EOG Resources Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Timothy K. Driggers, Chief Financial Officer And Executive Vice President
• Ezra Yacob, Chief Executive Officer And Director
• Billy Helms, President And Chief Operating Officer
• Ken Boedeker, Executive Vice President, Exploration And Production
• Lance Terveen, Senior Vice President, Marketing
• Jeff Leitzell, Executive Vice President, Exploration And Production

Analysts

• Paul Cheng, Scotiabank
• Arun Jayaram, JPMorgan Securities
• Doug Leggate, Bank of America Co.
• Scott Gruber, Smith Barney Citigroup
• Neal Dingmann, Truist Securities
• Scott Hanold, RBC Capital Markets
• Leo Mariani, KeyBanc
• Jeanine Wai, Barclays PLC
• Neil Mehta, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Good day, everyone, and welcome to the EOG Resources Fourth Quarter and Full Year 2021 Annual Results Conference Call. [Operator Instructions]

I would like to turn the call over to Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.

[Timothy K. Driggers, Chief Financial Officer And Executive Vice President 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 and EOG's SEC filings. This conference call also contains certain non-GAAP financial measures. Definitions and reconciliations schedules for those non-GAAP measures can be found on the 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 & Public Relations. Here's Ezra.

[Ezra Yacob, Chief Executive Officer And Director 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. And 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 $7.09 per share with $68 oil. 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 cost. 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. And last year, we raised the bar again to double premium. 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 target set at the beginning of the year. 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 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.

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. 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 the 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. By remaining humble and intellectually honest, we sustained 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.

[Timothy K. Driggers, Chief Financial Officer And Executive Vice President 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 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. 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 have 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. But 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. 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 0 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. This represents 28% of discretionary cash flow and 49% of free cash flow, putting EOG among E&P industry leaders for cash returned 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. 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. 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 Chief Operating Officer 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 continue to innovate and find opportunities to increase efficiencies and lowered 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. In our Eagle Ford oil play, after drilling several thousand wells, our teams continue to refine the drilling operation to drive consistent performance from our rig fleet, resulting in a 21% reduction in the drilling costs since 2018.

And 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 starts to expand the use of our Super Zipper or simo-frac technique to about 1/3 of our wells completed last year. Completion costs also benefited from reduced sand and water cost 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 row of contributing to a safer oilfield with lower emissions. 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 resource from reuse to 55%. Again, these are preliminary results as our final metrics will be published in our sustainability report later this year. 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 and 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 will -- we still see opportunities to sustainably improve our performance. 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 cost at least flat in 2022. EOG's capital efficiency continues to improve as a result of EOG's culture of continuous improvement. 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, Executive Vice President, Exploration And Production at EOG Resources]

Thanks, Billy. Last year, we replaced more than two 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 [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 cost by more than 55%. 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. And 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 are 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, Chief Executive Officer And Director 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. 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 and 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&A.

Questions and Answers

[Operator]

[Operator Instructions] Our first question today comes from Paul Cheng from Scotiabank. Please go ahead. The line is yours.

[Paul Cheng, Analyst at Scotiabank]

Thank you, good morning guys. Hello, sir, 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 that under what circumstances that, 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?

[Ezra Yacob, Chief Executive Officer And Director 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, 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. So when we look at our '22 plan, 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. And it really starts with investing in the double premium wells.

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. So the program this year is at a pace that allowed 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. And I'll turn it over to Billy to answer the second part of the question.

[Billy Helms, President And Chief Operating Officer at EOG Resources]

Yes, Paul. On the second part of the question, 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 developing -- development plays like the Delaware Basin play. And then 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. 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 want to make sure that we don't get too far out in front with the infrastructure spending, but it's done at a pace commensurate with the development activity in a given area. So 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, Analyst at JPMorgan Securities]

Yeah, good morning. Global gas is clearly in focus right now. So 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 over time. So 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 the gas to LNG? And how is the economic rent shared amongst you and Cheniere.

[Lance Terveen, Senior Vice President, Marketing at EOG Resources]

Arun, this is Lance. We're very excited about the new amendment that we have with Cheniere. And you're exactly right, I mean, we've got 140,000 MMBtu today that started in 2020. And I think that just really speaks to being really a first mover too, because as you can see right now, you can look at the price realizations, you can see JKM spot prices are near $40, having that first-mover 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.

So we've got the 140 today that will ramp to 420 as they go into service. That's estimated to be probably with the first [train now] for Stage three in 2026. But if you remember there, we ramp up. We kind of go to the 140 today we started into the 420 as Stage three goes into service. And we still will maintain and we extended the 300,000 MMBtu a day [still] that we have that's linked to Henry Hub. So we're excited about it. It's a brownfield facility. They've demonstrated 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, Analyst at JPMorgan Securities]

Great. And 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 activity. So I was wondering if you could give us a little bit of color there.

[Billy Helms, President And Chief Operating Officer at EOG Resources]

Yes. Arun, this is Billy Helms. So yes, 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. And so 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 this life cycle and still has a lot of opportunity to grow and test new horizons and expand our development capabilities over time. So it's just a lot younger in its maturity phase. So I think it naturally will command a little bit more activity on that side.

[Arun Jayaram, Analyst at JPMorgan Securities]

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, Analyst at Bank of America]

Thanks, good morning. As well on morning to you guys. last time I spoke to you, you were talking about the mix of the double premium wells in the production profile and of course the impact on sustaining capital and breakeven oil prices. So 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. So how do you see the sustaining capital? How do you see that breakeven trending? That's my first question.

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. Doug, this is Ezra. Thanks for the question. Yes, our maintenance capital on the back 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 a lower cost of the reserves, bringing those into the company's financials. Our maintenance capital continues to decrease, which is fantastic for us. You're right, the $32 breakeven that we provided today is actually with our -- commensurate with the capex program that we have for this year. But the double premium wells, we can't stress enough. Not only is it -- 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 an impact the full cycle returns and free cash flow generation potential of the company in the future.

[Doug Leggate, Analyst at Bank of America]

So where do you think those two numbers are today, the sustaining capital and the ex-growth breakeven?

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. So 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. And so it starts to get a little bit messy as you start going from oil into a BOE equivalent as we are starting to see the phenomenal results there with the Dorado play as we dedicate additional capital to it. Nevertheless, 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. And for the full cycle return, we have a slide in our deck that shows the one way that we like to present it is the price required for a 10% return on capital employed. And you can see we made a big step change last year as we drove that price down to $44.

[Doug Leggate, Analyst at Bank of America]

Okay. My follow-up is a capital allocation question, and it's really -- maybe it's for Tim. The free cash flow you're showing in your slide deck of north of $4 billion a 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, with the transparency of that breakeven 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? I'll leave it there.

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. Doug, this is Ezra again. Just to reiterate our free cash flow priorities, first, the commitment begins with the sustainable dividend growth of our regular dividend. In '21, we doubled that regular dividend. And 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, and 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 base of the company, trying to take at least a small step away from the inevitable commodity price cycles of our industry. The second free cash flow priority for us is a pristine balance sheet, which obviously provides tremendous competitive advantage in a cyclical industry. And then the third, what we're talking about right now is the additional cash return in the form of specials or opportunistic repurchases.

And as we talked about, last year, we demonstrated the commitment with $2.7 billion in cash return through the form of $3 per share special dividends and are regular. And then we also retired that $750 million bond early in the year. In general, what we've talked about is we're going to use our -- reserve our repurchase opportunities to be more opportunistic than programmatic. So in times 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. So we want to make sure that it competes on a returns basis. And 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, Analyst at Bank of America]

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

[Ezra Yacob, Chief Executive Officer And Director 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, Analyst at Smith Barney Citigroup]

Thanks, good morning. Just following on that line of questioning, given that your net debt negative here at the start of the year, should we think about the cash build is largely being over?

[Timothy K. Driggers, Chief Financial Officer And Executive Vice President at EOG Resources]

This is Tim. No. First of all, we are excited to have to be in a position where we are to have a cash balance going -- our net cash balance going forward. So 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 to -- for opportunities in the countercyclical 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 the countercyclical environment. So 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, Analyst at Smith Barney Citigroup]

Got you. I appreciate the clarification. And then congrats on the expanded export agreement. Just thinking about the broader backdrop here, there's likely another round of LNG project sanctioning along the Gulf Coast. It seems like the industry is in an advantaged position there. How aggressive EOG be on entering additional agreements, thinking kind of similar terms? Do you guys foresee and expanded JKM to Henry Hub spread that you'd want to capture? Do you think that's sustainable and you want to capture that spread? Or do you kind of look at additional agreements more through traditional diversification lens?

[Lance Terveen, Senior Vice President, Marketing at EOG Resources]

Yes, Scott. 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. So I think first, I would point you to that. And then I'd say secondly, yes, we're always interested in new opportunities. So we'll be continuing to look at that from like a business development standpoint. And it's really going to be commensurate like you heard from Billy as you talk about -- as you think about growth, our volumes. And then as we move forward, we'll be looking at new opportunities, but that will be definitely commensurate with our plans on a go forward as we look at our plan.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Got you. I appreciate the call and 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, Analyst at Truist Securities]

Good morning. I'll take the details so far, maybe for you or Tim, maybe just ask one more on the shareholder return. I know most popular question. But you guys continue now to pay out over 50% of your free cash flow. And 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 the exact metrics on how you want to pay out up to a certain amount. But 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, Chief Executive Officer And Director at EOG Resources]

Yes. This is Ezra. We continue to evaluate our cash position with respect to dividends on a quarterly basis. And 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. But on top of that, we are in a great position 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.

We stay 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. Said another way, I think we've demonstrated that over the past year. We've taken the opportunity to both strengthen the balance sheet last year. And again, last year pay out a significant amount, $2.7 billion in cash returns. And we've doubled down on that basically with this first quarter announcement with the $1.75 per share cash return this quarter. And essentially, that reflects the evaluation, the positive commodity price environment that we were experiencing in and the strength of the underlying business and our confidence in it going forward.

[Neal Dingmann, Analyst at Truist Securities]

Can't help but notice a nice bump on the NGL guide. Maybe could you talk about -- I've seen you obviously now having a number of wells up in the sort of liquids, units to area, is that what's driving the growth there? Or if you could talk about sort of plans in the Marcellus type area, or Appalachian area, I should say, is feasible?

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. 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, 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. So I will provide you a little bit of color on that. Domestically, we continue to explore across the U.S. Our exploration program that we've talked about for the last year or so has been progressing. We finished last year drilling 12 wells across multiple opportunities, all 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 entry, they're oil-focused, there are reservoirs that we think can exploit with our horizontal drilling and completions expertise. And this year, we look forward to doing some more delineation and appraisal drilling. And 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. And so 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 going to help lower the cost basis of the company and be a significant contributor to our portfolio going forward.

[Timothy K. Driggers, Chief Financial Officer And Executive Vice President at EOG Resources]

And I guess just a follow-up on that. As far as the NGL guide going up, that's simply a function of the fact that we have opportunity to make an election as to how much we recover or reject going forward on several of our processing contracts -- and 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, Analyst at RBC Capital Markets]

Thanks. And 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 in offshore Australia. Is there any update there? And how do you think about international versus onshore or U.S. opportunities?

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. Scott, in general, as we've talked about, the international opportunities have -- they have a higher hurdle to really be considered additive to the quality of our inventory simply because 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, we still have that opportunity. We plan -- we're in the permitting phase currently, and we plan to initiate drilling in that one early next year. And then in Oman, we did announce, as you recall, we had a low cost of entry into Oman. It included a two-well commitment. And during the second half of '21, 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 going to 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 kind of a lack of exploration competition out there. And 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. And so we're seeing a little bit more flexibility on the negotiation side, which gives us some encouragement.

[Scott Hanold, Analyst at RBC Capital Markets]

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

[Ezra Yacob, Chief Executive Officer And Director 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 the significant dislocation, we're talking about something more so than that. Like I said, we consider share repurchase in the same way that we do any investment decision. It's how does it create the most long-term shareholder value. And 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 that being in a position to execute during the market dislocation is a challenging thing to do. However, we feel with the strength of our balance sheet and the low cash operating cost 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. Please go ahead. The line is yours.

[Leo Mariani, Analyst at KeyBanc]

Yeah. Hey, guys. I wanted to see if there's any update on the PRB. Certainly noticed in the slide deck that activity there is going to be down a little bit in terms of a few less wells in '22 versus what you did in '21. So perhaps you could kind of speak to how well costs have trended and kind of where that opportunity is on your list amongst the different plays? Clearly, you described a significant increase in Delaware activity this year. So how does the PRB rank?

[Jeff Leitzell, Executive Vice President, Exploration And Production at EOG Resources]

Leo, this is Jeff Leitzell. 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 continue to really delineate our core areas. They completed about 50 wells, and half of those exceeded our double premium threshold. So 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 the Mowry formations, all doing this while reducing our cost year-over-year by about 10%. So 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. So it's really important that we operate at the right pace, and we don't outrun our learnings. So looking forward kind of to 2022, we plan on maintaining a similar amount of activity. And 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]

Okay, that's helpful for sure. And then if I can just take another crack at the kind of exploration. So I certainly noticed that you guys are spending about, if my numbers are right, about $100 million more on some of these U.S. plays here in '22, and you clearly talked about drilling more wells. 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'd kind of get to see a new significant U.S. oil play for the company. I know these things are hard to predict, but if I had to just kind of look at a high-level time line, I mean, do you think that's likely in '22 or maybe '23? I mean anything you can kind of say from a high level to get people some assurance that maybe these are progressing?

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. Leo, what I'd say is it'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, we did some early drilling in the Powder River Basin, and it was a number of years before we felt comfortable. We've gotten that to a point where we want to talk about it publicly in a big way. And then the same with Dorado. I know there was a lot of speculation as to our Austin Chalk exploration program for a number of years. And 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. 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, the plays coming out of the pandemic had really started to move it 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, we're really testing a little more delineation, repeatability, more appraisal. Because again, like I said, almost more than an exploration program, what we're trying to find is not just oil. That's not necessarily the most difficult thing anymore. 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. And so 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]

Okay, thanks.

[Operator]

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

[Jeanine Wai, 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. And were these additions spread out across your plays? Or are they concentrated in maybe one or two of them? And where do you see the most runway for future conversions?

[Ken Boedeker, Executive Vice President, Exploration And Production at EOG Resources]

Yes. Jeanine, thanks for the question. This is Ken. We added double premium locations over a number of our active premium plays, really in line with where we drilled our wells last year, mainly in the Permian and the Eagle Ford. And this is really just an example of our culture where we're working to get better, 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. And our goal is to always replace at least as many double premium locations as we drill every year.

[Jeanine Wai, Analyst at Barclays]

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. I just wanted to check in if that was still the thinking? And 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?

[Timothy K. Driggers, Chief Financial Officer And Executive Vice President at EOG Resources]

Yes. 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, but we -- that did not figure into the dollar. The dollar was a way of giving back just meaningful amount of cash to the shareholders in this period. And as we said, that's a backward-looking thing, not a forward-looking thing.

[Operator]

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

[Neil Mehta, Analyst at The Goldman Sachs Group]

Thank you very much. I know EOG has developed some more internal macro forecasting capability. And I'd just be 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? And talk about the moving pieces ranging from 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, Chief Executive Officer And Director 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. But in general, when we think about the growth forecasts that are out there and have been publicly discussed, we're probably a bit more on the lower end in general on the crude and condensate side. And the reason for that is I think you're seeing commitment from the North American E&P space to remain disciplined and 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 on this year. And I think Billy can provide a bit more details on it.

[Billy Helms, President And Chief Operating Officer at EOG Resources]

Yes. Neil, this is Billy. I'm sure you've heard the same comments from many of our peers about the supply chain constraints in 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 being -- 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. And then 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. So there's a lot of headwinds to try to -- for the industry to try to ramp up activity and grow production this year. So it will be 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. But this year is going to be a challenging year from that side.

[Neil Mehta, Analyst at The Goldman Sachs Group]

And then 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 the 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? If 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, Chief Executive Officer And Director at EOG Resources]

Yes. Neil, this is Ezra. In general, what I would say is the U.S. has discovered a very vast supply of natural gas and 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. And that's one of the reasons where 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 going to be a cost of supply. And we say that we want to be the low-cost producer, and that might sound like we're talking about oil dominantly, but that goes for gas as well. And it's one reason we're very excited about our Dorado prospect. We think it competes in North America, it's basically the lowest cost of supply, especially because of its geographic location, close to so many marketing centers, including the Gulf Coast. So we're very excited and very fortunate to have it. And 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&A session. So I'll now hand the call back to Mr. Yacob.

[Ezra Yacob, Chief Executive Officer And Director at EOG Resources]

Yes. We want to thank everyone for participating on the call this morning, and we want to thank our shareholders for their support. As we said, EOG had an outstanding performance in 2021, and we're poised for an up great year in 2022. And it really comes down to our employees. Our employees are the keys to our success, and it's why I'm convinced are to 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]

[Operator Closing Remarks]