Q1 2022 EOG Resources Inc Earnings Call
At 28%, including doubling our dividend last year.
Today, our regular dividend not only leads our E&P peer group it is more than competitive across all sectors of the market.
More recently, we have supplemented our regular dividend with significant special dividends, reflecting our commitment to both capital discipline and returning cash to shareholders.
While we are proud of our cash return track record, we acknowledged shareholders desire for more transparency and predictability to.
To provide bolt, we recently formalized and yesterday announced our cash return commitment of returning a minimum of 60% of annual free cash flow.
Going forward, our intention is to evaluate and pay the regular dividend and consider options for additional cash return every quarter.
The addition of quantitative guidance to our cash return framework reflects our confidence in our business the pandemic driven volatility in the oil and gas market is stabilizing however.
However, the macro environment continues to evolve with the war in Ukraine, and other geopolitical events, we've proven to ourselves over the last several years that our business is resilient through the cycle, including unprecedented shocks to the industry.
Credit for Eog's resilience for the steady improvement in our ability to generate free cash flow in any environment and the ability to make this free cash flow commitment to our shareholders goes to our employees, who embraced our premium return hurdle rate six years ago, which requires that all investments earn a minimum of 30% direct after tax.
Rate of return using a $40 flat oil and $2 50 flat natural gas price.
Last year, we doubled the minimum return to 60%.
Both the premium and now double premium hurdle rates have positioned the company to have an outstanding year in 2022.
In spite of the ongoing inflationary and supply chain issues facing our industry our employees outperformed during the first quarter and are positioned to deliver on our annual capital and volumes plan.
We have decades of low cost high return inventory that support the consistent financial performance that our shareholders have come to expect and that drives long term value.
Our inventory spans multiple assets across oil combo, and dry natural gas basins throughout the country, which enables us to pursue the highest netback by diversifying both our investment and sales market options.
We also continue to explore.
A year and a half ago, we announced Dorado a premium dry natural gas play, where we've captured 21 tcf of resource potential net to EOG.
In a moment, Kevin will update you on the progress we've made on well performance and well costs and what we believe is the lowest cost and lowest emission source of natural gas onshore U S.
Our organic exploration program has grown our premium inventory by more than three five times since the premium metric was introduced in 2016.
So our exploration program isn't focused on adding more we're looking for better inventory.
New plays like Toronto, and the potential we see in our current exploration pipeline gives us confidence we will continue to grow and improve our double premium inventory in the future as we have done in the past.
While we have earmarked and committed to return a minimum of 60% of annual free cash flow, our longstanding framework and priorities for total free cash flow are unchanged, our sustainable growing regular dividend a pristine balance sheet additions.
Additional cash returned to shareholders through special dividends and opportunistic stock buybacks and low cost property bolt ons.
Sustaining and growing the regular dividend remains our highest priority and reflects our confidence in the long term performance of the company.
Our pristine balance sheet as a strategic advantage functioning as a shock absorber that also provides the flexibility to exercise a buyback when the opportunity arises and to take advantage of other counter cyclical investments.
Additional cash returns through special dividends and buybacks compliment our other priorities and together with our free cash flow minimum return guidance support our goal to create significant long term shareholder value.
Now here's Tim to review our financial position.
Thanks, Andrew.
Our ability to refine our longstanding cash return framework by providing quantitative guidance is made possible by eog's outstanding operational and financial performance.
In the first quarter EOG earned $2 3 billion after adjusting items were $4 per share.
We generated $2 $3 billion of free cash flow.
Capital expenditures of 1 billion were near the low end of the guidance range, while production volumes in total per unit cash operating cost finished better than targets.
Our confidence is further bolstered because we finished the quarter in an incredibly strong financial position totaled.
Total debt on March 31 was $5 $1 billion. This includes the current portion of debt of 125 billion.
The bond that matures in March 2023 that we intend to pay off with cash on hand.
Cash on March 31 was $4 billion for a net debt of $1 1 billion.
This yields a debt to total capitalization ratio of four 8%.
The $4 billion cash balance excludes $2 4 billion of collateral for hedges held by our Counterparties.
The amount of collateral fluctuates with oil and natural gas prices.
These short term timing differences in cash flows are not considered in our calculation of free cash flow and do not influence our decision on the timing or amount of cash returned to shareholders.
To that end EOG has declared special dividends. So far this year totaling $2 80 per share on top of the regular dividend of $3 per share on an annual basis totaling $3 4 billion.
Our objective in establishing our cash return guidance was to make it simple dynamic so that is easily communicated and understood while remaining suitable under a range of commodity price scenarios.
The actual amount of cash returned each year as a product of our long standing free cash flow priorities. These have not changed.
The size of our regular dividend is now the largest of our E&P peers and the strength of our balance sheet supports our ability to return a large portion of free cash flow back to shareholders going forward under a range of scenarios.
The $1 80, San special dividend declared yesterday, along with the 75 regular quarterly dividend demonstrates significant progress toward our commitment to returning at least 60% of our 2022 free cash flow to our shareholders.
Subject to commodity prices the amount of free cash flow available and the board's discretion. Our intention is to return cash through special dividends or stock buybacks on a quarterly basis going forward.
Here's Billy.
Thanks, Tim.
We had a great start to the year, our first quarter volume capital expenditure and total per unit cash operating cost performance exceeded our forecasted targets were.
We're also pleased with our progress to date offsetting inflation and managing well cost.
Our drilling teams continue to reduce drilling days and generate consistent performance improvements.
Use of self sourced downhole tools as well as minimizing downtime and mud losses remain areas of focus to improve performance for.
For example.
Drilling times, and our Eagle Ford oil play continues to improve.
Decreasing 28% in the last five years.
The average well is now drilled in less than five days.
On the completion side, we have increased the amount of treated lateral per day by about 10% over the last year as we further deploy the super zipper technique.
We are now using this technique on more than half of the wells completed in the company.
And expect to increase they choose further as we progress through the year.
In addition, our self source sand program is providing a tremendous advantage and we expect to further offset additional inflation throughout the year.
When we established our plan at the beginning of the year, we knew the unusually tap supply constraints initially sparked by the economic recovery from the pandemic would present a unique challenge take.
Taking these headwinds into account. This year's plan was developed with none efficiency improvements that would maintained well costs flat with last year.
While we have seen increased deal in fuel prices directly associated with the war in Ukraine. We are confident we can still deliver on the capex and volume targets in our original plan.
Rather than accept inflation is a given.
Our employees remain proactive.
We have a track record of lowering cost in developing efficiencies through periods of economic expansion and other drivers of inflation.
Our operating teams are ever more diligent in their quest to identify new areas of performance enhancements that will lower well cost.
<unk> advantage lies with our people and our culture.
Today's challenges are met with innovation and value creation in the field.
Through our multi basin decentralized approach.
This period of inflationary fuel prices is the primary driver of the 2% increase in our full year per unit cash operating costs versus our previous guidance.
However, higher commodity prices also presented an opportune time to enhance our Workover program, which will be reflected in our low expense.
These additional workovers bring on low cost production.
Payout within weeks and increase the long term performance of our assets.
All in all we.
We are thoughtfully managing our assets to offset a small effect from inflation.
While we have flexibility to adjust our plan in any given year.
To respond to unique or extreme market conditions.
Such as the pandemic in 2020, our capital plan is thoughtfully planned across all our assets to support the pace of operations.
That is optimal for each individual asset to continue to improve.
We believe we have the best people assets and plan to mitigate any headwinds and continue to improve the company for the long term.
Here's Ken to discuss the incredible improvements we've made in our premium gas play Dorado.
Thanks, Billy a year and a half ago, we announced a major new natural gas discovery in South, Texas, We named Dorado, It's a dry gas play with 21 Tcf of resource potential net to EOG across stack pays in the Austin chalk and Eagle Ford formations, our breakeven cost and Dorado is less than a $1.
25 per Mcf, which we believe represents the lowest cost of supply of natural gas in the United States.
Toronto is the most recent double premium play to emerge from our organic organic exploration program. We began technical work on Dorado back in 2016 captured a large acreage position in the core of the play as a first mover during 2017 and 2018 and drill test wells in late 2018 in 2019.
<unk>.
After pausing during the downturn in 2020, we move Dorado into active development last year and completed 11 net wells.
This year, we anticipate completing 30 net wells nearly tripling activity.
Since last year, we have doubled our production rate out of Dorado, producing 140 million cubic feet per day in the first quarter of 2022.
We are leveraging our proprietary knowledge built from prior plays to move quickly down the cost curve as we increase activity at a pace that allows us to incorporate learnings and savings we completed seven net wells during the first quarter of 2022, while keeping well costs flat compared to similar designs in the first quarter of last year.
Successfully offsetting inflation since our first wells drilled in 2018, we have reduced well costs over 35% and are approaching our target well costs faster than we anticipated.
In addition, well performance is improving productivity from recent wells is significantly beating our initial forecast refined completion techniques and our focus on targeting have increased our performance projections on a per foot basis.
This year, we have also moved to longer laterals, which combined with the improvements to perfect foot productivity have resulted in an 80% higher two year accumulative production volume that our 2018 wells compounding our capital efficiency.
Our preliminary plan for the play was to focus initial development on the Austin Chalk formation, and then followed that with development of the Eagle Ford So it would benefit from well cost reductions as well as water and gas gathering infrastructure installed for the Austin chalk.
With the dramatic improvements to our Eagle Ford formation, well results. We now expect to co develop it with the Austin chalk, which will provide additional opportunities to lower costs through scale and simultaneous operations.
As a dry gas play in close proximity to multiple markets. We expect Dorado as gas will have a lower emissions footprint compared to other onshore gas supplies in the U S. In.
In addition, we continue to leverage companywide expertise to build out and operationally efficient and low emissions field.
As we expand development of Dorado into a core asset it will contribute to lowering eog's companywide emissions intensity rate.
And bind with Eog's low operating costs and advantaged market position located close to several major sales hubs in south, Texas, including access to pipelines to Mexico, and several LNG export terminals.
<unk> is in an ideal position to supply low cost low emissions natural gas into markets with long term growth potential.
Next up is <unk> for concluding remarks.
Thanks, Ken.
I'd like to note the following important takeaways from the call today.
First formalizing our cash return strategy demonstrates our commitment to our free cash flow priorities that along with high return disciplined reinvestment offer significant long term shareholder value.
Second EOG is realizing another tremendous year of improvement.
We're set to deliver outstanding returns, while demonstrating capital discipline within an inflationary environment delivering on both volumes and capital as announced at the beginning of 2022.
Third.
Our most recent organic exploration announcement Dorado has positioned us with over 20 Tcf of low cost natural gas with access to multiple markets. Our progress in Dorado is on pace to make this north America's lowest cost of supply.
Thanks for listening now we'll go to Q&A.
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Questions are limited to one question and one follow up question, we will take as many questions as time permits.
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Just a moment to give everyone an opportunity to signal for questions.
Our first question today comes from the line of Doug Leggate with Bank of America. Your line is open.
Thank you good morning, everybody as long I think.
I'll speak for everybody in saying, we're delighted to see the.
The screen, what we've been through this for cash returns.
Two quick questions around this however.
Curious what's changed.
Move you in that direction.
Wonder if I could ask you too you're obviously talking about percentage of free cash flow. So.
Wonder if you could.
Some similar parameters around how do we think about reinvestment rates on the planning assumptions that go along with that.
So we can get some kind of idea.
It looks like advances.
The level of spending and you can see.
Michael.
Yes, Doug I sure do.
So let me start with the.
The what is now why now and simply we feel that this is the right time for our business to come out with the additional guidance.
We've got the regular dividend increase to be competitive with the broad market, we've got the balance sheet.
And a very strong position and we're basically emerging stronger from the downturn and confident.
We can deliver this minimum amount of cash return.
Going forward.
It's consistent with our long term free cash flow priorities. So it's not really a change in strategy.
In 2021, we've returned about 49% of free cash flow and we paid off of $750 million bonds. So when you combine those.
That was about 60%.
And so it's a range internally we've discussed in the announcement really just provides a bit of transparency.
Now on the second part of your question with regards to how.
Do you think about how are we thinking about the reinvestment growth and to get to free cash flow.
One thing one reason, we have given this guidance as a minimum of 60% return on free cash flow.
Is because it's a it's a guy that can be consistent and long term in nature through the cycle like how we manage the business based on the guide off of free cash flow puts us in what we feel is the best overall position to create shareholder value through the cycle. So nothing's really changed in the reinvestment strategy. Its first always base.
On returns and our ability to get better each year.
There is as we've said in the past.
There is no reason to invest in growth.
If you are not generating high returns and you're not doing it.
With an ability to improve the underlying business year after year and what that means is not chasing free.
Free cash flow just because of high prices, if you're investing in something that's eroding the business long term. So you can take today for example, we could increase activity today into these high prices, but in the inflationary environment, that's going to erode our capital efficiency.
And then the second piece that we've talked about as far as reinvestment or growth is based on the macro environment.
The end market fundamentals does the market really need the barrels.
What's supporting the global supply and demand fundamentals.
Ultimately investing in premium and double premium as you know has made us somewhat price agnostic.
And those decisions on $40 oil and $2 50, natural gas and so it's really the capital discipline comes down to.
What can we do and are we investing at a pace where each of our assets can get better year after year.
And ultimately improve the overall returns and company profile.
I appreciate your answer.
Okay.
You've done so thank you for that.
Follow up is hopefully a quick one.
So some days ago pivot.
Pivoted away from natural gas, rather will obviously be exception today, but you also take a little while a lot of your legacy gas asset. The world has obviously changed so I'm just wondering within the company.
Any.
Effort.
Yes.
Guess initiatives to pivot some of those legacy some of the legacy guys.
But obviously still in your portfolio and write off levels below normal.
The LNG export expansion longer term I'll leave it there.
Yes, Doug.
As he said the world's changed a lot in the company has changed quite a bit the biggest thing for US is that introduction of the premium and now double the premium reinvestment hurdle rates. So all of our gas assets now are judged it's $2 50.
Flat natural gas price for the life of the of the well and that really high grades our reinvestment opportunities.
Into into any of our assets, but especially the natural gas lines as we're talking about right now ultimately what we see withdraw though is that we've captured a very significant resource geographically in the best spot, we think onshore U S with access to multiple markets and we're very excited about being able to focus in on.
Really that that asset that we have we think it's going to be the premier asset in North American natural gas.
Question appreciate it thanks for taking my question.
Our next question comes from Charles Meade with Johnson Rice, Charles Your line is open.
Yes.
Good morning, guys right into the whole EOG team there.
Sure.
Picking up on the point you just made I am curious does.
I get that you evaluate all your.
Projects at 40, and $2 50 in that services the best.
Oil projects and best gas projects, but.
Are there any concern or discussion inside EOG that that maybe evaluating projects at something so far below the strip is actually giving you a sub optimal relative ranking across oil and gas assets.
Yes, Charles the way we look at it is we've been fortunate we've been an unconventional north American exploration here for nearly two decades honestly and what that's allowed us to do is put together a multi basin portfolio of what we think is really the deepest and highest quality asset inventory.
When we switch to premium it was really taking a long term look at that $40.
Price $2 50, natural gas price to not only.
Help the immediate returns the rate of return the IRR has upfront, but really thinking about longer term through the cycles. What does it mean to really build a company where based on our commodity price you can still be successful and create value through the cycles ratcheting that up to double premium in 2020 was really a reflection of our ability to have grown our premium <unk>.
Or a three five times through organic exploration since 2016.
So actually I think.
The focus on double premium drilling and that reinvestment hurdle rate actually provides us with an optimal way to rank our assets.
Okay. Thank you for that insight and that perhaps going back to Dorado.
I call it during the prepared comments.
I think that the two year Cumulus is 80% higher.
And then your 2018 case and part of that.
As longer laterals, and I think the base, but the kind of the 2018 patients 9000 foot lateral so.
If I'm, making the right ballpark to thinking that if.
80% higher to your cube some of Thats longer laterals. So we're looking at maybe 40 or 50% higher productivity per lateral foot in the dorado play versus versus the earlier case.
Yes, Charles this is Ken.
We haven't really given out a number on how much higher the productivity is if we look back to those 2018 wells they were shorter laterals in the 6% to 7000 foot range. We've now have some extended laterals even past our original 9000 foot range that we thought we would get and those things are both.
The improved performance in our lower costs have really driven that finding cost down to two almost a 40% targets that we're showing on slide 11 there.
Okay, but no no don't care to offer any.
Comments on the productivity per lateral foot I guess.
That's fine thank you.
I guess, Charles just what I would say is it is our wells are beating our type curves that we have in those type curves do you have a fairly low decline over the first several months of production. So we are seeing beating seeing them, beating our type curves in and thank.
If you look at it we've really only drilled 30 of our 250 wells in that place. So we're continuing to learn.
Thank you Ken.
Our next question comes from Erin Jairam with J P. Morgan.
Your line is open.
Yeah. Good morning my.
My first question is just on the supply chain you guys are holding the line on Capex number of your peers have raised capex expectations.
So I was wondering if you could comment what's unique about the way you're managing the supply chain to give you confidence on delivering.
<unk> 5 billion Capex budget.
And maybe some of the supply chain headwinds that we're seeing within the industry. How does that influence your thoughts about 2023, given shortages of fifth.
Equipment labor and just broader just challenges on things like CTG.
Yes, Arun this is Billy.
Let me.
Start by providing maybe an overview.
Of how we're managing that.
This year's capital program.
I'd like to get Jeff to add some color and then I'll circle back to 2023, let.
Let me first start by.
Saying that we kind of look at.
Each year the same way as you know we would I would tend to bucket this and maybe three or four different areas. One we self source a lot of materials that.
<unk> it Insulates us from a lot of the supply chain issues. We also do a lot of innovation and efficiency gains.
The third bucket might be the pace of the adoption of these new efficiencies across the company and then may be finally.
<unk> ability with our multi basin approach so just to elaborate on that a little bit more.
At the beginning of the year, we constructed our plan certainly recognizing the inflation that we saw from the recovery of post Covid.
And we were confident in looking at that that we can offset inflation and maintained flat well cost.
While we didn't anticipate was the war in Ukraine.
And that additional pressure and increased inflation, we saw on commodities such as fuel and steel.
But we're still working to offset this additional inflation through our efficiencies and new innovations.
These improvements and efficiency gains are certainly happening largely in the areas, where we've had the most activity such as the Delaware Basin and the Eagle Ford.
But I would also say that.
The pace of the adoption of these new technologies, the rapid adoption of the supers, if our technology across the company is happening faster than we expected.
So we also have the advantage of being in multiple basins. So that gives us a lot of flexibility to shift activity between areas.
So we're very comfortable that we can maintain our plan and delivering our original volumes.
Our stated Capex goals that we laid out started the year.
So with that maybe I'll turn it over to Jeff to give you some more details.
Yes. Good morning, Arun This is Jeff Leitzel, So as Bill stated our ability to counter these inflationary.
Larry pressures in some of the supply chain constraints that you talked about is really just a huge credit to our teams operational execution their innovative culture and really continuing to.
Prove on the efficiencies so just to give you a little bit of color and some examples start off with our drilling operations. Our teams continued to increase their efficiencies and Thats, primarily with EOG is in house motor program, and our proprietary bit cutter development, which we can kind of design both of these uniquely around all the formations we drill in each of our plays and our Eagle Ford operations. There just.
A perfect example of this we've increased.
<unk> drilled footage per day by over 17%. This year and this is one of our more mature plays that we've been drilling in for 13 years, So really to EOG no matter how far along we are in development. There's always improvements that can be made and then on the same topic there with the Eagle Ford they've just done an outstanding job of reducing our drilling fluid costs also even as diesel price.
They've risen and Thats primary basin those fluids, we've done this by optimizing the density in the additives and the drilling fluid in each area really to try to reduce those fluid losses, which has resulted in a per barrel savings of about 20%. So far in 2022, and then just a couple more.
Basic examples in completions, our field team they continue to see really good improvements there and they've increased their overall completed lateral per foot per day by 10% compared to 2021 for the total company and as we've talked about in the past one of the main drivers and this is really our continued implementation of Super Zipper operations. So we've talked about.
Last year, we were about a third of our activity was super Zipper and this year, we had a goal of trying to get to 60% and we're just about there right. Now. So this is really significant because pretty much every additional well that we super Zip, where we realized savings of up to $300000 per well or that equates to about 5% of the total well cost so.
Another kind of new process on the innovation side that we've been implementing and testing is something called continuous frac pumping operations. So just a little bit of a rundown typically in any completion operations you have some unplanned maintenance and in order to be proactive our field teams have started planning some of that scheduled maintenance periods of about three to four.
Four hours every three days and what this has helped US do is really minimize any of that unplanned maintenance and really greatly appreciate and increase our overall efficiencies so in.
In the past quarter really primarily in the Eagle Ford We've started some testing in the Delaware basin, but we've been able to increase our completed lateral per foot per day by roughly 30%. So.
That's really just a huge time and cost savings there and what we plan on doing is as we optimize this process. We will continue to roll it out to all of our operating areas.
And then lastly, more on the supply chain and material side of things I just wanted to touch on a couple of our savings from the water and the sand cost side of things in the Delaware Basin. Our team continues to reduce our water costs by after rising the reuse process, which right now is approximately 90% of all their sourced water and they're really doing this just through increasing the automation of all of our infrastructure.
<unk> and reducing the overall treatment cost per barrel, which we realized about a 9% reduction in each barrel of reuse water for 2022, and this is pretty significant not just for capex, but also on the operating expense because every barrel were allowed to reuse.
One less that we have to dispose of and then finally here over on the sand logistics side EOG, we've been in the sand business and self sourcing for about 15 years now and we continue to reduce those costs across the company for example out in the Delaware Basin, we continue to advance our ability to get that sand closer to the wellhead and ultimately.
Reduce the amount of trucking needed and plans are we're going to open up a second plant in the second half of next year, and we really anticipate to see some pretty good savings from Q1 through the rest of the year of about 20% per pound. So these are just a few of the many examples of how our operations teams, just performing and really given us great confidence that will be.
We're able to calendar a lot of these inflationary pressures and supply chain constraints through 2022, and as Billy will talk about here 2023.
Yes, Ryan just to summarize maybe I know thats a lot of detail for you.
But obviously, we're very proud of the efforts of our employees to continue to fight against the rising well cost in this period of inflation as we move into 2023.
It's really early to talk about specifics about next year, but let me just kind of give you.
And overall impression of how we think about going into any year, certainly we have a long history of managing through inflation to maintain or lower well cost that gives us confidence to be able to meet our goals.
And we have two fundamental things that we think about one is our contracting strategy and how we approach that is for example, this year is just a reminder.
We have about 50% of our well cost secured.
With contracts with service providers that provide about 90% of our drilling fleet and about 60% of our Frac fleet locked up under existing contracts not all of those service contracts are set to expire at the end of this year. So we try to stagger those as we go through a year to make sure that we have some.
Annuity going into the preceding year.
And then the lastly would be as Jeff mentioned their innovation and efficiency improvements.
So we are already confident were seeing ideas that we can continue to push and explore to continue to reduce costs and offset inflation going into next year. So we're always chasing those kind of things and I know, there's a lot of color, but it's certainly something that were.
Im very proud of our employees and their efforts and I just wanted to make sure you fully understand it.
Yes, I appreciate the detail.
Billy.
My follow up is maybe for Ed or Tim.
You guys have now committed to a 60% minimum return of free cash flow kind of framework.
I wanted to get your thoughts on the other 40% bucket.
And what the priorities are between the balance sheet.
Additional cash return on the bolt ons I know last quarter, Tim did message EOG is intention to build more cash on the balance sheet.
For countercyclical opportunities at other points in the cycle.
If you could give us some updated thoughts on that.
Yes, Arun this is ezra.
Start right, there with where you left off.
Pardon me, let me say that.
Thrilled to be in a unique position here to be able to strengthen the balance sheet and returned $2 4 billion to shareholders in the first half of 2022.
But ultimately with the remaining 40% it comes back to the fact that we're committed to delivering on our free cash flow priorities.
And the right thing at the right time to maximize long term shareholder value.
And then it does include that balance sheet and some of the things with the balance sheet. We've discussed in the past as you know to have cash available.
Available just for running the business for operations to have cash for the small bolt on acquisitions as you mentioned.
Cash available for the $5 billion stock repurchase authorization, which we've we've said we prefer to look at that as an opportunistic repurchase rather than something more.
Programmatic and then the last thing with regards to our balance sheet and cash on hand would also be.
Our commitment there to retiring.
Our bond of $1 $2 billion bond that's coming due here in the first quarter of 2023, so really as we as we started off with the guide of returning.
A minimum of 60% of free cash flow, it's really not a change in strategy by any means just to provide a little more transparency a little more clarity we've heard some of our shareholders, who have asked for a bit more transparency and clarity on the cash returns and Thats really what the what the change in messaging is but our strategy remains.
Consistent.
Great. Thanks, guys.
Our next question comes from the line of Jeanine Wai with Barclays. Your.
Your line is open.
Hi, good morning, everyone. Thanks for taking our questions.
Our first question, maybe if we can just hit back to Gerardo nice update on that in the slides you highlight potential export markets can you talk about mid June capacity.
<unk> currently or maybe what you see is down the line in order to get gas to the sales points.
Anthony Good morning. This is lance yeah, as you think about Dorado and takeaway there were very well connected and you can see that on slide 11.
Obviously, you can see the proximity to market.
But as we talk about capacity, we have sufficient capacity there plenty of running room as we look forward and just really want to highlight two as you think about the proximity to those markets.
Especially the demand growth that is expected to see the potential.
Equally important in what we're excited about as you think about the proximity less than a 100 miles to get to the Agua Dulce market and then the connectivity that we have even to get up into the Kt Houston ship channel market and as you look forward on.
Over the next five years do you have the potential to see an additional potential five Bcf a day of new demand growth. So the proximity the connectivity that we have and obviously as you've seen as evidenced through our other plays as we think about capacity. We're always very forward looking and making sure that we have enough ongoing capacity as we think about our progress.
<unk>.
Okay, great. Thank you and then maybe just following up on Brian's question.
We appreciate all the details you just provided about the cash buildup there.
And I guess, just generally speaking and I know, it's narrowed a simple about back solving to the cash number but.
Net cash or is that like a sub optimal place for that business or would you be perfectly fine with the balance sheet getting to that point. Thank you.
Yesterday, we don't believe Thats, a sub optimal place in an industry like ours that has proven to be cyclical in nature, obviously and at times very volatile.
Even our current cash position I would say the cash on hand, as a percent of market cap places us roughly in the upper half of the S&P 500.
That's a fantastic position to be in especially when you think about a cyclical industry like ours.
Thank you.
Our next question is from Leo Mariani with Keybanc. Please.
Please go ahead with your question.
And I just wanted to follow up a little bit on the gas macro here, obviously very topical.
Dave.
In the past I know EOG has spoken about kind of.
Our longer term oil growth target.
8% to 10%.
And.
Do you guys feel that.
Point in time, just given the changes in the world that U S. Gas is really just going to be higher for longer and you think it would be appropriate to maybe do something similar on.
On the gas side, as well and obviously you've kind of talked about.
The accessibility of your gas LNG market down there as well so just wanted to get a sense. If you guys are actively working on perhaps the expanding activity over the next few years at Toronto, and you're trying to get that gas international models.
Yes, Leo this is Ezra let me maybe make a few comments and then Lance can follow up on on some more detailed LNG perspectives in general what I would say from the from the from.
From the macro perspective.
I know this will sound a little bit repetitive, but we base our decisions on investment in gas the same as we do on an investment in oil and that's on the premium price deck.
So for US it really comes down to the first question is returns how quickly can we invest in an asset.
And still generate high returns year over year still continue to improve upon the asset and what that means is lowering our finding and development cost every year in bringing adding lower cost reserves to the base of our company. That's how we dropped the cost base of the company and basically expand the margins going forward.
With regards to <unk>.
Global supply and demand that comes in second same as on the oil side I wanted to say that we have an optimal level growth because obviously there is associated gas, but then we've got these pure dry gas plays so we look at them a little bit agnostic Lee long term, how we do feel.
Going out longer in thinking about the long term global energy solution. We do feel the gas is going to play a significant role in that and Thats why were very committed to the $2 50 price that we evaluate the reinvestment on because we think thats globally going to be a very competitive and compelling price to be able to debase the investments.
Lance yes.
Yes, Leo good morning, maybe just add a little bit more color too as you think about just LNG and kind of LNG offtake that yes, I mean, it's an exciting time.
It's been excellent having some exposure, especially if you think about our <unk> exposure in the first mover advantage that we have because it depends on like Youre, saying youre seeing in the environment today is dependent on the swing and youre seeing more of a demand pool and so as we think about that.
Especially from a customer standpoint, I mean, we're very well positioned I mean.
The way, we think about it there's really.
Three important components of it and one of them that's critical as investment grade status and the pristine balance sheet that we have absolutely puts us and differentiate US and then as you think about the control that we have with our firm transportation. When we think about LNG offtake, it's not just from Toronto, we have firm offtake that can get us from each of our major plays and then.
Also when you think about supply flexibility too I mean, we have a lot of scale and a lot of flexibility and so we're excited about it obviously you saw the deal that we've done wishing here.
That's expanding and increasing our sale that we have there we feel that that's very strategic.
That helped commercialize stage III.
We're anticipating hopefully by the end of 'twenty five things you expected maybe in early 'twenty six all kind of in line with what we've been talking about for a long time, we've been.
Working LNG since 2017.
<unk> entered into our first agreements in 19, and then just recently expanded it again. So yes, we definitely have a constructive view as we think about LNG and all of those components that I just talked about earlier, we feel puts us very advantaged because we can transact quickly and we can move with scale, because we have the supply flexibility as well.
Okay. Now that's helpful. It sounds like you guys are looking at more deals.
Also just wanted to ask about the earlier target that you put out kind of pre Ukraine.
Welcome.
Year over year, I'm, certainly aware that you guys have efficiencies and working really hard on this.
At this point Manny do you think thats still a realistic goal just given inflation and I think I heard you say that you had about 50% of that it won't cost locked up in 2022.
Yes, Leo this is Billy Helms, Yes, we tried to address that certainly in the last answer we had but I guess the bottom line is we're very confident we're going to be able to keep our well costs flat this year and we're going to work hard to do it next year.
It's early to say what next year is going to be but we just to have line of sight on so many improvements we can continue to make in our business to fund moment fundamentally offset inflation. So we're very confident in this year's capex and volume targets.
Okay. Appreciate it thanks.
Yeah.
Our next question is from Neal Dingmann with cures Securities.
Please go ahead.
Yes. Thank you my first question.
And then maybe on exploration I'm just wondering.
What would it take what would it take initial success, maybe on a large acreage position such as wet gas or wherever so you would announce another plate or really just a broad question. What generally do you all like to see before publicly rolling out and talking about the next next best opportunity all of that.
Yes Neal.
We'd like to have confidence in what we're talking about bringing out to the public and what that means for us. These days and we've talked about a little bit before us.
These days, it's not just a matter of trying to find oil or gas.
That has become relatively not too difficult.
The challenge for US is to make sure that it's additive to the quality of our inventory.
Like I said earlier, we believe we've got a.
Really the the highest quality and deepest inventory across our multi basin.
Portfolio as far as North American E&P companies go and so trying to add to that trying to add to the double premium rates of return program.
As challenging.
What it takes as long some longer term production results before we going back to <unk> and.
In the powder River basin before we announce those.
Basins to the public we had.
Some pretty significantly long production results to really make sure that we captured what we had anticipated capturing last thing we want to do is mislead anybody and so, especially looking at some of the new players that we're talking about with these hybrid reservoirs.
<unk> are relatively new in nature to the industry and so gathering some longer term production results and or appraisal wells to really define the extent of these plays.
It is very important and critical before we'd be comfortable talking about them.
Got it great Great details and then my follow up.
Billy just on Oss inflation, maybe logistics you all continue a great job of mitigating even better than most all of this inflation I'm just wondering on when you look out remainder of this year to 23, if things stay like they are now.
We've heard some.
Issues of sand and different things in the Permian, maybe bring it up in our northern light from Wisconsin could you talk about are you all.
Two questions here one are you all walking in and continue to do sort of longer term whether that be on the sand pipe or other side.
And then number two just wondering would you.
When you think about.
Would you have if you have opportunities like you did last year or two ago about drill pipe if those persist.
I assume you will continue to go after and do some opportunities like that.
Yes, Neal this is Billy.
Certainly.
It's a very dynamic situation, we're dealing with here but.
Yes.
Part of the reason, we have so much confidence and being able to offset inflation, especially the inflation that the industry is seeing today.
Really goes back to the.
Involvement or engagement of our employees and how committed they are to to achieving the goals that are set out.
For example, I'll talk about sand, especially sand in the Permian and Jeff kind of went through some of this detail earlier.
The big overlying reason that we have so much confidence as we took ownership we took control of that many many years ago I wanted to say about 15 years ago.
Certainly through that taking ownership, we've learned a lot in the past.
We continue to look for ways to reduce that cost and lately, it's been by getting sand closer to the wellhead.
We move to locate near <unk>.
Near wellhead, so it kind of close to the end user sources of supply.
Can move closer and closer and continue to reduce our cost both on the cost of the sand itself, but also transportation to the wellhead all the logistics that you see are diminished we take trucks off the road is just good many many different ways.
We also stay very engaged on the <unk>.
Material side, <unk> and those kind of things that we work with mills really across the globe.
Directly we don't really go through distributors per se.
Worked directly with the mills and that way, we are able to establish relationships and capture opportunities.
At the right time, so yes.
Further engagement in all aspects of our business that allows us to do that and the creativity of our employees that allows us that opportunity.
So thats why we still remain so confident.
Very good thank you bill it to the details.
Our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead ma'am.
Thank you team at one micro question and then one macro question that the micro question is as you think about your growth assets, the Delaware the PRP and Dorado, how do you think about the relative capital allocation and how would you prioritize them based on.
Returns and cost of supply.
Sure.
Yes, Neal this is Ezra.
It's great to have.
Such high quality inventory across multiple basins. It makes our job with capital allocation and portfolio management.
I'm exciting the way we approach each of them is looking at where they are individually at in the lifecycle of the play and basing it off on the returns.
And so even even throw.
The Eagle Ford and they're certainly not a growth asset anymore, but by right sizing that program last year and I think we highlighted this in February last year, we turned in the highest rate of return drilling program, we've ever had in that play.
And when you think about a play like the Eagle Ford.
Really a trailblazing type of asset for the entire industry to see how to continue to make one of these resource plays long life resource plays even better year. After year after 12 or 13 years of drilling it. So when we think about the Delaware basin, the powder River basin and draw, though just at a high level, we would say the Delaware basin.
It is kind of in the sweet spot.
As far as drilling activity, our knowledge base infrastructure and the <unk> and Dorado are a little bit behind that.
We definitely slowed down as Ken had mentioned, we paused drilling and draw though during 2020.
Did the same in the powder River basin.
And so we're early in the life on those plays and so the capital allocation of those two really progresses with the build out of infrastructure and at the pace at which we can incorporate our learnings and continue to make the wells better.
That makes a lot of sense. The second is there is a big picture question. You guys are doing a lot of work on the oil macro and it's obviously a very dynamic environment, but there are two questions associated with that one is what do you think the long term implications of potentially structurally lower Russian production capacity will.
<unk>.
For the U S producers for global oil producers and the second is how are you thinking about exit to exit U S oil production this year.
Given some of the constraints that you talked about earlier on the call.
Yes, Neil I'll start with the second one and reiterate our position on exit to exit U S oil Hasnt really changed since February .
You look at kind of the range.
Of.
Forecasts that are out there.
On the lower end.
Is the way that we we said it in February and that's what we would stick to today, we think the supply chain constraints and the inflationary issues. The discipline that you are seeing in North American E&P sector.
We think that the U S exit to exit oil production growth is going to be on the lower end of most of the forecasts longer term with the structural implications for the Russian capacity for U S and global and how that plays in.
We're watching that as the same as everyone else.
It's volatile.
Situation are things developing as we speak including the sanctions.
Sanctions that are being discussed and how are those Russian barrels actually continuing to flow and how are they getting discounted and where are they showing up and what is that doing ultimately it'd take a bigger step back and just say for the last few years Neal we've been pretty consistent with our.
Model that chronic under investment in exploration and in our industry.
It's really going to lead to.
Generally lower supply under under supplied for for the global supply and demand market longer term.
That's why we continue to explore and we continue to explore for lower cost higher return assets and we think that really.
As we've said in the past there is only a handful of north American E&P companies that have asset quality or the size the scale to compete on a global scale with that cost of supply in and on top of that deliver the barrels with a lower environmental footprint.
And in the future you know those are the companies that the world is going to want to fill in additional barrels.
And especially with our operational results in this first quarter. We think we know we feel that EOG is a leader of <unk>.
Of that group of North American E&ps.
The under investment point, it's definitely playing out we appreciate an answer.
Thank you Neil.
We have time for one more question today and our next question comes from Paul Cheng with Scotiabank.
Your line is open.
Thank you good morning.
Two quick questions.
One I think you saw the follow up to Neil's question.
No.
Ladies and gentlemen, you say changed the way how would you look at.
The global market and perhaps that youll.
Paul Dobson.
On a development plan for the company I think <unk> been saying that you guys will be ready to grow things that Amit.
The market and you will be growing at maybe in the future.
At San <unk>.
Any kind of growth rate on the Mexican mode. So wondering if those have.
Had been changed any.
Any shape or form because you said in defense.
The second question that you.
Talk about how.
The with the basin so what.
Okay.
What that development pace.
Saturday.
Yes, Paul this is Ezra.
I think I can answer both of those questions almost in the same manner. When we came out with the 8% to 10% growth which was.
Gosh, maybe close to 20 months ago now.
That was and I think we said at that time that it's dynamic at that time that 8% to 10% model is reflective of what we could do to optimize near term and long term free cash flow with the current inventory on our current knowledge base and as you can see things continue to change for the better for US we continue to drive down costs, we continue to.
Drive forward each of our let's call them emerging plays with the powder River Basin and Dorado.
So when we talk about whats a good growth rate going forward. It comes back to those two things that I started off the call with Doug with the first is.
Optimizing our returns.
<unk> at a pace, where we can really create long term shareholder value and you do that through adding lower cost reserves to the base of the company so driving down the cost base of the company while also reinvesting.
So that you can turn your cash over quickly our wells this year at strip price since we base. It on a $40 investment what that really translates to or wells that pay out on average in two to three months right now in the strip price.
So it's a fantastic place to be and Thats really strengthening the base of the business on the company going forward with regards to the priv. It falls under the same type of line.
It all depends on how we build out our infrastructure in that basin and moving at a pace to be able to incorporate our learnings to drive down the well costs last quarter. I think we highlighted we had dropped the niobrara well cost pretty significantly over the past year 2021.
Which was just tremendous results and as we continue to see progress like that we feel more confident to go ahead and allocate more capital.
To that to that portfolio to that to that basin.
Thank you.
That is all the time, we have for questions today, So I'll now hand, the call back to Mr. Jacob to conclude.
Yes, we'd like to thank everyone for participating on the call. This morning, and thanks to our shareholders for your support.
Especially want to recognize each of our employees for their commitment to excellence and on delivering such an outstanding start to the year for EOG.
Thank you everyone for joining our call today. This concludes our call you may now disconnect your lines.
Yeah.