EOG 2Q16 Earnings Call Notes

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EOG Resources (EOG) William R. Thomas on Q2 2016 Results

Can grow production at 10% at $50 oil

” Due to the sustainable gains in well productivity and cost, we can grow oil production at a 10% compound annual growth rate at $50 oil. At $60 oil, our compound annual growth rate jumps to 20%. And most importantly, we can deliver that oil production growth while covering our capital expenditures and our dividend with cash flow, enabling us to meet our goal of maintaining a strong balance sheet.”

Longer laterals will improve returns

“One of the ways we convert locations to premium is by drilling longer laterals. Our success in the western Eagle Ford, as illustrated on slide nine, is a good example. The trick with longer laterals is to maintain, or preferably enhance, productivity per foot of lateral. Due to engineering breakthroughs in EOG’s completion design, we have gone out as far as two miles with no degradation in productivity per foot.”

also focusing on technical understanding and lowering cost

“While longer laterals will be one source of future premium inventory, two more significant sources will be EOG’s focus on performance improvement through advancing our technical understanding and lowering cost. On the technical side, geological and geophysical advancements enable us to refine our precision targeting efforts. For example, we are determining where there may be multiple lower Eagle Ford targets to support drilling a W pattern.”

We believe that $60 oil is necessary to achieve growth for the industry

“Even though oil prices have been volatile, our view of supply/demand fundamentals has not changed. We believe $40 oil will not provide enough cash flow or investment return to overcome the combined effect of production decline and demand growth worldwide. While EOG can deliver healthy growth in cash flow at $50 oil, we continue to believe the U.S. horizontal oil industry as a whole needs a sustained $60 oil price and extended lead time to deliver a moderate level of growth.”

As oil prices improve above $50, we’ll ramp our activity

” as oil prices improve above the $50 level, the more capital we’ll add and the faster we’ll ramp up our activity. We’re not limited on beginning out very significantly. We have ongoing operations and enough rigs and equipment going now, and the DUCs really help us get off to a good start. But it is, as you can tell from the chart on slide 14, it’s not 10% every year. ”

We’re getting better productivity than the rest of the industry

“better rock and better completions, and now we’re going to add longer laterals to that too. So the well results, the productivity of the well increase is just very, very large and incredible. I think once there’s enough of this data out in the big databases where people can analyze it and compare EOG wells versus the industry or really any other operator drilling horizontal oil wells now, they’re going be very, very surprised and very, very impressed.”

At $40 oil we would adjust our capital, but we’re hoping to get to a point where we can grow even at $40

“Paul, at $40, we would adjust our capital appropriately, and we would be able to generate what we believe would be the best rates of return in the industry. That’s certainly a big separator for EOG. But we would adjust our spending to cash flow and stay balanced and stay disciplined and hunker down and continue to improve. We are optimistic and we have hope, and we’re not there yet, but at one day, we would be able to get our capital efficiency to a point where we could actually grow oil at $40, and we’re working towards that goal. We’re not there quite at the moment, but we’re going to continue to focus on that.”

Gary L. Thomas – Chief Operating Officer

Rig daily rates falling from $26k to $13k

“And you’ll note too that we had quite a number of our rigs in 2016 under contracts placed a couple years ago, higher rates, $26,000 and $27,000 a rig. Now those are rolling off, and we’re going to be able to replace those, about half those rigs with rates that are in the $13,000 to $15,000 per day rate. So that allows drilling costs to be down about 20% – 25%.”

We’re not going to need the same number of rigs

“And the other thing is that our rig efficiency has improved such that, yes, we will not have to have the number of rigs we had back in 2013 and 2015. As a matter of fact, when we look at our 10% growth and our 20% growth, we think we’ll be able to provide this sort of growth running somewhere between 25 rigs to 35 rigs.”