EOG Resources 4Q15 Earnings Call Notes

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EOG Resources (EOG) William R. Thomas

Slammed on the brakes in 2015

“After four years of 40% compound annual oil growth, we slammed on the brakes and decided to defer production growth. It was an easy decision. Outspending cash flow to grow oil into an oversupplied market makes no sense.”

Can no longer be just a low cost producer in shale, must be low cost producer in global market

“2015 changed how we think about EOG’s position in the industry long term. It’s no longer enough to be the low-cost producer in U.S. horizontal shale. EOG’s goal is to be a competitive low-cost oil producer in the global market.”

Can find 2B barrels that produce 30% ROI at $40 oil

“Premium inventory is defined as wells that generate direct after-tax rates of return of at least 30% at $40 oil. We have identified over 2 billion barrels of equivalent of net resource potential and 3,200 net drilling locations that meet this hurdle. ”

This is a permanent upgrade for future drilling

“EOG’s shift to premium drilling in 2016 is not just simple high-grading. It is a permanent upgrade for all our future drilling.”

We continue to see a major step change in productivity that will return us to triple digit capital rates of return

“It’s important to realize that this is much more than a small incremental shift in our drilling program. It’s a major step change in terms of per well productivity. For the average 2016 well, we estimate a 50% increase in the first 120 days of production per foot of treated lateral versus wells we completed in 2015. Our shift to premium drilling allows EOG to quickly return to triple-digit, and I’ll say this again, to quickly return to triple-digit capital rates of return as oil prices improve to modest levels.”

Non premium inventory will either be turned premium through technology or sold

“So the next logical question is what becomes of the remaining inventory? Our non-premium inventory is still very high-quality. By any industry standard, it is Tier 1 quality with tremendous value. Due to the quality, a large percentage of this inventory will be converted to premium through technology and efficiency gains over time. The remaining high-quality inventory will add value to property sales or trades as part of our ongoing upgrading process.”

Encouraged by the discipline that operators are demonstrating around the world

“As we start 2016, we are encouraged by the discipline operators are demonstrating around the world. This disciplined capital reduction is rapidly slowing U.S. oil drilling and reducing significant amounts of future supply worldwide. We believe the pace of market correction is increasing in 2016.”

We believe we’ve captured the premium acreage in the US

“The quality of the rock is the most important factor in the productivity of the well. So we made extremely strong technical advancements in identifying the best rock in the best plays over the years, and certainly we believe we’ve captured the premier acreage in the premier plays in the U.S.”

No current plans to issue equity

“EOG has no current plans to issue equity at this time. Certainly we entered the year, we came into the downturn with a strong balance sheet, and we’ve been disciplined throughout the process.”

Premium wells would have >450 MBOE EUR

“That is for an average Eagle Ford well, and that is not a premium well. Premium wells would be quite a bit better than that. And then that number is stale. So we haven’t updated that 450 net MBoe per well for several years, and we’ve made quite a bit of advancements since then in the high-density frac technology, and now we’re making advancements in targeting also.”

No intention of expanding international efforts

“Brian, we have no intention of expanding international efforts, so we are going to be very much U.S. driven. We see tremendous opportunity in the U.S. And so this whole direction towards being not only the low-cost producer in the U.S. horizontal, we think we’re clearly there. And our sight now is really set on being one of the lowest-cost producers in the world market. ”

We don’t want to be fooled again on an uptick in oil prices

“When the oil prices begin to recover, we’re going to be disciplined going forward. We don’t – obviously don’t want to be fooled again, like the industry was fooled last year by a little bit of an uptick in oil price and it is not sustainable. So, we’re going to be disciplined and cautious going forward on ramping up capital until we’re very much convinced that this is not a short-term uptick in the price, and that the market is more in balance, and that the price is more sustainable.”