitement about eog's ability to improve returns and increase value has never been greater.
So thanks for listening and thanks for your support.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.