EOG Resources Q4 2021 Earnings Report

EOG Resources EPS Results

• Actual EPS: $3.09
• Consensus EPS: $3.21
• Beat/Miss: Missed by -$0.12
• One Year Ago EPS: $0.71

EOG Resources Revenue Results

• Actual Revenue: $6.04 billion
• Expected Revenue: $5.56 billion
• Beat/Miss: Beat by +$481.14 million
• YoY Revenue Growth: +103.80%

EOG Resources Announcement Details

• Quarter: Q4 2021
• Date: 2/24/2022
• Time: After Market Closes
• Conference Call Date: Friday, February 25, 2022
• Conference Call Time: 9:48AM ET

EOG Resources (NYSE:EOG) is an independent exploration and production company engaged in finding, developing, producing and marketing crude oil, natural gas liquids and natural gas. The company focuses on large-scale, onshore assets and applies drilling, completion and other technologies to develop unconventional oil and natural gas resources.

EOG’s principal operations are located in the United States, including the Permian Basin in Texas and New Mexico, the Eagle Ford in South Texas and the Rocky Mountain region. The company also has international operations in Trinidad and Tobago, where it produces natural gas and supplies energy for domestic and industrial use.

The company was established in 1999 following the separation of Enron Oil & Gas from Enron Corp. and was subsequently renamed EOG Resources. Its activities include acreage acquisition, well drilling and completion, hydrocarbon production, processing and marketing, with an emphasis on maintaining a diversified portfolio of oil, natural gas liquids and natural gas assets.

EOG Resources Q4 2021 Earnings Call Transcript

Key Takeaways

• EOG reported record 2021 results with $4.7 billion net income and $5.5 billion free cash flow.
• The company doubled its regular dividend and paid two special dividends, returning $2.7 billion to shareholders and announcing a $1 per share special dividend for Q1 2022.
• EOG raised its internal investment hurdle to a 60% after‐tax return (“double premium”) at $40 oil/$2.50 gas, further lowering full‐cycle costs and supporting stronger margins.
• Operational focus on cost efficiency drove a 7% reduction in well costs and improved drilling and completion techniques, offsetting inflationary pressures.
• The company advanced its ESG goals by cutting methane emissions by ~25%, reducing injury rates, boosting water reuse to 55%, and targeting net‐zero emissions by 2040.

Presentation

[Operator]

Good day, everyone, and welcome to the EOG Resources fourth quarter and full year 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 EOG Resources, Mr. Tim Driggers. Please go ahead, sir.

[Tim Driggers, EVP and CFO at EOG Resources]

Good morning, and thanks for joining us. This conference call includes forward-looking statements. Factors that could cause our actual results to differ materially from those in our forward-looking statements have been outlined in the earnings release in EOG's SEC filings. This conference call also contains certain non-GAAP financial measures. Definitions and reconciliation schedules for those non-GAAP measures can be found on EOG's website. Some of the reserve estimates on this conference call may include estimated potential reserves and estimated resource potential, not necessarily calculated in accordance with the SEC's reserve reporting guidelines. Participating on the call this morning are Ezra Yacob, Chief Executive Officer; Billy Helms, President and Chief Operating Officer; Ken Boedeker, EVP, Exploration and Production; Jeff Leitzell, EVP, Exploration and Production; Lance Terveen, Senior VP, Marketing; and David Streit, VP, Investor and Public Relations. Here's Ezra.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Thanks, Tim. Good morning, everyone. 2021 was a record-setting year for EOG. We earned record net income of $4.7 billion, generated a record $5.5 billion of free cash flow, which funded record cash return of $2.7 billion to shareholders. We doubled our regular dividend rate and paid two special dividends, paying out about 30% of cash from operations. We are continuing to deliver on our free cash flow priorities this year with an additional special dividend announced yesterday of $1 per share. The last time we set an earnings record was in 2014. We earned $5.32 per share, while oil averaged $93. Last year, we shattered that record, earning $7.99 per share with $68 oil.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

That's 50% higher earnings with a 27% lower oil price. The catalyst for that improvement was our shift to Premium six years ago. Premium is our internal investment hurdle rate that uses low fixed commodity prices to calculate the returns that drive our capital allocation decisions. $40 and $2.50 natural gas for the life of the well. While our Premium strategy ensures high well level returns and quick payouts in any given year, the more significant and durable impact is to our full cycle development costs. The benefit of making investment decisions using fixed low commodity prices has the enduring impact of steadily improving corporate level operating and cash margins over time. That impact is now directly observable on the face of our financial statements. Last year, we raised the bar again to Double Premium.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Our hurdle rate increased from 30% to a minimum of 60% direct after-tax rate of return using the same low fixed prices of $40 oil and $2.50 natural gas. The switch promises to further improve financial performance in the years ahead and is what gives us great confidence in our ability to continue delivering shareholder value through commodity price cycles. We expect to look back on 2021 like we do on 2016 as the year we made a permanent increase to our return hurdle that drove another step change in the financial performance of EOG. We also delivered as we promised operationally in 2021 with production volumes, CapEx, and operating costs in line or better than targets set at the beginning of the year.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

We were able to successfully offset emerging inflationary pressures during the year to lower well costs by 7%. 2021 was also a big year for ESG performance. We reduced our methane emissions percentage and injury rates and increased water reuse. We announced our 2040 net zero ambition and added our goal to eliminate routine flaring by 2025 to our existing near-term targets for greenhouse gas and methane emissions rates. We continue to develop creative solutions, leveraging existing technology to make progress on our path towards our net zero ambition. There's a growing recognition that oil and gas will have a role to play in the long-term energy solution. We know that to be part of that solution, we not only have to produce low-cost, high-return barrels, we also have to do it with one of the lowest environmental footprints.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

As we look into 2022, the global oil market is in a position to rebalance during the year. Our disciplined capital plan aims to increase long-term shareholder value through high return reinvestment that optimizes both near-term and long-term free cash flow. The plan also funds exploration and infrastructure projects to improve the future cost structure of the business. With the improvements we made in the business last year, combined with a higher commodity price environment, EOG is positioned to once again generate significant free cash flow. We continue to follow through on our free cash flow priorities. Our stellar fourth quarter performance allowed us to further strengthen the balance sheet, and we are returning cash to shareholders with the $1 per share special dividend declared yesterday.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Combined with our $3 per share regular dividend, we have already committed to return $2.3 billion of cash to shareholders in 2022. We remain firmly committed to our long-standing free cash flow and cash return priorities, and you can expect EOG to continue to deliver on them as the year unfolds. EOG has exited the downturn a much better company than when we entered it, higher returns with a shift to double premium, a lower cost structure, more free cash flow, a smaller environmental footprint, and a culture strengthened by the challenges we have overcome together. Our culture is the number one value driver of EOG's success.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

By remaining humble and intellectually honest, we sustain the cycle of constant improvement that drives our technology leadership. Of all the fundamentals that consistently create long-term value, none of them matter without the commitment, resiliency, and execution from our employees. Now here's Tim to review our financial position.

[Tim Driggers, EVP and CFO at EOG Resources]

Thanks, Ezra. EOG generated record financial results in the fourth quarter with adjusted earnings of $1.8 billion and free cash flow of $2 billion. Capital expenditures of $1.1 billion were right in line with our forecast, while production volumes finished above target. For the full year, adjusted earnings were a record $5 billion or $8.61 cents per share. This yielded return on capital employed of 23%, while oil prices for the year averaged $68 per barrel. Perhaps most important than setting records is what drove our outperformance. 2021 illustrated EOG's success at driving down our cost structure. ROCE would have been 10% or better at oil prices as low as $44.

[Tim Driggers, EVP and CFO at EOG Resources]

Keep in mind that back in 2016, when the premium investment standard was introduced, the oil price required for 10% ROCE was in excess of $80 per barrel. The dramatic improvements we've made to the profitability of our business reflect the benefits of using the highest investment threshold in the industry. The bottom line financial impact of double premium is just beginning to show up. Like our original switch to premium, it will grow over the coming years. Our goal is to position the company to earn economic returns at the bottom of the cycle, less than $40 oil, and generate returns that are better than the broader market on a full cycle basis. Free cash flow in 2021 was a record $5.5 billion, and we deployed this cash consistent with our long-standing free cash flow priorities.

[Tim Driggers, EVP and CFO at EOG Resources]

We doubled the regular dividend rate, which now stands at an annual $3 per share and represents a 2.7% yield at the current share price. We are confident in the sustainability of our high return, low cost business model to support a dividend that has never been cut or suspended in its more than 20-year history. We solidified our financial position, finishing the year with effectively zero net debt. We were also able to address additional cash return priorities. We paid two special dividends for a combined $3 per share. We also refreshed our buyback authorization, which now stands at $5 billion. We will look to utilize this on an opportunistic basis. In total, EOG returned $2.7 billion of cash to shareholders in 2021.

[Tim Driggers, EVP and CFO at EOG Resources]

This represents 28% of discretionary cash flow and 49% of free cash flow, putting EOG among E&P industry leaders for cash return in 2021. Looking ahead to 2022, our disciplined capital plan and regular dividend can be funded at $44 oil. At $80 oil, we expect to generate about $11 billion of cash flow from operations before working capital. The $4.5 billion capital plan represents about a 40% reinvestment ratio, resulting in more than $6 billion in free cash flow. This, of course, is on an after-tax basis, as we expect to be a nearly full cash taxpayer in 2022, as we were last year. We are in an excellent position to continue to deliver on our free cash flow priorities in 2022.

[Tim Driggers, EVP and CFO at EOG Resources]

EOG declared a $0.75 regular dividend yesterday, which is our highest priority for returning cash to shareholders. The size of the regular dividend is evaluated every quarter. As the financial performance and cost structure of EOG continues to improve, we expect that will be reflected in continued growth of the dividend. Turning to our second priority, this period of high oil prices allows us to further bolster the balance sheet. To support our renewed $5 billion buyback authorization and prepare to take advantage of other countercyclical opportunities, we plan to build and carry a higher cash balance going forward. We expect there will be opportunities in the future to create significant shareholder value by deploying a strong balance sheet and ample liquidity at the right time.

[Tim Driggers, EVP and CFO at EOG Resources]

Finally, we also announced an additional cash return to shareholders yesterday with a $1 per share special dividend to be paid in March. Along with the regular dividend, EOG has already committed to return $2.3 billion of cash to shareholders in 2022. We are fully committed to continuing to deliver on all of our free cash flow priorities. Here's Billy.

[Billy Helms, President and COO at EOG Resources]

Thanks, Tim. First, I want to thank all of our employees for their outstanding accomplishments and stellar execution last year. I'm especially proud of their safety performance. In addition to outstanding operations and financial improvements, we achieved a record low injury rate. 2021 was another year of execution. Throughout the year, we consistently exceeded our oil production targets, primarily due to strong well results. Our operations teams continued to innovate and find opportunities to increase efficiencies and lower the average well cost by 7%, beating the 5% target we set at the start of the year. Our drilling teams are achieving targeted depths faster with lower cost by focusing on reliability of the tools and technical procedures that drive daily performance. For example, in our Delaware Basin Wolfcamp play, our teams have improved days to drill by 42% since 2018.

[Billy Helms, President and COO at EOG Resources]

In our Eagle Ford oil play, after drilling several thousand wells, our teams continued to refine the drilling operation to drive consistent performance from our rig fleet, resulting in a 21% reduction in the drilling cost since 2018. With our decentralized organization and collaborative teamwork across operational areas. We continue to generate ideas for improvement through our innovative approach to areas such as improved bit design and drilling motor performance and share them throughout the company. On the completion side, we made great strides to expand the use of our Super Zipper or simul-frac technique to about one-third of our wells completed last year. Completion cost also benefited from reduced sand and water costs through our integrated self-sourcing efforts and water reuse infrastructure. Utilizing local sand and water pipelines includes the added benefit of removing trucks from the road, contributing to a safer oil field with lower emissions.

[Billy Helms, President and COO at EOG Resources]

Cash operating costs were in line with forecast, and while delivering a higher level of total production, they were nearly equivalent to our cash operating cost pre-pandemic in 2019. The savings are a result of a focus on reducing workover expenses and improvements in produced water management. These efforts will expand in 2022 to help offset additional inflationary pressure. We also had another great year improving our ESG performance metrics. Preliminary calculations indicate that we reduced our methane emissions percentage by about 25% and our total recordable incident rate by 10%. We also achieved a 99.8% target for wellhead gas capture and increased water resourced from reuse to 55%. Again, these are preliminary results as our final metrics will be published in our sustainability report later this year.

[Billy Helms, President and COO at EOG Resources]

As we enter 2022, EOG is not immune to the inflation that we're seeing across our industry, but we have line of sight to offset these inflationary pressures through innovation and technical advances, contracting for services, supply chain management, and self-sourcing of materials. Over 90% of our drilling fleet and over 50% of our frac fleets needed to execute this year's program are covered under existing term agreements with multiple providers. Our vendor partnerships provide EOG the ability to secure longer-term, high-performing teams at favorable prices while providing the vendors a predictable and reliable source of activity to run their business. EOG's technical teams take ownership of various aspects of the drilling and completion operations to drive performance improvements and eliminate downtime. As a result, we still see opportunities to sustainably improve our performance.

[Billy Helms, President and COO at EOG Resources]

Some of the largest efficiency gains will be in our completion operations this year. For example, we expect to utilize our Super Zipper technique on about 60% of our wells, increasing the amount of treated lateral per day. We're also enhancing our self-sourced local sand efforts, which we expect to not only secure the material needed for the year, but also offset the effects of inflation. We continue to expand our water reuse capabilities that will assist in offsetting inflation in both our capital program and lease operating expense. We remain confident that we'll be able to keep well costs at least flat in 2022. EOG's capital efficiency continues to improve as a result of EOG's culture of continuous improvement.

[Billy Helms, President and COO at EOG Resources]

2022 looks to be a year of challenges and inflationary headwinds, and I'm excited about the opportunity to bring our talented employees to further improve our business through innovation and improved operational execution. Here's Ken to review the year-end reserves and provide an inventory update.

[Ken Boedeker, EVP of Exploration and Production at EOG Resources]

Thanks, Billy. Last year, we replaced more than 2 times what we produced and reduced our finding and development costs by 17%. Our permanent shift to premium drilling and focus on efficiencies driven by innovation and our unique culture are keys to why our capital efficiency continues to improve and our corporate finding costs and DD&A rate continue to decline. Our 2021 reserve replacement was 208% for a finding and development cost of just $5.81 per barrel of oil equivalent, excluding revisions due to commodity price changes. Since 2014, prior to the last downturn and the implementation of our premium strategy, we have reduced finding and development costs by more than 55%.

[Ken Boedeker, EVP of Exploration and Production at EOG Resources]

With our double premium standard and the high grading of our future development schedule, we grew our reserve base in 2021 by over 500 million barrels of oil equivalent for total booked reserves of over 3.7 billion barrels of oil equivalent. This represents a 16% increase in reserves year-over-year. In terms of future well locations, we added over 700 net double premium locations across multiple basins to our inventory in 2021, replacing the 410 drilled last year by 170%. Our double premium inventory is growing faster than we drill it, and the quality of the locations we are adding to the inventory is improving. Innovation continues to drive sustainable cost improvements and operational efficiencies.

[Ken Boedeker, EVP of Exploration and Production at EOG Resources]

When you combine that with our focus on developing higher quality rock, we further improve the median return of the portfolio. We don't need more inventory. We're focused on improving our inventory quality. With this in mind, our double premium inventory now accounts for 6,000 of the 11,500 total premium locations in our inventory, representing more than 11 years of drilling at the current pace. Now, let me turn the call back to Ezra.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Thanks, Ken. In conclusion, I'd like to note the following important takeaways. First, investment decisions based on a low commodity price puts the emphasis on full cycle cost of development and demands efficient use of capital. While the benefits of such discipline are realized immediately, the larger impact builds over time. The seed to our stellar results in 2021 was the Premium strategy established six years ago, and we have set the stage for the next step change in financial performance by instituting Double Premium last year. Second, we are confident EOG's innovative and technology-driven culture can offset inflationary pressures this year. Our disciplined capital plan is focused on high return reinvestment to continue improving our margins in not only 2022, but in future years as well. Third, we are committed to returning cash to shareholders.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

We demonstrated this through the return of nearly 50% of free cash flow last year, and this quarter's special dividend, our third in less than a year. Doubling our regular dividend rate indicates our confidence in the durability of our future performance. The regular dividend is our preferred method to return cash to shareholders. As we continue to increase the capital efficiency of EOG through low-cost operations and improved well performance, growth of the regular dividend will remain a priority. We truly believe the best is yet to come. Going forward as a company and an industry with a financial profile more competitive than ever with the broader market and a growing recognition of the value we bring to society, EOG has never been better positioned to generate significant long-term shareholder value. Thanks for listening. Now we'll go to Q and A.

[Operator]

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star, the star key followed by the digit one on your touch-tone telephone. If you're using a speaker phone, please make sure your mute function is turned off 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 permits. Once again, press star one on your touch-tone telephone to ask a question. If you find that your question has been answered, you may remove yourself by pressing star followed by the number two. We will pause for just a moment to give everyone the opportunity to signal a question. Our first question today comes from Paul Cheng from Scotiabank. Please go ahead. The line is yours.

[Paul Cheng, Analyst at Scotiabank]

Hi. Thank you. Good morning, guys. First, we have been asked by many clients that with your CapEx plan and your production profile, if the current commodity price hold by mid-year, will you change the plan or under what circumstances that plan may get revised? That's the first question. The second question is that in your future capital allocation, is 2022 the way how you allocate will be a reasonable proxy in the future? Or we will see the percent in the new domestic drilling, which is about 10%, this year, and also that the facility and the gathering and processing, those percentage will go up as a total percent of your CapEx as you're trying to proven up more new resource area. Thank you.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Paul, this is Ezra. I'll answer the first question, and then I'll hand the second question over here to Billy to answer for you. With regards to our plan this year, as we've talked about, you know, the way we're approaching our planning is not based on the oil price that we're seeing. We're really looking to see the broad market fundamentals that are underlying and supporting that oil price and other macroeconomic indicators. When we look at our 2022 plan, you know, we think we've designed a very high return capital program. It balances our free cash flow this year with increased free cash flow in future years. It really starts with investing in the double premium wells.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

You know, when we bring those low cost reserves into the company's financials, it helps drive down the cost basis of the company, and it continues to expand the margins. It's what allows us to continue delivering high corporate level returns, as well as increase the cash flow potential of the company, and that further supports our free cash flow priorities. The program this year is at a pace that allows us to capture and incorporate technical learnings to continue to improve each of our assets, and that's the most important thing that we look to do every year, not only in 2022, but to go forward into future years as well.

[Paul Cheng, Analyst at Scotiabank]

Mm-hmm.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

I'll turn it over to Billy to answer the second part of the question.

[Billy Helms, President and COO at EOG Resources]

Yeah, Paul, good morning. On the second part of the question, if going forward beyond 2022 and the percent we have allocated to new domestic drilling potential are really our exploration plays and infrastructure spend, it's been fairly consistent in the past, and I expect it to be fairly consistent going forward. The largest amount of our CapEx spend will always be dedicated to our more development plays, like the Delaware Basin play. Going forward, we remain excited about the exploration potential we see in many of our new emerging plays, and we'll continue to fund those at a pace where we can continue to learn and get better, just as Ezra mentioned.

[Billy Helms, President and COO at EOG Resources]

The infrastructure spend has always been about the same percentage each year, and I expect that will continue to be managed in the same way. We wanna make sure that we don't get too far out in front with infrastructure spending, but it's done at a pace. Commensurate with the development activity in a given area. I expect that will continue to be the case.

[Paul Cheng, Analyst at Scotiabank]

Thank you.

[Operator]

Thank you. Our next question today comes from Arun Jayaram from JPMorgan Securities. Please go ahead. Your line is now open.

[Arun Jayaram, Research Analyst at JPMorgan Securities LLC]

Yeah, good morning. Global gas is clearly in focus, you know, right now. I wanted to get your thoughts on the revamped agreement with Cheniere, which will provide you more linkage to JKM. I think today you're selling about 140,000 MMBtu, and that increases to 420,000 over time. I was wondering if you could give us a sense of timing, and shed some light on the type of realizations you get from marketing this gas to LNG and how is the economic rent shared amongst you and Cheniere?

[Lance Terveen, SVP of Marketing and Midstream at EOG Resources]

Arun, hey, good morning. This is Lance. Thanks for your question. How are you today?

[Arun Jayaram, Research Analyst at JPMorgan Securities LLC]

Doing well.

[Lance Terveen, SVP of Marketing and Midstream at EOG Resources]

Well, hey. I was just saying good morning. Hey, no, we're very excited about, you know, the new amendment that we have with Cheniere. You're exactly right. I mean, we've got 140,000 MMBtu a day that started in 2020, and I think that just really speaks to being, you know, really a first mover too, 'cause as you can see right now, you can look at the price realizations, you can see, you know, JKM spot prices are near $40. Having that first mover, that capability, moving quickly there to get that exposure is exactly right. As you mentioned in your question, it's been very impactful in a positive way as we think about our price realizations. We're very excited about the commitment. You're right, it ramps up.

[Lance Terveen, SVP of Marketing and Midstream at EOG Resources]

We've got the 140 today. That'll ramp to 420 as they go into service. That's estimated to be probably with the first train there for stage three in 2026. But if you remember there, we ramp up, we kind of go to the 140 today. We start into the 420 as stage three goes into service. We still will maintain, and we extended to 300,000 MMBtus a day sale that we have that's linked to Henry Hub. You know, we're excited about it. It's a brownfield facility. You know, they've demonstrated you know, being early on many of their projects, so we're excited to see our relationship grow from that standpoint and expect to see the price realizations materialize as well.

[Arun Jayaram, Research Analyst at JPMorgan Securities LLC]

Great. My follow-up is just on the 2022 program. Ezra, you guided to 570 net wells. We want to get a bit more color on the decision to allocate more capital to the Delaware versus Eagle Ford. It looks like your Eagle Ford activity will be down, call it more than 50% year-over-year, while your Delaware will be up 30% more, including a little bit more Second Bone Spring. I was wondering if you could give us a little bit of color there.

[Billy Helms, President and COO at EOG Resources]

Yeah. Arun, this is Billy Helms. So yeah, we're allocating a little bit more money to the Delaware Basin, and it's really just a function of the maturity of the Eagle Ford at this point. The Eagle Ford has been an active play for more than, I guess, 12 years, and certainly has been a highly economic play for the company and continues to be. I would remind everybody that last year was the single best returns we've ever generated in the Eagle Ford play since its inception 12 years ago. It's still a very valuable play, but it is more mature. The Delaware Basin, on the other hand, is still a lot earlier in its maturity, in its life cycle, and still has a lot of opportunity to grow and test new horizons and expand our development capabilities over time. It's just a lot younger in its maturity phase. I think it naturally will command a little bit more activity on that side.

[Arun Jayaram, Research Analyst at JPMorgan Securities LLC]

All right, great. Thanks a lot.

[Operator]

Thank you. Our next question today comes from Doug Leggate from Bank of America. Please go ahead. The line is yours.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

Thanks. Good morning, Ezra, and good morning team. Guys, last time I spoke to you were talking about the mix of the double premium wells in the production profile and of course, the impact on sustaining capital and break-even oil prices. I wonder if you could just walk us through how you see that. The $32 breakeven you've given us today obviously comes with a, I guess, some element of growth in the capital. How do you see the sustaining capital? How do you see that breakeven trending? That's my first question.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Doug, this is Ezra Yacob. Thanks for the question. Yeah, our maintenance capital, you know, on the backs of a 7% well cost reduction last year and then additional well improvement combined with increasing the percentage of double premium wells, and what I mean by that is the lower cost of the reserves, bringing those into the company financials. Our maintenance capital continues to decrease, which is fantastic for us. You're right, the $32 break even that we provided today is actually commensurate with the CapEx program that we have for this year. But the double premium wells, we can't stress enough.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Not only does the impact show out on very rapid payout and a high rate of return, but really by bringing those lower cost reserves and a lower decline into the base of the company. Over time, it really does start to show up and impact the full cycle returns and free cash flow generation potential of the company in the future.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

What do you think those two numbers are today, the sustaining capital and the ex-growth break even?

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yeah. We didn't release a maintenance capital this earnings call due to the fact that we've started to allocate some additional capital into the Dorado play. It starts to get a little bit messy as you start going from oil into a BOE equivalence, as we are starting to see the phenomenal results there with the Dorado play as we dedicate additional capital to it. Nevertheless, you know, I think what we've outlined is with the 7% well cost reduction and slight improvements on the well mix year-over-year, we've continued to drive down that breakeven. For the full cycle return, we have a slide in our deck that shows the, you know, the one way that we like to present it is the price required for a 10%, return on capital employed. You can see we made a big step change last year as we drove that price down to $44.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

Okay. Thank you for that. My follow-up is a capital allocation question, and it's really maybe it's for Tim, but the free cash flow you're showing in your slide deck of north of $4 billion this year after the special could essentially wipe out the majority of your share buyback authorization. I'm just wondering why you still feel no need to offer some kind of capital return framework, because clearly, you know, with the transparency of that break-even level, with the duration of your inventory and so on, valuation becomes a little bit more transparent. Therefore buybacks could perhaps be more justifiable. So I'm just curious why you've been reluctant now to go down that route, and I'll leave it there. Thank you.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yeah. Doug, this is Ezra again. You know, just to reiterate our free cash flow priorities, you know, first or the commitment begins with the sustainable dividend growth of our regular dividend. You know, in 2021 we doubled that regular dividend. To us, that regular dividend is really indicative of what we're trying to accomplish. It reflects the continuing increase in the go-forward capital efficiency of the company, and it's also focused on creating through the cycle value and free cash flow. That's ultimately what we're trying to do. Again, going back to what we were just talking about with the investment in the double premium wells and lowering the cost basis of the company, trying to take at least a small step away from the inevitable commodity price cycles of our industry.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

The second free cash flow priority for us is a pristine balance sheet, which obviously provides tremendous competitive advantage in a cyclical industry. Then the third, you know, what we're talking about right now is the additional cash return in the form of specials or opportunistic repurchases. As we talked about last year, you know, we demonstrated the commitment with $2.7 billion in cash return through the form of $3 per share special dividends and our regular. We also retired that $750 million bond early in the year. In general, what we've talked about is, you know, we're gonna use our reserve, our repurchase opportunities to be more opportunistic than programmatic.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

In times, you know, one way to think is that in times of rising share or oil price, you can expect us to prefer to do special dividends. And really the way that we think about the share repurchase is we measure it as an investment, the same as we measure any investments across our business. We want to make sure that it competes on a returns basis. That's why we still prefer in an environment like this to stick with the special dividend as the priority for additional cash return.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

I'll keep pressing on it. Thanks, Ezra.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Thank you, Doug.

[Operator]

Thank you. Our next question today comes from Scott Gruber from Citigroup. Please go ahead. Your line is open.

[Scott Gruber, America Head of Equity Research at Citigroup]

Thanks. Good morning. Just following on that line of questioning, given that you're net debt negative here to start the year, should we think about the cash build as largely being over?

[Tim Driggers, EVP and CFO at EOG Resources]

This is Tim. No. First of all, we are excited to have to be in the position where we are to have a cash balance going for our net cash balance going forward. We will continue, as I said in my opening remarks, we'll continue to build cash on the balance sheet during these high oil price scenarios and look for opportunities in the counter-cyclical times to deploy that cash in a meaningful way, in the form of more specials or stock buybacks or just opportunistic things that come along in a counter-cyclical environment. The answer again is no. We will be in these high price environment, we will be building more cash on the balance sheet.

[Scott Gruber, America Head of Equity Research at Citigroup]

Gotcha. Appreciate the clarification. Congrats on the expanded export agreement. Just thinking, you know, about the broader backdrop here. You know, there's likely another round of LNG project sanctionings along the Gulf Coast. Seems like the industry is in an advantage position there. How aggressive will EOG be on entering additional agreements? You know, thinking kind of similar terms. You know, do you guys foresee an expanded JKM to Henry Hub spread that you'd wanna capture? Do you think that's sustainable, and you wanna capture that spread? Or do you kinda look at additional agreements more through a traditional diversification lens?

[Lance Terveen, SVP of Marketing and Midstream at EOG Resources]

Yeah. Scott, hey, thanks for your question. This is Lance. I think. What I can really point you to is like you think about each of our operating areas and you think about our transportation positions that we have, it really puts us, one, we're in close proximity, but two, we have the capability that we can transact very quickly. I think first I would point you to that, and then I'd say secondly, yeah, we're always interested in new opportunities. We'll be continuing to look at that from like a business development standpoint. It's really going to be commensurate, like you heard from Billy, as you think about growth, our volumes. Then as we move forward, we'll be looking at new opportunities, but that'll be definitely commensurate with, you know, with our plans on a go forward as we look at our plan.

[Scott Gruber, America Head of Equity Research at Citigroup]

Gotcha. Appreciate the color. Thank you.

[Operator]

Thank you. Our next question today comes from Neal Dingmann from Truist Securities. Please go ahead. The line is yours.

[Neal Dingmann, Managing Director and Energy Research at Truist Securities]

Morning all. Thanks for the details so far. Ezra, maybe for you or Tim, maybe just ask one more on the shareholder return. I know the most popular question. You guys continued now to pay out over 50% of your free cash flow. I'm just wondering on a go forward, I know there were some estimates out there thinking you all would even have potentially a higher payout. Is that something that you're targeting? I know you're not going to have an exact metric on it. You want to pay out up to a certain amount. Is that something internally you're always continuing to sort of look at paying out over 50% or 60% or something like that on a go forward, given your strong free cash flow?

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yeah. Thanks for the question. This is Ezra. You know, we continue to evaluate our cash position with respect to dividends on a quarterly basis. What I would say is that you're correct. We're thrilled to be in the position where we are, where we can offer to the shareholders such a competitive regular base dividend. That again, I think is our number one priority as a way to create value through the cycles. On top of that, we are in a great position and to offer continued strength of our balance sheet to support that dividend and then continue to offer cash return, additional cash return of excess free cash flow in the form of these specials and buybacks. We don't have a specific target that we do.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

You know, we've stayed away from providing a formula because we want to be able to have the flexibility to do the right thing at the right time to really maximize the shareholder value, in a way that is protected through the cycles. You know, said another way, I think we've demonstrated that over the past year. We've taken the opportunity to both strengthen balance sheet last year and again last year pay out a significant amount, $2.7 billion in cash returns. We've doubled down on that basically with this first quarter announcement with the $1.75 per share cash return this quarter. Essentially, that reflects the evaluation of the positive commodity price environment that we are experiencing, and the strength of the underlying business and our confidence in it going forward.

[Neal Dingmann, Managing Director and Energy Research at Truist Securities]

I couldn't help but notice nice bump on the NGL guide. Maybe, you know, could you talk about it? I've seen you, obviously now, have a number of wells up in the sort of liquids Utica area. Is that what's driving the growth there? Or if you could talk about sort of plans in the Marcellus type area or in the Appalachian area, I should say. Excuse me.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes. You know, we actually divested of our Marcellus position a couple of years ago that was in a dry gas part of the Marcellus acreage there in Pennsylvania. With respect to some of the other opportunities that we haven't really discussed publicly, you know, that's really exploration. As you guys know, first and foremost, we're an exploration company. We're always striving to be a first mover and organically improve the quality of our inventory. I will provide you a little bit of color on that. You know, domestically, we continue to explore across the U.S. Our exploration program we've talked about for the last year or so has been progressing.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

We finished last year drilling 12 wells across multiple opportunities, all, you know, dominantly oil-focused, and we'll be slightly increasing that number this year to about 20 as we're encouraged with some of the results that we had last year. In general, though, like I said, we don't discuss the details of the exploration other than just to say that the opportunities are low cost to entry. They're oil-focused. They're reservoirs that we think we can exploit with our horizontal drilling and completions expertise. This year, you know, we look forward to doing some more delineation and appraisal drilling.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

As we've said in the past, the goal of our exploration program is not just to find oil or find reserves, it's really to add to the quality of our inventory from a lower finding cost and higher returns perspective. It takes time to be able to evaluate that we can actually discover these opportunities and bring them into the mix where they're really gonna help lower the cost basis of the company and be a significant contributor to our portfolio going forward.

[Neal Dingmann, Managing Director and Energy Research at Truist Securities]

I guess.

[Operator]

Thank you.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Just to follow up on that, as far as the NGL guide going up, that's simply a function of the fact that we have the opportunity to make an election as to how much we recover or reject going forward on several of our processing contracts. With the strength of much of the NGL pricing, we're simply assuming we'll be in recovery mode more than rejection mode in several of those contracts this year.

[Operator]

Thank you. Our next question today comes from Scott Hanold from RBC Capital Markets. Please go ahead. The line is yours.

[Scott Hanold, Managing Director and Energy Research at RBC Capital Markets]

Thanks. You know, maybe just since you talked a little bit about the exploration opportunities in the U.S., can you give us a sense of how you think about international exploration opportunities? I know you all were doing some work in Oman and offshore Australia. Is there any update there, you know, how do you think about international versus onshore or U.S. opportunities?

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Scott. In general, as we've talked about, the international opportunities have a higher hurdle to really be considered additive to the quality of our inventory, simply because, you know, we need to have access to services there. We need to have access to contracts, and we need to find the subsurface geology that actually makes it not just competitive, but really superior to much of what we're drilling here. In Australia, to start with that one, you know, we still have that opportunity. We're in the permitting phase currently, and we plan to initiate drilling in that one early next year. In Oman, we did announce, as you recall, we had a low cost of entry into Oman.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

It included a two-well commitment, and during the second half of 2021, we drilled those two exploratory wells, one of which was a short horizontal. We completed that horizontal, made a natural gas discovery there. But ultimately, as I was just saying, the prospect we decided is not gonna compete with our existing portfolio. So we won't be moving forward with that project. In general, we do feel encouraged with the international opportunities out there because we see really a kind of a lack of exploration competition out there. We see that many times national oil companies or ministries the owners of those lands have really started to realize that they can't rely on traditional conventional term contracts to be able to get some unconventional type prospects drilled. We're seeing a little bit more flexibility on the negotiation side, which gives us some encouragement.

[Scott Hanold, Managing Director and Energy Research at RBC Capital Markets]

Great. Thanks for that. I'm gonna, you know, hit on the shareholder returns too, because obviously you all are in a very enviable position. You know, Ezra and Tim, you guys, you know, talk about being opportunistic in counter-cyclical ways with your balance sheet. You know, during the fourth quarter, I guess, you know, post Thanksgiving, there was a little bit of a disconnect there of, you know, your stock was a lot lower than it is today. You know, why not take that opportunity then to buy back stock? Just trying to frame for us, like, you know, when you think the right opportunities to buy back stock are.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, in general, Scott, we didn't see that as one of the opportunities that we're looking for there in the fourth quarter. When we talk about a significant dislocation, we're talking about something more so than that. You know, like I said, we consider a share repurchase in the same way that we do any investment decision. It's how does it create the most long-term shareholder value? We're in a cyclical industry, and that's why we prefer to use it opportunistically with a significant opportunity. The challenge, of course, as we recognize, is that you know, being in a position to execute during a market dislocation, you know, is a challenging thing to do. However, we feel that with the strength of our balance sheet and the low cash operating costs that we have, we'll be well positioned when we see the opportunity.

[Operator]

Thank you. Our next question today comes from Leo Mariani from KeyBanc Capital Markets. Please go ahead. The line is yours.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Yeah. Hey, guys. Wanted to see if there's any update on the PRB. Certainly noticed in the slide deck that activity there is gonna be down a little bit in terms of a few less wells in 2022-

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Mm-hmm

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Versus what you did in 2021. Perhaps you could kinda speak to maybe how well costs have trended and kinda where that opportunity is, you know, on your list amongst the different plays. Clearly, you described a significant increase in Delaware activity this year. How does the PRB rank?

[Jeff Leitzell, EVP of Exploration and Production at EOG Resources]

Hey, Leo, this is Jeff Leitzel. The PRB, we're really excited about where it's going. In 2021, we had a record year, both from a well performance and an economic standpoint. Last year, our team, they continued to really delineate our core areas. They completed about 50 wells, and half of those exceeded our double premium threshold. We're really encouraged by that. On top of that, we also brought on multiple record wells in the basin, both in the Niobrara and Mowry formations. All doing this while reducing our cost year-over-year by about 10%. The one thing that we really look at with the Powder River Basin is it's a little bit more geologically complex compared to our other basins.

[Jeff Leitzell, EVP of Exploration and Production at EOG Resources]

It's really important that we operate at the right pace and we don't outrun our learnings. Looking forward kind of to 2022, we plan on maintaining a similar amount of activity. As our team up there really high grades our acreage, refines our well spacing, and strategically builds out our infrastructure, we really expect the Powder River Basin asset to be able to increase activity in 2023 and beyond.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Okay. No, that's helpful for sure. If I can just take another crack at the kinda exploration. Certainly noticed that you guys are spending about, my numbers are right around $100 million more on some of these U.S. plays here, you know, in 2022, and you clearly talked about, you know, drilling more wells. You know, I guess a common question I hear from investors out there is it's been a number of years since EOG has kind of announced the strategy, and I guess we have kinda yet to see a, you know, a new significant U.S. oil play, you know, for the company. I know these things are hard to predict, but if I had to just kind of look at a high-level timeline, I mean, do you think that's likely and in 2022 or maybe 2023? I mean, anything you can kinda, you know, say from a high level to give people some assurance that maybe these are progressing?

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Leo. What I'd say is, you know, that's just really hard to predict, and I'd hate to commit to something to lead you down the wrong path. I might point to historically, you know, we did some early drilling in the Powder River Basin. It was a number of years before we felt comfortable. We had gotten that to a point where we wanted to talk about it publicly in a big way. The same with Dorado. I know there was a lot of speculation as to our Austin Chalk exploration program for a number of years. As you can see, we waited until we had some long-term production and felt confident as to what we had there before we started really talking about it publicly.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

The current exploration program was definitely slowed down, even maybe a little bit more than we anticipated during the pandemic. It was just a little more difficult even to get leasing done and things of that nature. As we talked about in 2021, you know, the plays coming out of the pandemic had really started to move at kind of various paces or various rates. Some of the wells last year that we drilled were the initial wells in these plays. In other prospects, some of the wells were really testing a little more delineation, repeatability, more appraisal. Because again, like I said, almost more than an exploration program, you know, what we're trying to find is not just oil. That's, you know, not necessarily the most difficult thing anymore.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

It's really, as you guys can appreciate, trying to find low-cost barrels. Barrels that are additive to what not only we have already discovered, but what the industry has really discovered. What the world wants is access to lower cost barrels, and that's what we're searching for. It takes a little bit longer to be able to really get the appraisal on these and make sure that these opportunities are really going to be additive, again, to the quality of our inventory.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Okay, thanks.

[Operator]

Thank you. The next question today comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

[Jeanine Wai, U.S Integrated Oil and Oil & Gas Exploration and Production Analyst at Barclays]

Hi. Good morning, everyone. Thanks for taking our questions. Our first question is maybe just back to the double premium. You added 700 new net double premium locations in 2021. Were these additions spread out across your plays or were they concentrated in maybe one or two of them? Where do you see the most runway for future conversions?

[Ken Boedeker, EVP of Exploration and Production at EOG Resources]

Yeah, Jeanine, thanks for the question. This is Ken. We added, you know, double premium locations over a number of our our active premium plays really in line with where we drilled our our wells last year, mainly in the Permian and the Eagle Ford. This is really just an example of our culture, where we're working to get better, you know. Continuing to lower well costs while focusing on increasing the recovery is what leads to significant increases in returns and really allows us to convert wells to premium and double premium through time. You know, our goal is to always replace at least as many double premium locations as we drill every year.

[Jeanine Wai, U.S Integrated Oil and Oil & Gas Exploration and Production Analyst at Barclays]

Okay, great. Thank you. Maybe our second question, maybe one for Tim or Ezra. In the past, I think if memory serves me correctly, I think you've commented that after you pay off the 2023 notes, that you don't really have a desire to pay down any further debt. We just wanted to check in if that was still the thinking. I think we're just really looking for a little bit more color on how you decided that $1 per share for the special this time around was the optimal level. Thank you.

[Tim Driggers, EVP and CFO at EOG Resources]

Yeah, this is Tim. No, we have not announced any intention of paying off more bonds as they become due. We'll continue to evaluate that as we go forward. That did not figure into the dollar. The dollar was a way of giving back a meaningful amount of cash to the shareholders in this period. As we said, that's a backward-looking thing, not a forward-looking thing.

[Operator]

Thank you. Our final questions today come from Neil Mehta from Goldman Sachs. Please go ahead. The line is yours.

[Neil Mehta, Managing Director and Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thank you very much. I know EOG has developed some more internal macro forecasting capability. I'm just curious on your views on U.S. shale production in the United States. How are you guys thinking about it, entry to exit U.S. oil growth? Talk about the moving pieces ranging from, you know, what you're seeing from your competitors in the private market, to services constraints such as pressure pumping. Your thoughts on U.S. growth would be valuable.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Neil. I'll add a bit of an overview, and then maybe I'll hand it off to Billy for some more details for you on the activity side. In general, you know, when we think about the growth forecasts that are out there and have been publicly discussed, you know, we're probably a bit more on the lower end in general on the crude and condensate side. The reason for that is I think you're seeing commitment from the North American E&P space to remain disciplined. Then you couple that with some of the inflationary and supply chain pressures, and we think the U.S. is definitely going to face some headwinds in growth this year. I think Billy can provide a bit more details on it.

[Billy Helms, President and COO at EOG Resources]

Yeah, Neil, this is Billy. I'm sure you've heard the same comments from many of our peers about the supply chain constraints, and the industry is seeing across all the sectors. Certainly on the drilling rig side, there's certainly most of the active super spec rigs are deployed and active today. There's not a lot of new pieces of equipment that can come into the market. The same is true on the frac side of the business. Most of the good equipment is already under employment today. Bringing in new fleets both on the drilling side and on the frac side is challenged also from the standpoint of attracting labor to the market.

[Billy Helms, President and COO at EOG Resources]

There's a lot of headwinds to try and do for the industry to try to ramp up activity and grow production this year. It'll be, I probably viewed as maybe a transition year, also in that light, and hopefully, the industry can strengthen and get better on a go-forward basis. This year is gonna be a challenging year from that side.

[Neil Mehta, Managing Director and Head of Americas Natural Resources Equity Research at Goldman Sachs]

The follow-up is around natural gas, both U.S. and global. A lot of moving pieces obviously right now from a geopolitical standpoint, but most of the industry has been of a lower for longer U.S. natural gas view. Do you see that evolving, as we have more LNG linkage into the global market? Do you think about global gas, especially in light of your announcement with Cheniere, do you see a structural change in this market, until Qatari supply comes on mid-decade?

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, Neil. This is Ezra. In general, what I would say is, you know, the U.S. has discovered a very vast supply of natural gas. It's important that we get that gas offshore and into the global market for some of the reasons that you talked about now, not only geopolitical, but just developing nations, so on and so forth. That's one of the reasons we're so glad to partner and continue to take out some of our LNG. For us, the way we think about the natural gas globally is really it's gonna be a cost of supply. You know, we say that we wanna be the low-cost producer, and that might sound like we're talking about oil dominantly, but that goes for gas as well.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

It's one reason we're very excited about our Dorado prospect. We think it competes in North America is basically the lowest cost of supply, especially because of its geographic location, close to so many marketing centers, including the Gulf Coast. We're very excited and very fortunate to have it. I think the U.S. is going to continue to be, in the long term, a significant player in the global gas supply.

[Operator]

Thank you. This concludes today's Q and A session, so I'll now hand the call back to Mr. Yacob.

[Ezra Yacob, Chairman of the Board and CEO at EOG Resources]

Yes, we wanna thank everyone for participating on the call this morning, and we wanna thank our shareholders for their support. As we said, EOG had an outstanding performance in 2021, and we're poised for another great year in 2022. It really comes down to our employees. Our employees are the keys to our success, and it's why I'm convinced we're only getting started at being one of the lowest cost, highest return, and lowest emissions energy suppliers that can play a significant role in the long-term, future of energy. Thank you.

[Operator]

This concludes today's call. You may now disconnect your lines.

Participants

Executives

• Billy Helms, President and COO
• Ezra Yacob, Chairman of the Board and CEO
• Jeff Leitzell, EVP of Exploration and Production
• Ken Boedeker, EVP of Exploration and Production
• Lance Terveen, SVP of Marketing and Midstream
• Tim Driggers, EVP and CFO

Analysts

• Arun Jayaram, Research Analyst at JPMorgan Securities LLC
• Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America
• Jeanine Wai, U.S Integrated Oil and Oil & Gas Exploration and Production Analyst at Barclays
• Leo Mariani, Analyst at KeyBanc Capital Markets
• Neal Dingmann, Managing Director and Energy Research at Truist Securities
• Neil Mehta, Managing Director and Head of Americas Natural Resources Equity Research at Goldman Sachs
• Paul Cheng, Analyst at Scotiabank
• Scott Gruber, America Head of Equity Research at Citigroup
• Scott Hanold, Managing Director and Energy Research at RBC Capital Markets