EOG Resources Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 15 speakers on the call.

Operator

Good day, everyone, and welcome to EOG Research's Second Quarter 2021 Earnings Results Conference Call. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Chief Financial Officer of ELG Resources, Mr. Dembrigert. Please go ahead, sir.

Speaker 1

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing Q2 2021 earnings and operational results. This conference call includes forward looking statements. The risks associated with This conference call also contains certain non GAAP financial measures. Definitions as well as reconciliation schedules for these non GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com.

Speaker 1

Some of the reserve estimates on this conference Call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U. S. Investors that appears at the bottom of our earnings release issued yesterday. Participating on the call this morning are Bill Thomas, Chairman and CEO Billy Helms, Chief Operating Officer Ezra Yacob, President Ken Boedeker, EVP, Exploration and Production Jeff Leitzel, EVP, Exploration and Production Lance Terveen, Senior VP, Marketing and David Strite, VP, Investor and Public Relations.

Speaker 1

Here's Bill Thomas.

Speaker 2

Thanks, Tim, and good morning, everyone. EOG is focused on improving returns. Results from the first half of the year are already reflecting the power of VOG's shift to our double premium investment standard. Once again, we posted outstanding results in the second We delivered adjusted earnings of $1.73 per share and nearly $1,100,000,000 of free cash flow, Repeating the record level of free cash flow we generated last quarter. Our outstanding operational performance included another beat of The high end of our oil production guidance, while capital expenditures and total per unit operating costs were below expectations.

Speaker 2

We are delivering exceptional well productivity that continues to improve. In addition, even though the industry is in an inflationary environment, EOG continues to demonstrate the company's unique ability to sustainably lower costs. Our performance clearly proves the power of doubling our reinvestment hurdle rate. Double premium requires investments to earn a minimum of 60% direct after tax return using flat commodity prices of $40 oil and $2.50 natural gas. I'm confident our reinvestment hurdle is one of the most stringent in the industry And a powerful catalyst to drive future outperformance across key financial metrics, including return on capital employed and free cash flow.

Speaker 2

As Double Premium improves our potential to generate free cash flow, we remain committed to using that cash to maximize shareholder value. The regular dividend, debt reduction, special dividends, opportunistic buybacks and small High return bolt on acquisitions are our priorities. In the first half of this year, we reduced our long term debt by 750,000,000 And it demonstrated our priority to returning cash, significant cash to shareholders with a commitment of $1,500,000,000 in regular and special dividends. We also closed on several low cost, high potential bolt on acquisitions in the Delaware Basin over the last 12 months. Year to date, we have committed $2,300,000,000 to debt reduction in dividends, which is slightly more than the $2,100,000,000 of free cash flow We've generated.

Speaker 2

Looking ahead to the second half of the year and beyond, our free cash flow priorities and framework have not changed. As we generate additional free cash, we remain committed to returning cash to shareholders in a meaningful way. We are focused on doing the right thing at the right time in order to maximize shareholder returns. Over the last 4 years, we've made huge progress Reducing our GHG and methane intensity rates, nearly eliminating routine flaring and increasing the use of recycled water And our operations, we are focused on continued progress towards reducing our GXG emissions in line with our targets and ambitions. This quarter, we announced a carbon capture and storage pilot project, which we believe will be our next step Forward in the process of reaching our net zero ambition.

Speaker 2

Ken will provide more color on this and other emission reduction projects in a few moments. Driven by EOG's innovative culture, our goal is to be one of the lowest cost, highest return and lowest emission producers, Playing a significant role in the long term future of energy. Now here's Ezra to talk more about how our returns continue to improve.

Speaker 3

Thanks, Bill. While we announced our shift to the double premium investment standard at the start of this year, the shift has been underway since 2016, when we first established our premium investment standard, a 30% minimum direct after tax rate of return Using a conservative price deck of $40 oil and $2.50 natural gas for the life of the well. In the 3 years that followed, our premium drilling In addition, Premium enabled this remarkable step change in our financial performance While reinvesting just 78% of our discretionary cash flow on average resulting in $4,600,000,000 of cumulative free cash flow. The impact from doubling our investment hurdle rate from 30% to 60% using the same conservative premium price deck Is now positioning EOG for a similar step change to our well productivity and costs, boosting returns, capital efficiency Double premium wells offer shallower production declines and significantly lower finding and development costs, resulting in well payouts of approximately 6 months at current strip prices. The increase in capital efficiency resulting from reinvesting in Tie return projects is increasing our potential to generate significant free cash flow.

Speaker 3

This year, we are averaging less than $7 per barrel of oil equivalent finding cost. Adding these lower cost reserves is continuing to drive down the cost basis of the company and when combined with EOG's operating cost reductions is driving higher full cycle returns. Looking back over the last four quarters, EOG has earned a 12% return on capital employed with oil averaging $52 We are well on our way to earning double digit ROCE at less than $50 oil and it begins with disciplined reinvestment And high return double premium drilling. While EOG has 11,500 premium locations, approximately 5,700 Double premium wells located across each of our core assets. We are confident we can continue to grow our double premium inventory through organic exploration, Improving well costs and well productivity and small bolt on acquisitions just like we did with the premium over the last 5 years.

Speaker 3

In the past 12 months through 8 deals, we have added over 25,000 acres in the Delaware Basin through opportunistic bolt on acquisitions at an approximate cost of receive immediate benefit from our existing infrastructure. Premium and now double premium established a new higher threshold for adding inventory. Exploration and bolt on acquisitions are focused on improving the quality of the inventory by targeting returns in excess of the 60% After tax rate of return hurdle. EOG's record for adding high quality, low cost inventory predominantly through organic is why we do not need to pursue expensive large M and A deals. 2021 is turning into an outstanding year for EOG.

Speaker 3

Our exceptional well level returns are translating into double digit corporate returns and our employees continue to position EOG for long term shareholder value creation. Here's Billy with an update on our operational performance.

Speaker 4

Thanks, Ezra. Our operating teams continue to deliver strong results. Once again, we exceeded our oil production target, Producing slightly more than the high end of our guidance, driven by strong well results. In addition, capital came in below the low end of our guidance As a result of sustainable well cost reductions, we have already exceeded our targeted 5% well cost reduction in the first half of twenty twenty one. We now expect that our average well cost will be more than 7% lower than last year.

Speaker 4

As a reminder, this is in addition to the 15% well cost savings achieved in 2020. We continue to see operational improvements outpace the inflationary pressure in the service sector. Average drilling days are down 11% and the feet of lateral completed in a single day increased more than 15%. We are utilizing our recently discussed super zipper completions on about a third of our well packages this year and expect that percentage to increase next year. In addition, our sand costs are flat to slightly down year to date.

Speaker 4

We have line of sight to reduce the cost of sand sourcing and processing and expect to start realizing savings in the second half of twenty twenty one and ended 2022. Water reuse is another source of significant savings and we continue to expand reuse Throughout our development areas. Finally, we have renegotiated several of the expiring higher price contracts for drilling rigs and expect to see additional savings the remainder of this year and next. We also use the strength of our balance sheet to take advantage of opportunities to reduce future cost in several areas. As an example, last summer, we prepurchased the tubulars needed for our 2021 drilling program when prices were at their lowest point.

Speaker 4

EOG is not immune to the inflationary pressures we're seeing across our industry, But this forward looking approach helps EOG mitigate anticipated cost increases. As a reminder, 65% of our well costs are locked in for the year and the remaining costs we are actively working down through operational efficiencies. As usual, we have begun to secure services and products ahead of next year's activity with a goal of keeping well cost at least flat in 2022. But as you can rest assured that with our talented and focused operational teams, our ultimate goal is to always push well costs down each year. The same amount of effort is being placed on reducing our per unit operating cost, with the results showing up in reduced LOE, driven mainly by lower workover expense, reduced water handling expense and lower maintenance expenses.

Speaker 4

Savings are also being realized from our new technology being developed internally to optimize our artificial lift. We have several new tools that help us reduce the amount of gas lift volumes required to produce wells without reducing the overall production rate. These optimizing tools not only reduce costs, but also help reduce the amount of compression horsepower needed, which ultimately reduces our greenhouse gas footprint as well. These and other continual improvements are a great testament to our pleased but not satisfied culture. This quarter, we can also update you on our final ESG performance results from last year.

Speaker 4

We reduced our greenhouse gas intensity rate 8% in 2020, driven by sustainable reductions to our flaring intensity. Operational performance in the first half of this year indicates promise For future further improvements to our emissions performance in 2021, putting us comfortably ahead of pace to meet our 2025 intensity targets for GHG and methane and our goal to eliminate routine flaring. Achieving these targets is the first step on the Path towards our ambition of net 0 emissions by 2,040. Water infrastructure investments also continue to pay off. Nearly all water used in our Powder River Basin operations last year was sourced from reuse.

Speaker 4

For company wide operations in the U. S, Water supplied by reused sources last year increased to 46%, reducing freshwater to less than 1 5th of the total water used. These achievements and other along with the insight into ongoing efforts to improve future performance will be detailed in our sustainability report to be published in October. We are starting to fill in the pieces on the roadmap to get to net 0 by 2,040. Here's Ken with the details.

Speaker 5

Thanks, Billy. Earlier this year, we announced our net zero ambition for our Scope 1 and Scope 2 GHG emissions by 2,040. Our ambition is aggressive but achievable and we expect it will be an iterative process requiring trial and error. This approach mirrors how we develop an oil and gas asset. By minimizing costs and maximizing recoveries of oil and natural gas.

Speaker 5

Here, we are aiming to maximize emissions reductions. We then apply the successful technologies and solutions across our operations where feasible. Our net zero strategy Generally falls into 3 categories: reduce, capture or offset. That is we are focused on directly reducing emissions from our Capturing emissions from sources that can be concentrated for storage and offsetting any remaining emissions. Reducing emissions intensity from our operations is a direct and immediate path to reducing our carbon footprint.

Speaker 5

Our approach is to invest with returns in mind and seek achievable and scalable results. We made excellent progress the last 4 years through initiatives We have reduced our GHG intensity rate 20%, our methane emissions percentage by 80% and our flaring intensity rate by more than 50%. We recently obtained permits to expand the successful pilot of our closed loop gas capture project, which prevents flaring in the event of a down We designed an automated system that redirects natural gas back into our infrastructure system and injects the gas temporarily back into existing wells. The project requires a modest investment to capture a resource that would have otherwise been flared and stores it for further or for future production and beneficial use. The result is a double premium return investment that reduces flaring emissions.

Speaker 5

Our wellhead gas capture rate was 99.6% in 2020 and rollout of Closed loop gas capture systems will help capture more of the remaining 0.4%. Turning to our efforts to capture CO2, We are launching a project that will capture carbon emissions from our operations for long term storage. This project is designed to capture and store a concentrated source of EOG's direct CO2 emissions. We believe we can design solutions to generate returns from carbon capture and storage by leveraging our competitive advantages in geology, well and field facility design and field operations. Our CCS efforts are directed at emissions from our operations and we are not currently looking to expand those efforts into another line of business.

Speaker 5

We will provide updates in our pilot CCS project as it progresses. EOG is also Other innovative solutions for GHG emissions reductions. Over the past 18 months, we have deployed capital into several fuel substitution projects to power compressors used for natural gas pipeline operations and natural gas artificial lift. Compressors are the largest source of EOG's stationary combustion emissions. By replacing NGL rich field gas with lean residue gas, EOG can reduce the carbon intensity of the fuel, which lowers CO2 emissions and improves engine efficiency.

Speaker 5

Using lean residue gas also earns a very favorable financial return by recovering the full value of the natural gas liquids versus using those components as fuel. Another fuel test we conducted recently was blending hydrogen with natural gas. While it is still in the early stages, we are analyzing the test data to evaluate the emissions reductions that would be possible from this blended fuel at an operational and economic scale. We're very excited about this part of the business. Just like cost reductions, well improvements or exploration success, this is a bottom up driven initiative.

Speaker 5

UG employees thrive on this type of challenge. We create innovative solutions and apply technology to solve problems, improve processes And optimize efficiencies while generating industry leading returns. The EOG culture has embraced our 2,040 net zero ambition And we are focusing our efforts to minimize our carbon footprint as quickly as possible. Now here's Bill to wrap up.

Speaker 2

Thanks, Ken. In conclusion, I'd like to note the following important takeaways. First, by doubling our reinvestment standard, the future Our earnings and cash flow performance are the best they've ever been. Results from the first half of this year demonstrate the power of Double Premium and the beginning of another step change in performance. 2nd, EOG is not satisfied.

Speaker 2

We are committed to getting better. Sustainable cost reduction and improving well performance are driving returns and free cash flow potential to another level. At the same time, The same innovative culture that is driving higher returns is also improving our environmental performance. 3rd, Our commitment to returning cash to shareholders has not changed. As we have already demonstrated, returning meaningful cash to shareholders Remains a priority.

Speaker 2

And finally, as Eversa transitions into the CEO role, I could not be more excited about the future of the company, The quality of our assets and the quality of this leadership team are the best in company history, all supported by EOG's talented employees The company is incredibly strong and our ability to get stronger has never been better. The future of EOG is in great hands. Thanks for listening. Now we'll go to Q and A.

Operator

Thank you. The question and answer session will be conducted electronically. To allow your signal to reach our equipment. Questions are limited to one question and one follow-up question. We will take as many questions as time The first question comes from Leo Mariani with KeyBanc.

Operator

Please go ahead.

Speaker 6

Hey, guys. You obviously highlighted some success on kind of these small bolt on deals here. And I guess just from my perspective, it seemed like those were very, very economic, just very cheap per acre cost at around $2,500 per acre.

Speaker 7

Is a lot of this just

Speaker 6

a function of the fact that these are very small deals and sort of captive to EOG existing acreage and infrastructure, which just gives you kind of The natural ability to kind of buy these without a lot of competition and just want to get a sense of how repeatable these type of bolt ons can be for you guys going forward?

Speaker 2

Yes. Thanks, Leo. I'm going to ask Ezra to comment on that.

Speaker 3

Yes. Leo, you described that Very, very well. These are smaller deals as I highlighted. It's 25,000 acres across 8 different deals that we've captured and put together Over the past 12 months. And these are low cost opportunities in our core positions within the Delaware Basin.

Speaker 3

And typically these are things that are either contiguous with our pre existing acreage position or very, very close to our acreage position. And so there's not a lot of outside competition. A lot of times, we're just by all regards, we're the partner that makes sense to go ahead and get these deals because like I Said we have the surrounding wells, information, seismic and oftentimes some of these deals can go immediately right into our existing infrastructure. And these are typically we highlighted the last 12 months, but we wanted to give a sense of the type of scale and the impact that these low cost These can have when we're focused on them. And these deals are pretty continuous throughout all of our plays and throughout the year.

Speaker 6

Okay. That's helpful. And I guess I also wanted to ask about your comment around Seeing a less than $7 per BOE F and D year to date, clearly you attributed some of the factors There we talked about how your well costs are coming down, I know that's part of it, and also the move to double premium. But maybe you can provide just A little bit more color. I mean, I guess that less than $7 seems like a very low number out there.

Speaker 6

Are there any other just kind of Key factors where maybe there's more of a mix shift to certain plays where perhaps your higher concentration of Certain zones in the Delaware this year, and I know you guys are also drilling some gas wells in South Texas might be helping. Just any color around kind of Some of the key drivers that are getting it under 7?

Speaker 2

Yes, Leo. Billy Helms will comment on that. Yes. Good morning,

Speaker 4

Leo. It's strictly a function of moving to our double premium strategy. We saw a similar change, if you remember back when we shifted to premium a few years ago, And we're seeing that same compounding effect as we shift to double premium. The quality of our wells improves. And as you noted, we have a history of continuing to focus on lowering well cost and just our continued effort in those areas.

Speaker 4

So it's not really attributable From to one basin or the other, it's just a function of the impact of shifting to double premium across our portfolio. And I might add is we look to add wells to the inventory of double premium wells. They'll be in that same category to compete on both returns and finding cost.

Speaker 7

Thanks, guys.

Operator

The next question is from Neil Dingmann with Trust Securities. Please go ahead.

Speaker 8

Good morning, guys. Nice quarter. My first question is really just Ryan, when you've talked about shareholder return, obviously, that seem to be the hot topic these days. Billy, I'm glad you don't do this, but my thoughts about If you guys would ever there's been others out there that have sort of guaranteed a type of return or amount Or something like that. You guys seem to want to stay more flexible.

Speaker 8

But I'm just would just love to hear more color on, again, obviously, you guys have a monster amount of free cash flow coming in. That's the issue. I'm just wondering how you think about if you'd put any sort of guarantees on the type or amount going forward?

Speaker 2

Yes, Neal. We've outlined a very clear framework and we've consistently delivered on our priorities. And so maybe the best way to think about the future is to look What we've done in the past and I want to ask Ezra to give more color on that.

Speaker 3

Yes, Neal. In our investor presentation there on Slide 56, I think we can reference that. This year, we've been very successful executing on all of our cash flow priorities in the framework that we've kind of laid out. We've been able to increase the regular dividend by 10%, which we feel is our primary mode of capital return. Secondly, we were able to reduce our debt earlier this year by $750,000,000 by retiring a bond.

Speaker 3

And then, 3rd, we just paid a $600,000,000 special dividend on July 30 of this year, which we had announced during the last earnings call. So our year to date free cash flow commitment is $2,300,000,000 which is slightly more than the $2,100,000,000 we generated. And going forward, our framework and priorities have not changed. Lastly, we also highlighted in the opening remarks as we just Spoke about a little bit with Leo, some of the small bolt on acquisitions we've done, which is one of the avenues to growing our inventory. And that's really the where the entire process begins.

Speaker 3

It's having the depth and quality of inventory to continually improve the business. And with our shift to drilling these double premium wells, the free cash flow potential of the company continues to expand. And as it does and as we realize the cash, We're well positioned to continue executing on our priorities. We're committed to creating the most shareholder value and our cash return strategy is really a reflection of that. So as the company continues to improve, we're excited about that potential.

Speaker 8

Agree, guys. Really like the cash return strategy. And then Just one follow-up. Exploration, your opportunities are really you guys continue to stick out there. You obviously continue to be the leaders.

Speaker 8

Mentioned a number of things that have you excited. Could you just remind us again, I think the last was it, I forget Bill, was it maybe 13 or 15? Was it unique projects here in the U. S? I'm just wondering, can again, could you tell us maybe or just talk about the upside potential you see For that business this year, going into 2022 for the exploration upside?

Speaker 2

Yes, Neal. I think, what we've outlined is we've got about Steen exploration wells built into the CapEx this year, so in the U. S. So I'm going to ask Ezra to give some more color on that.

Speaker 3

Yes, Neil, the exploration prospects are all moving forward. As we discussed on the last call, the prospects have all started to move at Different phases, really kind of as a result of some of the slowdown during COVID and during 2020. So we're as Bill just mentioned, we're planning on drilling 15 wells outside of the publicly discussed assets. Some of these in some of the prospects are initial exploration wells. Some of them are more what we'd call appraisal wells, evaluating kind of the repeatability of these plays.

Speaker 3

We're still leasing across many of the plays as well. And as we've discussed, the opportunities are really targeting a higher quality rock than what's typically been drilled horizontally. It's an outgrowth of a lot of technical work we've done across multiple basins to combine modern drilling and completions technologies and apply those to reservoirs that have been traditionally overlooked. And really, we're very happy with our progress And we look forward to sharing additional information at an appropriate time.

Speaker 8

Great details. Thank you all.

Operator

The next question comes from Doug Leggate with Bank of America. Please go ahead.

Speaker 9

Well, thank you guys. So I think this is the first time I've had a chance to say, Bill, congratulations on your retirement. And Ezra, Excited to see what you how you move forward with the business. But I wonder, Bill, if I could ask you just to maybe a little bit of a retrospective here as you walk out So to speak. There's been a lot of changes in the business model, growth transitioning to free cash flow and so on.

Speaker 9

So I'm just wondering if you can offer any thoughts as to how this business should look going forward both at the sector level and at the UG level As you kind of look back on your tenure and the changes that have taken place all that time.

Speaker 2

Yes, Doug. Well, thank you very much. And you're right. I mean, the business has evolved over the last Year since the shale business really started. And it's obviously, it's moving in an incredibly Great positive direction right now that the focus on returns, we've always been, I think, a leader in focus on returns and we're like super excited about that.

Speaker 2

The capital discipline, spending well below cash flow and Generating high returns and giving significant amount of cash back to shareholders, I think is certainly all very positive. And So I think really we're entering a super new era, and I think it's more positive than it's ever been before. I think we as an industry are going to be generate better returns and going to give more back to shareholders. And I think we're in a more The macro environment that we've been in, since really the shale business started. I think OPEC plus is solid.

Speaker 2

I think the U. S. Will remain disciplined. And so I think the industry is in for a long run of really Good results.

Speaker 9

We've enjoyed butting heads with you over the years still. So congratulations again. Good luck. Ezra, my follow-up is maybe for you. EOG has obviously been an organic story for many, many years and you've touched on exploration again today.

Speaker 9

But Yates was one of the I guess the step out acquisitions that you did. And if we look at your portfolio position today, there's clearly a large Asset potentially for sale right in your backyard in a very high quality acreage position you could argue. Why would M and A not be a feature of the business at some point? And maybe I go so far as to say, would you rule yourself out of Being interested in that shale package in a week or so. Thank you.

Speaker 3

Yes, Doug. No, we're not evaluating any large acquisition packages at this time. We're focused on these small high return bolt on acquisitions. And as discussed in the

Speaker 2

opening remarks,

Speaker 3

the larger expensive M and A deals, the opportunity struggle to compete With the existing return profile that we have within the company due to either high PDP cost, the high acreage cost or both. Oftentimes, acreage being marketed might be additive to the quantity of our inventory, but not additive to the quality. And as we've discussed, as you know, We're always working to improve the quality of our assets. We're having a great success with the small bolt on acquisitions. We're feeling very confident with our ability to increase the quality of our deep inventory through our organic exploration program.

Speaker 3

So we're excited about our prospects there.

Speaker 9

Very clear. Thanks, Ezra.

Operator

The next question comes from Paul Cheng with Scotiabank. Please go ahead.

Speaker 7

Thank you. Good morning, gentlemen. Two questions, please. The first one, Maybe that Bill, you can help us to frame it to understand the decision a little bit faster. If we look at the last quarter when you announced special dividend, I think you said a number of precondition And that's all being met such as you generate substantial free cash flow, you don't have much of the debt maturity In the near term and your cash is already in excess of what you think is a reasonable level, which is 2,000,000,000.

Speaker 7

If we look in this quarter, basically all those conditions are still being met, but you decide not to decay another special dividend. So we're just trying to understand that what is the additional consideration in that decision? And also if you can talk about between buyback and special dividend at this point of the cycle, Which is more preferable for you or how you look at the differences? So that's the first question. The second question is with A2, I think that you guys Kian is one of the And the question leader in many of the basins, you are not interested in large scale M and A, which understandable.

Speaker 7

Does it make sense, however, that to work with some of your peers to pull together The asset is to form a really large joint venture. So everyone still have their own equity ownership. You don't pay any premium, But you will be able to allow to use your technical know how to apply to even a larger Scale asset and drive even better efficiency gain. Do you think that it makes sense for EOG for that kind of structure? Thank you.

Speaker 2

Yes, Paul. So on the first question, I think it's Super important and I think we've already shared this. Our we've got a very clear framework and we've consistently delivered As you pointed out, on that framework and significantly given in that framework, significantly given a lot of money back to shareholders. And going forward, our framework and priorities are not changed at all. So as we generate additional free cash flow, We're committed to returning cash to shareholders in a very meaningful way.

Speaker 2

It's really all about doing the right thing at the right time. As the company continues to improve, we're excited about our potential to increase total shareholder return. And in the framework, we do have the option for opportunistic buybacks As long as along with special dividends. And so we look at opportunistic buybacks as being able to Have the opportunity to consider buying back shares in the countercyclic environments where the market It's not well and our stock price is significantly undervalued. Well, that would be an opportunity to consider Buybacks, in the good times, we think the special dividend is the way to go and that's what we're executing on now And that's what we're hopeful to continue to execute in the future.

Speaker 2

On the second part of your question, on the large scale M and A, I'm going to ask Billy to kind of think through that question and give his feelings on that.

Speaker 4

Yes. Thanks, Bill. On the large scale M and A, as Ezra just talked about a minute ago, certainly we're not interested in Adding quantity to our inventory, but it's more about the quality of the assets we have. And as we think about Forming maybe a potential larger JV, that same approach needs to apply as we look across the fence. If our assets are in what we consider the core acreage position in the play, adding in acreage outside of that ring fence would dilute our We've also taken, as you know, taken a lot of effort to build out infrastructure to make our to lower our unit cost and We continue to improve our returns and we build out that infrastructure to meet the volume expectations that we have for developing our acreage.

Speaker 4

That may or may not apply as you add in additional acreage outside of that. So I think each operator looks at how to make the most efficient Use of the acreage and their capital as they can and forming JVs doesn't necessarily improve overall Company metrics. So I think, while we've looked at bolt ons as a way to Shore up a lot of our core area acreage. I think that is a very applicable part of maybe thinking about JV expansions, Continue to core up in your base areas where it adds the same quality, doesn't dilute your quality of the assets, But just expanding in a basin may or may not do that.

Speaker 7

Thank you.

Operator

The next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Speaker 10

Yes, good morning. Tim, maybe starting with you. I just wanted to get maybe some of the order of operations around Potential incremental cash return beyond the dividend. Last quarter, you mentioned that EOG like to keep a $2,000,000,000 minimum Cash balance plus fund the $1,250,000,000 bond maturity. So that suggests that you'd like to get to $3,250,000,000 of cash And anything beyond that is available for cash return beyond the dividend?

Speaker 1

Certainly, you can You do that math, but it's more than that. As Ezra and Bill talked about further, we have to look at all of our priorities And the timing of those priorities to determine when and if there's another special dividend or share repurchases Our bolt on acquisitions, all those things are in play at all times. So and the $2,000,000,000 is not an end of the month number, It's during the cycle. So cash can vary tremendously during a month. So The $2,000,000,000 is the low point during the month, not necessarily the end of a month.

Speaker 1

So you have to keep that in mind as well. But Yes, you can do that math, but that's not all there is to it. We have to look at all of our priorities and where we're at in the cycle. And as has been pointed out On slide 6, we've already distributed more cash than we brought in, in the first half of the year. So we're well on our way to achieving that.

Speaker 1

So as we move through the second half of the year, we'll look at what other cash is generated and we'll evaluate how to Use that cash at that time.

Speaker 10

Great. And maybe just a follow-up to Paul's question. Could you give us maybe some feedback you've gotten from some of the shareholders on the special dividend? And your thoughts On the pros and cons of moving to a formulaic type of approach around cash return And either special dividends or

Speaker 7

the buyback?

Speaker 2

Yes, Arun, this is Bill. We've gotten enormously positive responses from every shareholder on the special dividend. That was a super hit. And they like our framework when you really think through it. It's not really a complicated framework.

Speaker 2

It's a framework where We want to be in a position to maximize total shareholder returns and as we said, I've said, be able to do the right thing at the right time. If you look at the history of what we've been doing, really over the last several years, we have been we've increased the Regular dividend by 146 percent, and now we're working on special dividends. So, As we go forward, it is certainly our goal to continue to return meaningful cash back to the shareholders through the process. So, really, it's a pretty straightforward process if you kind of think through it and the framework is pretty simple. And it's just a matter of giving us the ability to have the options to do the right thing to maximize Total shareholder return.

Speaker 10

Great. Bill, thanks a lot.

Operator

The next question is from Michael Scialla with Stifel. Please go ahead.

Speaker 11

Good morning, everybody. And Bill, I'd like to offer my congratulations on a great career as well. I know it's Too early to give details on 2022, but wanted to see if you could speak to at least at a high level, given your outlook for Flat to lower well costs next year. If you still see barrels held off the market by OPEC plus would you just look to hold production flattish And could you do that with kind of equal to lower capital than you spent this year?

Speaker 2

Yes, Mike. Well, thank you very much. Again, we appreciate your comments. It's a team effort in EOG. I'll tell you what, we've got a lot of great employees and Super management team.

Speaker 2

So it's a team effort and it's been an honor to be able to work with all the everybody. About 2022, it's really too early to talk about growth. We need to watch the pace of demand and recovery and spare Capacity drawdown, so we don't want to really speculate on anything specific for 2022, but I'm going to ask Ezra to make some additional color on that.

Speaker 3

Yes, Michael. As Bill said, it's Pretty early on 2022. It's really it's still pretty early to discuss any type of growth. EOG is we're committed. We're not going to grow until the market Clearly needs the barrels and we've outlined what we're looking for.

Speaker 3

We're committed to staying disciplined and currently we want to see demand return to pre COVID levels, Low spare capacity and we want to see inventories at or below the 5 year average. Every year market factors are going The plan for that year and we're going to remain flexible and modify our plans to fit the market conditions. As you said, we have made great progress this year On our total well cost reductions, and going forward, that's strengthening the underlying capital efficiency of the company And continuing to lower the cost base of the company. And so as we move forward, regardless Of any type of growth rates, we've set the company up with this double premium investment plan to continue to expand the free cash flow generation potential EOG.

Speaker 11

Okay. And I guess really just my question there was if you were to Hold production flat, it looks like the capital required to do that is not going up at least over the next 12 to 18 months as you see the world now. Is that fair to say?

Speaker 2

Yes, Mike. That's certainly fair to say. I mean, We're reducing costs all the time and improving well productivity. So we're hopeful that Our maintenance costs in the future will be lower than it is today and that's certainly directionally what we've done in the past and that's hopeful what we're going to do in the future.

Speaker 11

Okay, great. And then just want to follow-up with Ken on you mentioned the CCS pilot you have there. Is there any more detail you can offer, Ken, in terms of sounds like it's EOG specific, at least at this point. Can you talk about what the source of emissions are? Where you're focused within your footprint and are you looking at Storing CO2 in depleted fields or saline aquifers, just any more detail you can give us there?

Speaker 5

Sure. Thanks for that question. At this point in time, we really don't anticipate any partners on our pilot project. But with our geologic operational expertise, we'll evaluate partnering on future projects on a case by case basis. This project is really part of our broader strategy of reduce, capture and offset and it's focused on capturing our CO2 emissions in an area where we Permanent and secure geologic storage, in an interval thousands of feet below the surface and that's pretty much what we're giving out at this time.

Speaker 8

Okay. Very good. Thank you.

Operator

The next question comes from Bobby Brackett with Sanford Bernstein, please go ahead.

Speaker 12

Hi, good morning. To put you on the spot a little bit, you highlighted the various well cost Categories, tubular sticks out as being both significant and also exposed to inflation. You tackled the problem last year With prepurchasing, can you throw out some ideas that the organization has come up with to sort of attack that cost category?

Speaker 4

Billy, you want to comment on that? Yes. Good morning, Bob. Obviously, yes, steel costs are going up, which is affecting tubular costs. This last year, we were very fortunate to take advantage of pre purchasing The tubulars we needed for this year's program and benefited greatly from that.

Speaker 4

As costs go up in the future, We use the same approach and try to take an opportunistic look at when to secure tubulars for the next coming drilling program. And so we'll continue to look at that. Undoubtedly, it's likely that the cost for tubulars will be higher next year than they are this year, Which is why in that slide number 10, we tried to give you some color on other ways we're trying to keep our well cost Flat to down going into next year and those come from the efficiencies we're seeing across the operation from drilling time to The implementation of our super zipper technology on the completion side to newer contracts at a lower Right, for some of the services we have. So it's a mixture of things we use to offset those inflationary pressures we see in the different parts of our business.

Speaker 12

Okay. That's clear. And just as a quick follow-up, could you contrast SuperZippers the way you think about them versus, say, a traditional zipper frac we might think of or even a dual frac?

Speaker 4

Sure. So our super zipper technique is very similar to what industry calls a simulfrac. The differences would be in how we actually implement it on a well to well basis. We keep very close control over the injection rates and pressures Individual wells within the Super Zipper operation. So it's a very Encrypted and very detailed procedure that allows us to control the rates and pressures just like we were doing a conventional frac with Any other fleet, but the advantages of course is being able to double the amount of stages you get in a particular day by attacking the locations 2 at a time.

Speaker 4

And we really are Advancing that technology quite a bit. Last year, we probably did less than 10% of our wells Across the company benefited from SuperZipper. This year, it's probably directionally closer to a third of the wells and we expect that percentage to increase going into next year. So, we think it's going to give us a tremendous cost advantage next year as we go into the program. Great.

Speaker 9

Thanks for that.

Operator

The next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Speaker 13

Thanks. And Bill, again, I also want to congratulate you give you congratulations on your tenure. Obviously, you all Navigated a lot of ups and downs over the past few years fairly successfully, so congrats for that. I just have One question and you all seem to be doing better than expected. I mean certainly it seems like production, especially oil Rakshan on the upper end of your range.

Speaker 13

And can you just give us some general thoughts? I know you're not in a position where you're going to talk to 2022 And how you think about growth, but if you are running a little bit ahead based on outperformance of your wells, Would you think about tapering as you get into 2022 a little bit just to maintain the flattish kind of production you all expected this year?

Speaker 2

Yes, Scott, again, thank you so much for your comments. And I'm going to ask Billy to comment on The remainder of this year and particularly the Q4.

Speaker 4

Yes. Good morning, Scott. So Certainly, we're very pleased with the progress we've made on both reducing our well cost and the performance we're seeing from the Wells we are bringing to production this year. It's a testament to the strategy of shifting to the double premium standard again. So as you go into the We started out the year with a little bit higher activity level.

Speaker 4

We had a little bit higher rig count at the start of the year. And then this tapered off. And We're running at a pretty consistent rate now and expect that to continue through the end of the year. And then next year, as Bill elaborated. It's kind of hard to anticipate what we'll need this year, but I think the performance that we're seeing this year will continue into next year certainly.

Speaker 4

And the pace of activity will be dictated by what we see in the market conditions. So that's kind of the color I could give you, but our performance will continue to At least they plan to improve.

Speaker 13

Understood. Thanks for that.

Operator

The next question comes from Neil Mehta with Goldman Sachs and Company.

Speaker 14

Good morning, team and congratulations, Bill, last quarter you talked a little bit about the analytics that you were building around monitoring the oil macro. I'd love your latest real time thoughts. A lot of moving pieces here. OPEC, demand uncertainty, Iranian barrels, U. S.

Speaker 14

Supply, how are each of those parameters evolving here as you guys are evaluating?

Speaker 2

Yes, Neil. As we've all seen, we're definitely demand is on a strong recovery. It's a bit lumpy, obviously, due To the virus resurgent in a few areas, but we expect even with that, we expect pre COVID demand To be reached by early 2022. Inventories are already below the 5 year average really in the U. S.

Speaker 2

And in the world, so that has already been checked. And on the supply side, as I've said before, we believe that The U. S. Will stay disciplined and there'll be a small growth in the U. S.

Speaker 2

Next year, but not much growth. And we see OPEC Plus, they look to be very solid. So they'll continue to bring back on There are shut in volumes and spare capacity as needed gradually. And we see that spare capacity, If the recovery continues like we expect, we see spare capacity could be very low by the Q2 or by the middle Of next year. So we'll just have to watch and see how it goes.

Speaker 2

But overall, we see a very positive macro environment.

Speaker 9

The follow-up is just as

Speaker 14

you think about the U. S. Production profile, maybe you can get a little bit more granular in terms of how you're thinking about those volumes. But the question we continue to get asked is where are we in terms of resource maturity? Have the best of efficiencies been driven out of Shale, maybe you talk about the Permian, the Eagle Ford and the Bakken.

Speaker 14

What are you seeing in each of those plays? Where are we in terms of efficiencies? And then Is the slowdown in U. S. Production being driven by resource maturity or is it really being driven by capital discipline?

Speaker 2

Yes. We see we run the numbers on all the different groups from the privates to the publics To the majors, and then generally, particularly in the privates, we see definitely well productivity is Going down, not up. So it takes a lot more wells for that group to maintain production or even think about growing it. And overall, in the other groups, not specific to EOG, but we generally see Well production to be flat, to not improving, over time. And so I think that is a function Resource maturity, I think, when you get in downspacing, in Spacing and in timing and all that, I think, is going to subdue the productivity.

Speaker 2

And so literally in the biggest factor of course is in the capital discipline where you're spending tremendously amount of Less cash flow than we've been spending in the previous year. So when you put all that together, we do not We think the discipline will remain with the group. We do not see the U. S. Growing significant Next year.

Speaker 2

So that's a very positive I think for shareholders and positive for the macro.

Speaker 7

Thanks, Bill.

Operator

This concludes our question and answer session. I would like to turn the conference back Over to Mr. Thomas for any closing remarks.

Speaker 2

So in closing, I'd like to say thank you to all the EOG employees To continue to make EOG so successful. It's truly a privilege and an honor to be on the same team with each one of you. As Ezra transitioned into the CEO role And Billy steps up to President and Chief Operating Officer, along with the rest of the Senior management team, I could not be more excited about the future of the company. So to all shareholders and future shareholders, we want to

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
EOG Resources Q2 2021
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