Q3 2021 EOG Resources Inc Earnings Call
The strength of our current and future earnings and cash flow that supports both dividend announcements can be traced back to 2016.
Amid a potentially prolonged prolonged low commodity price environment, we made a permanent upgrade to our investment criteria.
Our premium hurdle rate was established not only to protect the company's profitability in 2016, but all future commodity cycles, the discipline to only invest in new wells that earn a minimum 30% direct after tax rate of return assuming a $40 oil price for the life of the well continues to improve our capital efficiency profitability.
<unk> and cash flow.
Our employees immediately embraced the challenge of this new investment hurdle and by the second half of 2016, EOG was reinvesting capital and paying the dividend within cash flow.
We have generated free cash flow every year since.
From 2017 to 2019, we generated enough free cash flow to significantly reduce net debt by $2 2 billion.
While also increasing the dividend rate 72%.
We also expanded our inventory of premium wells by more than three times.
Adding inventory that meets the minimum premium threshold increases quantity our goal through technical innovation and organic exploration is to add higher quality inventory or employees empowered by Eog's unique culture applied innovation and efficiencies to raise the return of much of the existing inventory.
While adding higher rate of return wells through exploration.
The premium standard established in 2016, and the momentum that followed provided a step change in operational and by extension financial performance, which set the stage for the second upgrade to our reinvestment hurdle rate double premium.
Double premium, which is a minimum return hurdle of 60% direct after tax rate of return at $40 oil was initiated during the depth of last year's unprecedented down cycle.
That capital discipline enabled EOG to deliver extraordinary results in a $39 oil price environment last year.
Using such stringent hurdle rates prepared the company not only for 2020, but for our stellar results this year.
There is no clear indication of the impact premium and now double premium has had on our confidence in eog's future profitability than the 82% increase to our regular dividend announced yesterday.
Combined with a 10% increase made in February of this year, we have doubled our annual dividend rate from $1 50 per share to $3 per share.
After weathering two downturns during which we did not cut nor to spend the dividend suspend the dividend the new annual rate of $3 per share reflects the significant improvement in eog's capital efficiency since the transition to premium drilling.
Going forward, we are confident the double premium will continue to improve the financial performance just like premium did five years ago. We're also confident in our ability to continue adding to our double premium inventory without any need for expensive M&A by improving our existing assets and adding new plays from our deep pipeline of organic exploration prospects.
Developing high return low cost reserves that meet our stringent double premium hurdle rate expands our future free cash flow potential and support the eog's commitment to sustainably growing our regular dividend.
EOG is focused on returns discipline growth strong free cash flow generation and sustainability remain constant just as our free cash flow priorities are consistent so remains our broader strategy and culture Eog's competitive advantage is our people and today's announcements are a reflection of our culture of innovation and execution.
Looking towards 2022 oil market supply and demand fundamentals are improving but remain dynamic.
While it is unlikely the market will be fully balanced by the end of 2021, we will continue to monitor macro fundamentals as we plan for next year, we are committed to maintaining production until the oil market needs additional barrels.
Under any scenario, we remain focused on driving sustainable efficiency improvements, we are well positioned to offset inflationary price pressures to help keep our well costs flat next year.
To summarize this quarter's earning release in three points.
Our fundamental strategy of investing in high return projects consistently executed year after year is delivering outstanding financial results.
Second we are still getting better.
As we continue to expand our opportunity set to add double premium inventory through sustainable well cost reductions and organic exploration EOG is set up to improve performance even further.
And third we are well positioned to execute our high return reinvestment program in 2022 to deliver another year of outstanding returns.
Here's Tim to review, our capital allocation strategy and our free cash flow priorities. Thanks.
Zero.
As we have been progressing premium the last five years, our capital allocation decisions have been guided by a set of long standing consistent priorities.
First is high return disciplined reinvestment.
Our returns on capital investment have never been higher however market fundamentals remained the number one determinant of women to grow.
Second is our regular dividend, which we believe is the best way to return cash to shareholders. We.
We have paid a dividend for 22 years without suspending our cutting it.
At the new level of $3 per year, we can comfortably fund, both the dividend and maintenance capex at $40 <unk>.
The combination of our low cost structure high returns and strong financial position will sustain this higher regular dividend.
This resilient financial position is backstopped by our third priority a pristine balance sheet with almost zero net debt.
We remain firmly committed to a strong balance sheet, it's not conservatism as a competitive advantage.
Fourth we regularly review other cash return options, specifically special dividends and share buybacks.
Yesterday, we declared a special dividend for the second time in 2021 and updated our share back share buyback authorization.
Share buybacks have always been part of our playbook and will remain an opportunistic cash return alternative.
We are cognizant of the challenges of successfully executing a share buyback in a cyclical industry.
We now expect there will be periods in the future when the stock will be impacted by macro factors such as the commodity cycle geopolitical events and other unforeseen events like the Covid pandemic in 2020.
The updated $5 billion authorization provides the flexibility to act and take advantage when the right opportunity presents itself.
We believe our strategy for the use of other cash return options as well designed to deliver value through the cycle.
Finally, we are not in the market for expensive M&A.
It is simply a low return proposition, we can create much more value through organic reinvestment in our shareholders can do better with their excess cash our premium strategy generates back in their hands.
Since our shift to premium in 2016.
<unk> has generated nearly $10 billion of free cash flow.
With that cash flow EOG has reduced debt $1 5 billion.
Increase the cash balance by $3 6 billion and will have returned more than $5 billion to shareholders by the end of 2021.
This is a significant amount of shareholder value driven by premium.
Today, EOG is positioned to translate that value creation into even more cash returns to shareholders.
In the third quarter, we generated a record $1 4 billion of free cash flow, bringing our year to date free cash flow to $3 5 billion.
Which is equal to the total return of capital paid and committed this year to a regular dividend two special dividends and debt repayment.
You can expect us to continue returning cash going forward.
There might be times, where we strategically increase or decrease the cash balance but over time, the cash will go back to our shareholders.
Here's Billy.
Thanks, Tim.
As a result of the to the consistency of our operating performance, we delivered another quarter of outstanding results.
It couldnt be more proud of the engagement of our employees and their culture of continuous improvement.
Their execution of our 2021 plan has been near perfect for.
For the third quarter in a row, we produce more oil for less capital that as we exceeded our production targets, while spending less than our forecast for capital expenditures.
Well productivity driven by our double premium hurdle rate continues to outperform while our drilling and completion teams push the envelope on new sustainable cost savings and expand those efficiencies throughout our active operating areas.
Examples include in sourcing.
In redesigning drilling equipment adopting innovative techniques to reduce nonproductive time expanding.
The expanding super zipper completion operations, and reducing sand and water sourcing cost.
Our ability to continue to lower costs and deliver reliable execution quarter. After quarter is tied to a common set of operating practices that together form a sustainable competitive advantage for EOG.
First.
We are a multi play company.
With activity spread across four different basins in the U S.
As conditions change, we have the flexibility to shift capital between plays to optimize returns.
Second we are organized under a decentralized structure.
Decisions are made by discrete focused teams closer to the operation rather than dictated by headquarters.
Our culture is non bureaucratic and entrepreneurial.
We empower our frontline employees to make decisions.
Leading them to drive innovation and efficiency improvements.
Third we have established strategic vendor relationships with our preferred service providers.
We are typically we are not typically the biggest beneficiary of price reductions during downturns, but you also tend to not be on the leading edge of price increases journey inflationary periods.
Fourth we have taken ownership of the value added parts of the drilling completions and production supply chain.
By applying our operational expertise and proprietary technology to improve efficiency and lower cost.
<unk> includes sand water chemicals drilling fluids completion design.
Drilling motors, the marketing of our products and much more.
As a result, our operating teams have complete ownership of driving improvements in every step.
And finally, we apply our world class information technology to every part of our operation.
Our data gathering and analysis capabilities.
To improve which we leveraged to better manage day to day field operations for more efficient use of resources as well as discovering new innovations.
As a result of these strategic advantages.
We are confident in achieving our target of 7% well cost savings this year.
This is an incredible accomplishment given the state of inflation.
And as we move into next year, we are on track to lock in 50% of our total well cost by the end of this year.
We have locked in 90 plus percent of our drilling rigs at rates that are flat to lower than 2020 and 2021.
We've also secured more than 50% of our completion crews at favorable rates.
While it is still early the savings from these initiatives and other improvement efforts will continue to be realized next year, helping us offset the risk of additional inflation and thus we remain confident that we will be able to keep well costs at least flat in 2022.
Now here's Ken.
Thanks Billy.
Last month, we published our 2020 sustainability report.
As detailed in this report we are focused on reducing emissions in the field, our flaring intensity rate decreased 43% in 2020 compared to 2019, which drove an overall, 9% reduction in greenhouse gas intensity, we continue to make progress toward our goal of zero routine flaring across all our operations.
By 2025 with our more immediate goal of 99, 8% wellhead gas capture this year. We also made significant progress on methane last year, reducing our methane emissions percentage by one third to less than 110th of 1% of our natural gas production since 2017, we've reduced.
Our methane emission intensity percentage by 80%.
Our sustainability report profiles, the technology and innovation that contributed to these improvements and illustrates why we are optimistic about future performance on our path to net zero by 2040.
Examples of how we are addressing emissions in the field include closed loop gas capture which helps us continue to reduce flaring.
We're leveraging information technology, and our extensive data analysis capabilities from both mobile platforms and our central control rooms to better manage day to day operations. In addition, we are piloting technology in the field such as sensors and control devices that complement our already robust leak detection program.
These are just a few examples of the initiatives we have underway like all efforts at EOG, our sustainability strides are bottom up driven creative.
Creative ideas to improve our ESG performance come from employees working in our operating areas. Every day, we have a long list of solutions, we expect to pilot and profile in the future.
Our record of significantly reducing our GHT intensity over the last several years speaks for itself and we're committed to continuing to improve our emissions performance.
Now here's Ezra to wrap things up.
Thank you Ken.
Our record breaking operational and financial results throughout this year and the cash returned announcements we made yesterday deserve to grab some headlines however, the real story behind our performance is consistency of strategy supported by our unique culture.
At the start of the call I said, there is no clear indication of the impact premium and now double premium has had on our confidence in eog's future profitability than the annual $3 per share regular dividend.
And while establishing the premium standard back in 2016 shifted us into a different gear, culminating in the magnitude of our cash return this year, our fundamental strategy executed year after year by employees United by a unique culture dates back to the founding of the company.
That's ultimately what gives me confidence that Eog's best days are ahead.
We are a returns focused organic exploration company that leverages technology and innovation to always get better.
Decentralized non bureaucratic every employee is a business person first focused on creating value in the field at the asset level. Our financial strategy has always been and remains conservative not just to offset the inherent risks in a cyclical business, but to take advantage of them.
We are committed to the regular dividend and believe it is the best way to create consistent and dependable long term value for shareholders. We.
We have a proven track record that our strategy works and going forward investors can expect more of the same consistent execution year after year.
Thanks for listening, we will now go to Q&A.
Thank you the question and answer session will be conducted electronically.
If you'd like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
<unk> preliminary to one question and one follow up question, we will take as many questions as time permits.
Once again press star one on your Touchtone telephone to ask a question.
If you find your question Thats been answered you may remove yourself by pressing the Stark star two key we'll pause for just a moment to give everyone an opportunity to signal for questions.
Our first question will come from Paul Cheng with Scotiabank. Please go ahead.
Thank you and good morning.
Two question piece.
First.
You have the authorization for the buyback, but quite frankly, I don't even call yes.
And the buyback.
Yes.
So can you talk about what is the condition.
Conditional quite keyword.
To actually act on yet.
In theory.
<unk> willing to buy it when the market is suffering.
Does that mean that you.
Use it have a really strong balance sheet going into the.
Into that.
Long term may be at a net.
Net cash position.
But yes in order for you to be able to afford it.
Yes.
Hey.
At the top of the pandemic I'll say of pilots we need it.
But I'm not sure that you asked upon shape all of that that we need to do the buyback at that point.
So thats the first question.
The second question, yes on the hedging.
You have been quite aggressive putting on.
A lot of natural gas hedges.
With that I mean, with your low breakeven requirement and a very strong balance sheet.
Why put on hedges, so up rapidly and to some degree even though yes, it musical bellow or mcf debt to support yet, but yes that does.
The fundamental thing is that it's become a speculation on the direction of commodity prices.
When youre doing badly.
Thank you.
Yes. This is Paul thanks for the question.
Start by just outlining a little bit on the buyback and then I'll hand, it to Tim Driggers for a little more detail on it.
Youre right were buyback authorization, we've had one previously and we have an exercise that in quite some time, what we've done right. Now is we've refreshed it to a size thats little more commensurate with the scale of our company today.
And we plan to exercise.
The buybacks and more of an opportunistic way rather than something something programmatic is how we expect to be able to use it.
I'm going to ask Tim to provide you a little more details on exercising it sure.
Microphone I'm sorry.
First of all we will evaluate buybacks like any other investment decision how does it create long term shareholder value. So that'll be the first thing we will have to look at every time, we make this decision.
Specifically to answer your question about <unk>.
We have started during the pandemic, but didn't have the financial wherewithal to do that Youre exactly right at that point in time oil was negative.
Price of oil was negative we had two bonds coming due totaling $1 billion. So had we been in the shape. We are in today that would have been a perfect time to buy shares, but we werent in that same position. We are today, that's how that's why continuing to work on the balance sheet and positioning ourselves for the future has been so important to EOG. So.
We should not ever have that situation again, we have positioned the company to be able to opportunistically take advantage of these situations.
And Paul on the second question regarding our hedges, specifically gas, but but really in general you know our hedging strategy hasnt changed at all.
We invest on a very very stringent.
Our hurdle rate, our premium and now double premium rate that's based on a $40 oil price, but it's also based on a $2 50 natural.
Natural gas price for the life of the well and so when we can opportunistically look to lock in some hedges north of $3. We feel very good about the returns that we're generating going forward on on the gas price in.
In general we like to have.
A bit of hedges put on whether oil or gas to just give us a little bit of line of sight into our budgeting process as we as we enter into a new year.
So really that's the that's the commentary on both the gas and the oil oil hedges.
The next question will come from Arun <unk>. Please go ahead.
Yeah, good morning, everyone.
2021 cash return to equity holders as tallied just under 30% of CFO.
If you add in that it's around 36% of your CFO.
I know that there is no formal framework in place, but how should investors be thinking about cash returns on a go forward basis.
And could this 30% be viewed at some sort of benchmark.
Yes, Arun this is Ezra no I wanted to I would not take that as any type of benchmark.
But I think we've been very clear for the last couple of years and talking about our framework for cash return really just our free cash flow priorities.
Emphasis the priority really is on a sustainable growing regular dividend, we think thats. The hallmark is forward looking and that's a hallmark of a very strong company. It hopefully sends a signal to everybody that our confidence in the growing capital efficiency of our company.
Obviously, we've talked about some low cost property bolt on acquisitions, we've highlighted those on the last call and in the slide deck today.
We obviously come at a very strong not just strong, but really a pristine balance sheet and then to the last part of really the other part of your question is our other cash return options for excess free cash flow, which is a special dividends and then as Tim was just mentioning.
Some of the share repurchases and as we've said, we're very committed to returning excess free cash flow. We have stayed away from a specific formula because we'd like to be able to.
We try not to run the company on a quarter to quarter basis, we try to take a longer view of things. We realized that there are times when potentially the cash on hand may need to move up or down.
Regardless of it over the long term.
I think we've demonstrated especially this year that we're very committed to returning that excess free cash flow.
Great and my follow up.
With the dividend increase to $3 on an annualized basis.
That will represent just over $1 seven.
$5 billion in annual outlays to equity holders of the dividend.
Should investors be thinking about.
Future growth does it temper how we.
We should think about longer term production growth given the higher mix of dividend payments.
Yes Arun.
Up this year.
In the in the regular dividend is really a reflection of what we've been doing for the last five years and reinvesting in the premium wells.
We've seen it slowly, but surely show up in our financial performance as we've lowered the cost basis of the company and the confidence going forward really is what we're seeing with our change in focus over the past 18 months to these double premium wells, we feel that it's providing another step change in operational performance that should filter through to <unk>.
<unk> change in financial performance as we've witnessed with that change to to premium and then our inventory of course is spread across multiple basins.
5800 of these double premium locations and over 11000 of the premium locations and we're adding to that every day.
Our employees are working.
Through either low identifying low cost bolt on acquisition opportunities sustainable well cost reductions as we've highlighted this quarter stronger well productivity.
And then of course, our low cost entry into organic exploration opportunities to further expand both the quantity and the quality of that inventory. So I think as we continue moving forward.
Sticking to our game plan of investing in double premium it has the potential to continue to expand the free cash flow potential of EOG and thereby continue to provide an opportunity for us to remain committed to.
To sustainably growing our dividend.
Our next question will come from Jeanine Wai with Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
Our first question is on this special dividend.
In terms of the timing and the process for that when you looked at the potential to announce one.
What did you see this time around that perhaps you didn't see last quarter, when you decided to forgo a special dividend.
Hi, Janine this is Tim so as has already been stated we are committed to our free cash flow parties that has not changed so we look at all the factors every quarter to determine when is the right time to do either special dividend or now the share buybacks or increase the regular dividend. So when we looked at our cash.
At September 30 was sitting at $4 3 billion.
That gives us that.
It leaves us well positioned to pay off our bond in 2023 and provide this $2 special dividend. So it's a combination of all those factors and we felt this was a meaningful meaningful amount of cash to return at this time.
Okay, Great and then my second question, maybe following up on Irene's question.
Base dividend so the large increase in the base. It seems like it's a catch up to close the gap between what the business can support given the premium and double premium wells like you just said and what was actually getting paid out.
In terms of the timing also on the base or just curious how much of a factor the potential that you see in your exploration. Please factored into the decision to increase the base.
Yes, Jeanine this is Ezra again.
It's not just the exploration plays its really just our confidence in being able to expand the overall inventory the quality of the inventory into that double premium in and some of it comes from the announcements that you saw in this quarterly.
On the quarter results, the stronger well productivity supporting better than guidance volumes, the better than guidance capex driven by sustainable well cost reductions so when I think about that.
About our existing inventory increasing in.
Performance in quality, and then I think about converting some of our premium wells into double premium status.
And then of course, we have identified.
Small bolt on acquisitions, where we can continue to grow and expand that that that inventory level for us.
And then as you highlighted we've got the organic exploration mix we're drilling.
<unk> wells this year that we've talked about that are not in the publicly disclosed plays those plays are at various states of either.
Initial drilling collecting of data or.
Evaluating as we've talked about on other calls repeatability.
Production performance of those plays and so we're very excited and confident in our ability to continue to expand and as I said increase the quality of our of our double premium inventory and ultimately that's what gives us the confidence.
To be able to see that we can continue to lower the cost base of the company.
Increase the capital efficiency of EOG and continue to support.
A sustainably growing base dividend, which is which is our commitment.
Yeah.
Our next question will come from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
So in your deck, you mentioned, a carbon capture pilot project, which is interesting.
So can you speak to your army ambitions and carbon capture are you looking strictly at what.
Are you investigating.
And what level of resources have been committed in parallel to the Michigan.
Yes, Scott I appreciate the question I'm going to ask Ken <unk> to address it.
Scott.
We're continuing to make good progress on that initial carbon capture project that we've talked about.
We finalized many of the below ground geologic studies and we're currently working on the engineering and regulatory portions of the project.
As we work our way through these steps, we'll get more clarity on timing, but right now we hope to initiate <unk> injection in late 2022 in terms of capital that we're allocating towards it it's roughly 2% to 3% of our budget.
It's going to be allocated towards all of our ESG projects is what we see.
Got it and as we investigate the opportunity yeah how.
How are you thinking about participating.
In the value chain would you be interested in entering.
<unk>, obviously, it's an exciting opportunity.
It is more capital intensive as you kind of broaden participation.
Just how you're thinking about.
The broader opportunity in participating across the value chain.
Yes, Scott, we're really not going to change the business that we're in we're looking at carbon capture right now to significantly reduce our our scope one and scope two emissions at this point that that business has a much lower return business than what we see with our with our well development that we have so we will keep an eye on that but our.
Our real.
Goal for carbon capture is just reducing our scope, one and scope two emissions, which we've.
Made significant progress on in the last several years.
Yeah.
Our next question will come from Leo Mariani with Keybanc. Please go ahead.
Hey, guys just looking at the guidance here for fourth quarter, we can certainly see some pretty significant growth in U S. Gas, obviously looking at gas prices right. Now we are at multiyear highs at this point in time should we see that as a bit of a signal that EOG is perhaps flat.
Clean up a little bit on the natural gas side to try to capture what it probably some fantastic returns at the current prices here.
Yes, Leo this is Billy Helms so on the.
Capex add certainly part of our program as we laid out earlier this year was to advance some of our Dorado prospect in South Texas as you know, it's a very competitive gas play with the rest of the plays in the U S.
We've been very pleased with the results there, but we remain we remain disciplined to only complete the 15 wells were targeted and laid out it started this year.
And it's really a little bit early to be talking about what we're going to look like next year, but obviously with the results. We're seeing we're very pleased with the results being meeting or exceeding the type curves. We have laid out that certainly gives us an option.
To look at increasing activity there.
So it's a little bit early yet to be saying, what we're going to do next year, but we're very pleased with what we've seen.
Okay. That's helpful.
And I guess, obviously in your prepared comments you certainly spoke about the fact, it may be challenging to kind of meet all of the necessary conditions at year end.
'twenty one.
I'll have had laid out to put any type of real oil growth back into the market at this point in time, but.
I guess, we certainly heard some rumblings lately that.
Perhaps you might already be it kind of pre pandemic demand levels here as we work our way into November I think OPEC plus has a plan to reduce its spare capacity pretty dramatically by mid 'twenty. Two I just wanted to get a sense. If you think perhaps in that.
Mid to second half part of 'twenty two there's a good shot at kind of hitting the conditions at EOG laid out to potentially put a little growth back into the market.
Yes, Leo this is Ezra.
As Billy said typically we don't provide guidance.
For the following year on this call, but in general our focus on.
2022.
Essential for that and US as you highlighted the things that we're looking at we're focused on remaining disciplined and that Hasnt changed as we look into 2022. They are the three items that you referenced that.
That should signal a bit of a balanced market that first is demand, which has probably surprised to the upside a bit with just how quickly.
We've approached pre COVID-19 levels. The second is going to be the inventory numbers, which for us we'd like to see at or below the five year average.
They are currently.
There right now, but that brings up kind of that third item that you spoke to which is the spare capacity.
And we'd like to see that spare capacity back to low levels.
More in line with historic trends so as we sit here today 2022 is looking like a year of transition.
Spare capacity is going to come back online at the scheduled rate that should translate into rising inventory levels and if things move forward, we could be looking at a balanced market sometime in the first half of 'twenty two.
For us for EOG in a scenario like that we could probably return to maybe our pre COVID-19 levels of oil production around that 465000 barrel a day mark that would represent no more than 5% growth next year, but again, that's as we're sitting here today, we will be officially firming up that 2022 plan.
Watching how the market develops over the next couple of months.
But as we are witnessing.
Bringing spare capacity back online has hit some snags so we're watching to see if.
Is that more routine startup challenges or is that more structural in nature due to underinvestment and those two factors are going to be just as important as seen how the continued demand recovery from COVID-19.
Really develops with any potential future lockdowns and so on and so forth. So ultimately we continue to remain to be discipline going forward.
Yeah.
Our next question will come from Charles Meade with Johnson Rice. Please go ahead.
Good morning.
Do you and the whole EOG team there.
You actually anticipated a large part of my question with your answer to the last one, but maybe just to touch.
To dial in on it a little more closely how far out do you think your view holds.
Your ability to look at.
The balance or unbalanced in the wall market and then.
And then once you did see a call to two.
To increase your oil activity, how long would it be before we actually saw it in the public markets.
Our quarterly financials.
Yes, Charles Thanks for the question I'll answer the first part of it and then ask our ability to provide a little bit more color also.
How far out we can see the balance of the imbalance to be perfectly honest, we're watching a lot of the same things that all of you are those three things that we highlighted demand has recovered pretty aggressively I would say I think it's surprised everybody and then the inventory numbers in concert with the spare capacity coming back online and the spare <unk>.
Pasty again, if you simply look at the schedules that have been laid out and everybody sticks to the schedules and the supply actually comes back online that would contemplate some sometime in the front half of the year, but as I highlighted and everyone's been seen there are some.
Challenges or hurdles to getting all of that spare capacity back online as.
As far as the color on on what we would be looking at perhaps.
Speak to it.
Yeah Charles.
For as far as how long it would take before we'd see any response, especially showing up in our financials.
If you just simply look at when we see the signal in the meantime, we deploy rigs and get the wells completed and on production takes usually three to four months.
So you'd start seeing it no earlier than that but probably sometime a quarter or two after so to have a meaningful difference in financial performance.
Got it so if I'm understanding you correctly it would be two quarters, maybe you start to see it nearly three quarters before there was a there was up.
A real Delta.
That's correct.
And then just one quick follow up for Tim and I think you partly addressed this in your.
Earlier comment.
In the past I recall, you guys have talked about.
A target of $2 billion of cash on the balance sheet with this new $5 billion share authorization in slightly different posture about about wanting to.
To have some dry powder does that mean that your target for 2 billion of cash and I recognize you're not always going to be at the target, but does that mean that the target has gone north of that.
Sure.
So is it going to three or four or what's your thinking.
No we haven't changed our target we will continue to monitor that through the cycle and see theres all sorts of factors, we have to take into consideration for the cash balance as you know.
Working capital changes for example.
As prices swing up and down so that's a big consideration, but no. It has not changed the authorization has not changed our philosophy on the cash balance.
Our next question will come from Neal Dingmann with <unk> Securities. Please go ahead.
Good morning, all.
I don't want to belabor. This just just on the growth of the investment, but I just want to make sure I'm clear on this you guys have been quite clear about returns I just want to make sure that I'm certain around the priority.
The moderate and the reinvestment rate in order to drive the cash returns is that what I'm hearing over growth.
Yes, Neal when we think about moving forward.
We've done a lot on reinvesting and <unk>.
This company to take a bit of a step away from the commodity price cycles by focusing in on the on the premium wells and now double premium strategy. The growth for US has always been an output of our ability to reinvest at high rates of return.
Through 2017 to 2019.
During a period of rapid growth for the industry. In fact, we are reinvesting only at a rate of about 78% and still generating free cash flow every year and putting that towards an aggressively growing base dividend. So the strategy for us hasn't really changed I think we've talked about potentially.
Potentially watching the macro environment, a little bit more to help.
Formulate our plans year to year, and that's where it falls in line with with what we've been discussing over the last couple of questions.
We'll remain very committed to that we don't want to push barrels into a market, that's oversupplied or doesn't need the barrels and so we'll be looking for the right time.
To see if the market needs our barrels before contemplating any any returned to growth.
Okay very good very clear and then just follow up on.
Asked earlier about you it looks like you all had been added a little bit of gas hedges is that in relation to does that mean that your <unk> been increasing the focus on the Dorado play given what.
Natural gas prices are doing so I guess I'm just wondering.
The two correlated or are you adding to that.
Activity in the Dorado.
Yes, Neal this is Billy Helms, so as far as the volume of gas hedges and what we've been doing there. It really is not focused strictly on Dorado, it's simply.
It goes back to our premium strategy that as we just laid out it's based on a $40 oil and $2 50, St gas price, we saw the opportunity to lock in gas prices above $3. So it gave us encouragement of locking in returns over the next several years at those prices.
We have gas production quite a bit as you know in Dorado, but also quite a bit in other places as well. So it just helps ensure locking in returns over a multi year period.
Our next question will come from Scott Hanold with RBC. Please go ahead.
Yeah, Thanks, I'm going to try as or I know, you'll probably give you. The answer that you will talk about the budget next year, but if I could talk about it more big picture. If we all think of just the base maintenance spending levels into 2022.
Wood.
As the capital change too much from what you all did this year like what would be the puts and takes from that because it seems like your well costs are going to hold pretty steadily. So is sort of your maintenance Capex case. This year somewhat similar to what it would be next year, all else being equal or are there anything else to consider.
Yes, Scott This is Ezra <unk> will talk about next year's budget next year.
I would say that a little bit facetiously for you, but but quite frankly, I think we haven't updated our maintenance capital number.
Yet we will provide that number commensurate with our with our plans laid out next year, but I think what you can see that our team continues to make great progress.
Aggressive sustainable well cost reductions.
Through their efficiency gains on applying innovation and technology.
Billy highlighted pretty well that we feel very confident that we achieved our first initial goal I should say, a 5% well cost reduction and we're in line to reduce our cost 7% this year.
We feel that a lot of those costs are what's going to insulate us against some of the inflationary pressures out there.
And how about like just on was there anything unusual you would say this year that we should think about next year in terms of like exploration play. Our ESG spending is that is there any reason for us to think about that any differently.
No Scott really over the last few years, a lot of our percentage dedicated towards exploration and ESG have been pretty consistent.
Our next question will come from Doug Leggate with Bank of America. Please go ahead.
Thanks, Good morning, everybody.
Well I think youre share price reaction today, I think you can see the.
The market's response to the greater cash returns I'm.
I'm wondering.
Why.
Why is the reluctance seemingly still.
From EOG to provide a framework around the proportion of cash returns.
It seems to be persistent.
Body or perhaps the recognition of sustainable free cash flow, which at the end of the day is what defines the value.
I'm just wondering why there's reluctance to commit to what at least some kind of framework as to how you think about the go forward contract terms as opposed to one or special.
Hands.
Yes, Doug.
It's a question that we've been answering and and we feel that.
We have we have provided a framework for our free cash flow priorities. It's as you mentioned the sustainable growing base dividend.
To strengthen the balance sheet. These low cost property acquisitions, and then more on point with your question to the other cash return options, which are special dividends and opportunistic share repurchases and then a lot of ways. When we look back I think we've shown our commitment to that not only this year.
Committing to to $2 7 billion.
Turn in dividends over a year to date free cash flow generation of about $3 5 billion, but I think we added a slide into the deck that shows longer term, what we've been able to do.
And providing just over five.
Just over $5 billion of free cash flow return since 2016 on about $10 $9 billion of free cash flow generated and so I think we've laid out a framework I think are too.
Announcements this year on special dividends totaling $3 per share on the specials really demonstrates our commitment to it and as far as having the.
The ability for our investors to see through and capitalize on that number I think we've demonstrated our commitment to the point, where the investors can can capitalize on some of our excess free cash flow.
Thus.
We still remain committed to delivering on those free cash flow prior priorities.
We do want to continue to make decisions based on what we think will create the most significant long term shareholder value.
And that means sometimes not necessarily running the business on a quarter by quarter basis, but really taking a longer term approach and so locking ourselves into a formula that might have to change as.
Conditions change is really at the at the heart of our reluctance to do that.
Yes, I understand I guess.
So moving pieces and maybe my follow up is related then I wanted to talk specifically about the buyback.
There's been a lot of reference to the $6 19. The history. There was a subsidized environment you double production.
Dave has taken off the market, we will see how that ended so we know what the response.
Response to the industry has been but I want to get specifically to your view of mid cycle.
How do you think then about the relative priorities around the mid cycle. What is your definition of that cycle.
How should we think about growth versus per share given the buyback you mentioned.
Well, Doug I don't think im comfortable getting into.
Mid cycle metrics on here, but.
What I would tell you is we continue to think of this buyback is opportunistic we think again.
With our authorization in place we want to use it in a way that we feel confident we're going to be generating long term shareholder value.
More often than not for us that's going to tend towards special dividends and we're going to reserve our buyback authorizations to be used really just in times of.
Dislocations and you use it opportunistically rather than a more programmatic method.
Our next question will come from Bob Brackett with Bernstein Research. Please go ahead.
Good morning, it looks like you've turned a couple pads on in Dorado and the.
Third quarter, any color or commentary there hitting expectations exceeding.
Yeah, Bob This is Ken.
I've always said earlier, we have turned on several wells in the last few months and the color is all of them are at or above our type curve and what our plans were going into the end of the year. We do have one drilling rig active in the play right now and we're really moving rapidly up the learning curve.
Again, just to reiterate this play has really doubled premium returns and it's competitive for capital with our oil plays.
Okay, great. Thanks for that.
Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning, good morning team as our new CEO has an opportunity to put their own thumbprint on the business and record breaking.
<unk> recognized that you were a part of.
The prior leadership team as well, but just talk about your early observations as the new leader of the organization any subtle changes that youre, making in talking about your messages.
To your internal and external stakeholders.
The market to be aware of.
Yes Neal.
I appreciate the question on the opportunity I think the biggest thing for our investors our employees.
Everyone, who is listening to the call is that EOG has got a proven track record.
Our strategy works the shift to premium strategy has put us on a different trajectory and the shift to double premiums going to do that as well the culture of EOG.
People at EOG has always been our competitive advantage and that will continue to be that way.
Honestly Neal the most important thing we can do as a leadership team is.
<unk> put our employees in a position to succeed where they can really contribute to the best of their abilities and that's what we try to do every day and that's going to translate into our not only our operational performance that would you see the results of this quarter, but to our financial performance as well.
Thanks.
Follow up is I appreciated the slide that shows the breakdown of the well cost and how you guys are ahead of your competition in terms of.
Managing and mitigating some of these inflationary pressures as you step back and think about the U S oil industry broadly do you think this is ultimately going to be a challenge these inflationary pressures to restart the shale machine.
And in which of these bottlenecks.
Do you worry about the most in terms of being a constraint on the ability for the industry to grow again.
Yes, Neal this is Billy Helms.
Certainly as the industry is seeing.
We're seeing quite a bit of inflationary pressure, mainly in three areas I would say steel prices so tubular.
Labor, which certainly affects all industries and then fuel.
Those are probably the three inflationary pressures that.
Throughout the Oregon throughout our industry and really throughout all industries.
The one thing that I think is going to be or maybe two things two top priorities would be.
Probably steel I think availability of tubular is something that I think most companies are are struggling with or dealing with I guess.
And then the other one would be labor and just getting enough people to manage the activity levels.
Maybe you can give you a little bit color then on where EOG sits you know each year, we try to do.
Get ahead of the curve and lock in a certain amount of our services to secure activity.
But in this case also protect us from inflation.
So for instance in 2021, we've protected about a 65% of our well costs going into the year.
And as a result of that plus the improving efficiencies, we were able to reduce our average well cost by about 7% as was stated earlier.
So during the year, though we also took advantage and renegotiated many of our services.
Lower rates and locked in through and through the end of next year.
So going into 2022.
We expect to have about 50% of our well cost secured.
And with over 90% of our drilling rigs secured at lower rates and also 50% of our Frac fleets secured.
So we expect to see inflation certainly in items, such as steel labor and fuel just like everybody else.
But by doing that we've given our sales visibility into areas of also improving efficiencies that.
We expect to offset much of this inflation. So we're still confident we can keep well costs.
<unk> flat going into next year.
Our next question will come from Michael <unk> with Stifel. Please go ahead.
Okay.
Yes, hi, good morning.
High level question.
On your long term outlook as you think about the energy transition how are you thinking about oil versus natural gas is there any preference there.
Are any of the exploration plays focused on gas or are they all on oil.
Yes. Thank you Michael you know long term, we believe the.
Hydrocarbons are going to have a.
<unk> be a significant part of the.
The energy solution long term, obviously, we need to do as an industry a better job with our emissions profile, but when you think about oil and natural gas you know they both go to different different.
Markets are dominantly your natural gas essentially is more on your power side and potentially in direct competition with things such as coal and renewables and then your oil transportation that your oil obviously is a little more focused on transportation in general and I think longer term I think the energy transition is going to be significantly slower.
Then then oftentimes you hear about and we're very bullish on the prospects for both.
As far as the exploration plays go as we've said in the past dominantly to exploration plays are all oil focused.
Okay. Thanks for that and Ken you had said on your pilot.
Ccs pilot I think you said you plan to inject.
Late 'twenty two that seems to suggest you would not need a class six permit. So I'm wondering is it fair to say you're reinjecting two into an EUR project.
And when you say, it's not really economically competitive with your upstream business are you planning on capturing 45 tax credits with any of your projects.
Yeah, Michael this is Ken.
To answer your question on the on the tax credit side, we are planning on capturing those 45 acute tax credits our goal in terms of what class of permit that we would secure.
We believe that we will initially secure a class II permit that can be converted will go through all of the regulatory requirements to be able to convert it to a class. Six later later in its in its life, but thats what the plan is for our our Ccs project at this point.
Our next question will come from Paul Sankey with Thank you research. Please go ahead.
Hi, guys.
Just very quickly on <unk> could you talk about your LNG or downstream natural gas strategy.
Oh, Hey, good morning Atlanta.
Thanks for your question and good morning.
The team is definitely executing.
<unk> seen several of our slides that we've put back talking a lot about our our transportation position and still incredibly valuable we can move.
Gas from all our different basins from the Permian basin from the Eagle Ford and we talked a lot about Dorado earlier, and then with that it gets access as you look along the Gulf Coast and you look at the LNG demand, especially thats growing over time, obviously, we've got a position.
Are there that we started.
And just really speaks to being a first mover and especially when you think about LNG. We went through a whole BD effort kind of 17 and 18, we got the contracts finalized in 2020 and in 2021, obviously, we're definitely seeing that.
The value of that contract.
So being a first mover is absolutely important and.
Yeah.
We're going to continue to look at new opportunities from an LNG standpoint, and very well positioned again it gets back to our transport.
Our export capacity and just having that ability to transact we can definitely be very nimble as we think about new opportunities.
Got it and then a follow up on the buyback I'm not clear, you're saying that it's a shelf ability to buy back shares. When you won or are you actually going up.
Try and get through this amount in let's say the next 12 months.
Alright, Paul This is Tim we do not have a timeline on when we plan to buy back $5 billion.
When the opportunity presents itself, we will be in the market.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jacobs for any closing remarks.
We just want to thank each of you for participating in our call. This morning, and thank our shareholders for their support as I highlighted at the start of the call.
<unk> competitive advantages our employees and they deserve all the credit for delivering another outstanding quarter. So thank you and enjoy the weekend.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.