EOG 2Q17 Earnings Call Notes

Bill Thomas – Chairman and CEO

Quantity, quality and breadth of data drive tech advantage

“I can’t emphasize enough that EOG’s quantity, quality and breadth of data drives our information technology advantage. First, we believe we have multiple times more data on horizontal oil wells than anyone in the industry. More importantly, the data is proprietary. The type and granularity of data and the frequency of collection is customized to our needs. Second, we are constantly experimenting and applying and learning to the next well. EOG’s cultures is to always question and push the envelope on what can be done. The result is terabytes of differentiated data capturing results of thousands and thousands of experiments. The application they’ve built in-house analyzed and delivered all the data real time better than any other comparables suite of applications in the industry. However, these applications are virtually useless without the big data and the culture of experimentation and innovation you need to drive data science in the first place.”

EOG 4Q16 Earnings Call Notes

William Thomas

Starting to see some encouraging signs on inventory drawdown

“Scott, I think we’re watching the oil market, particularly inventory levels. And I think just in the last week or so, we’re starting to see very encouraging signs on inventory drawdown, and I think we’re getting close. It won’t be in the next month or two. I think we’re going to know a lot about how the OPEC cuts have affected supply/demand dynamics and the drawdown of that inventory. So we’re about there, but we just need a little bit more time on that. I think the other thing is, with the rapid ramp-up of drilling rigs in the U.S., we don’t want to ramp up too rapidly to decrease the capital efficiency. So we’re very committed to keeping the capital efficiency of the company extremely high, and we really only want to increase the capital efficiency. So part of our ramp-up strategy will be certainly to stay very disciplined, to allocate the capital to obviously the highest return investments that we have, and then do it in a systematic manner where we’re bringing in really good equipment, really good people, and we don’t lose performance there.”

EOG 3Q16 Earnings Call Notes

EOG Resources’ (EOG) CEO William Thomas on Q3 2016 Results

Bill Thomas

Oil in the 40s not enough to sustain production growth

” Over the long-term we believe oil in the 40s will not sustain enough production to meet demand worldwide. While EOG can deliver strong oil growth within cash flow with $50 oil, we believe that US industry as a whole needs to sustain $60 oil prices and extended lead time to provide a moderate level of growth. Worldwide Base decline rates are slowly reducing supply and consensus view is the current large inventory overhang could return to normal levels by late 2017.”

EOG 2Q16 Earnings Call Notes

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.”

EOG 1Q16 Earnings Call Notes

EOG Resources (EOG) William R. Thomas on Q1 2016 Results

Shifting to “premium”

“The third item I would like to review is EOG’s shift to premium drilling this year. The shift is a game-changer with significant long-term implications. I will cover those implications in a moment. But first, let’s review what we mean by premium. Premium inventory is defined as drilling locations that generate at least 30% direct after-tax rate of return at $40 oil. Here are a few more clarifying points regarding this inventory. First, 30% return is not an average; it’s a minimum. Second, 30% was established as the minimum direct return to ensure that when indirect costs are included, the drilling program earns healthy full-cycle returns. Third, we fully expect to more than replace our drilling inventory with new premium locations every year. Therefore, and this is the most important point. Our shift to premium is permanent and not simply a temporary high-grading process in a low commodity price environment.”

Believe that it will take $65 oil for the industry to return to growth

“First, a brief word on our macro views and how they relate to EOG’s plans. The substantial reduction in capital investment by the industry in 2015 and 2016 is causing oil supply to decline in many producing regions around the world. Led by steady declines in the U.S. and supported by strong gasoline demand, the market continues to rebalance. We agree with consensus that this process will accelerate in the second half of this year and into 2017. We believe that in the U.S., it will take a sustained $60 to $65 oil price and 12 months of lead time for the industry to deliver a modest level of growth.”

We have a robust exploration effort ongoing

“Yes, we have a very robust exploration effort on new plays, and so we have various plays actually we’ll be testing this year. We’ll update you that when we have some meaningful results. And then we’re also picking up acreage. It’s been a great time to pick up low-cost acreage in places that we couldn’t get acreage in, in previous years. So we have an active program going on. Of course, we’re very selective. We only want premium plays to fit into our capital program. So we’re identifying rock that would meet that category and deliver those kinds of returns. So we’re not shortchanging that effort at all.”

EOG Resources 4Q15 Earnings Call Notes

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.”

EOG at Wells Fargo Conference Notes

EOG Resources Presents at Wells Fargo Energy Symposium Conference

Billy Helms

Drilled a lot of uncompleted wells this year. Efficiency improved so much that will be more productive when completed next year

“we improved the productivity and we learned so much about how to better complete those wells. So, we’re actually going to get a better result at a lower cost by completing those wells next year than how we completed those this year. But, you’re right as far as going to the next year our capital efficiency should be greatly improved.”

Drilling cost is 1/3, completion 2/3 of well cost

“Typically from a well cost perspective, drilling cost is about a third of the total well cost, the completions are about two-thirds. So you can think about it in that sense that ratio as far as their capital efficiency improvement.”

We’re not sure how many rigs we’ll keep running next year

“we’re still going to have some rigs running. We’re not sure exactly what that level is going to be yet. We’re waiting to determine really what we see the oil price outlook is going to be before we set that number.”

Focus on rate of return

“ultimately, if you’re not generating a good rate of return you’re destroying capital. And we don’t want to do that as a company. So we’re always focused on rate of return”

Going into next year unhedged

“typically, we like to have about 50% of our production hedged. Obviously we don’t have that now. We don’t have hardly any production hedged next year. And so, we’re going to be looking for the opportunity to do that, we don’t currently see the current market is an opportunity to place any hedges. We’ll be looking to see what the forward curve looks like and try to take advantage of that opportunity, when it presents itself.”

Marginal cost of supply now probably in $75-$80 range

“the break-even perhaps used to be $90 to $100 probably. The marginal cost of supply was $90 to $100, now it’s probably $75 to $80. For EOG we would be tickled to death for $60, $65 price. I think we’d be able to generate really strong rate of returns and grow the company at very healthy level at $60 or $65 price environment.”

We entered the year thinking we may do an acquisition, but we never found anything that made sense

“You’re right we started off the year thinking okay in this down cycle we might seen an opportunity for a corporate acquisition. And we’re not really used to the company to doing that, but we’re hoping at the opportunities. And we looked at the lot of different things, so that we never really saw anything that would compete with our portfolio here that we’ve shown. And we do evaluate everything on a rate-of-return basis. So if they didn’t stack up, we’re just not going to do that.”

We still get >10% returns on $40 oil

“we probably need to update it with the $40 oil price, we haven’t updated this slide with that. I would say that a year ago we had this slide and we said that $40 oil, all those budgeted and rated at least 10% rate-of-return. And that was a year ago and we made steady improvements in lowering cost and productivity gains.”

EOG 1Q15 Earnings Call Notes

Not going to accelerate production at bottom of the cycle

“We have also stated that we have no interest in accelerating oil production at the bottom of the commodity price cycle. Instead, we are drilling but deferring completions on a significant number of wells known as DUCs until oil prices improve.”

Double digit growth at $65 WTI

“If oil prices recover and stabilize around $65 WTI, EOG can resume strong double-digit growth for the balance CapEx to discretionary cash flow program.”

Slowdown giving more time to focus on efficiency

“the slowdown in activity is giving us more time to focus on efficiency improvements. While much has been made of service cost reductions, we expect, we will gain the most long-term benefits from efficiency gains.”

Going to take advantage of down cycle to add acreage

“Objective number four, take advantage of opportunities during the down cycle to add acreage. We are using our exploration skills to define high quality acreage and are having good success capturing leasehold interest in emerging plays. Competition is down, acreage is available, and leasing costs are low compared to previous years, and we are optimistic more opportunities will materialize as the year progresses. We are also evaluating tactical acquisition candidates.”

If forward oil curve continues to improve then will increase completions in 3Q

“As we described on our February call, our production profile will be U-shaped this year. If the current forward oil curve continues to improve, our plan is to increase well completions in the third quarter. Therefore, we expect our oil productions to return to growth in the fourth quarter, building momentum as we head into 2016. We are right on track with this plan.”

U Shaped production

“And so the ramp up will be, as we talked about, the production shape is going to be U-shaped this year and the second and third quarters will be the low point, but the fourth quarter, with the current plan, is to ramp up production growth and the heading into 2016 on a very strong note.”

A big spread between bid and ask on acquisition front

“There’s still a pretty good spread between the bid and ask on the acquisition front. I think we’ll be very selective. We continue to be very selective in our approach, and what we’re looking for, and I think we’ll see some opportunities as we go forward, but there will be smaller, more tactical acquisitions, as well as just continuing to be able to accrete leasehold in some of our key plays and emerging place.”

This has been the plan since February

“We made the call to defer drilling, because we thought this would be or could be a short-term cycle, and we’re hopeful and certainly we’re encouraged by the current firming of the products. So we’re hopeful that’s what will turn out.

But we still, as I said earlier, we’re more optimistic in the forward curve than what it is right now. So we believe being patient and waiting on that products to continue to come up, while also continuing to take advantages of the cost reductions in the wells and the well productivity improvement. Those will all make a very significant difference in the returns we get on the wells when we begin to complete them.”

Not tried any refracts

“we’ve not tried any refracts. Our outlook on that is that it really — technically, we believe that just drilling a new well and kind of starting fresh and making sure your lateral is in the very best target and making sure that you can redistribute the frac very evenly along the wellbore with the new well is probably the preferred way to go. We just think that the upside on the completion will be much greater than if you try to refract the well.’

We’ll be able to ramp pretty quickly since servicers have kept people in place

“If we were ramping up here in the next month or two, I think you can ramp up pretty rapidly. And that’s why many of those operators are trying to keep as many services in place even if reduced work levels just to maintain that support that service companies.”

EOG 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

It’s clear that oil prices are too low right now

“our overarching goal this year is to prepare for oil price recovery. It is clear that current prices are too low to meet the world’s supply needs and the market will rebalance. We would be ready to respond swiftly when oil prices improve and resume our leadership and high return oil growth.’

We don’t believe that growing oil in a low price environment is the right thing to do

“we do not believe that growing oil in what could turn out to be a short cycle low price environment is the right thing to do. And let me repeat, we do not believe that growing oil in what could turn out to be a short cycle low price environment is the right thing to do.”

Our top lays still return 35%

” returns are what matter. Therefore we will focus capital on the Eagle Ford, Bakken and Delaware Basin plays. At $55 oil, these premier assets deliver a direct after-tax rate of return greater than 35% without factoring in the potential for additional service cost reductions.’

Going to drill wells without completing them

“First, we will reduce average rigs 50% down to 27% for 2015 and intentionally delay any of our completions, building a significant inventory of approximately 350 uncompleted wells. This allows EOG to use rigs under existing commitments and when prices improve we will be poised to ramp up completions.”

Lower costs mean higher returns at lower oil prices

“as a result of cost and oil productivity improvements in the Eagle Ford Western acreage, we can now generate better returns with $65 oil than we did with $95 oil just two or three years ago.”

Low oil prices mean unique opportunities to add high quality acreage

“low oil prices mean unique opportunities to add low-cost, high-quality acreage. We will continue to grow our acreage portfolio through leasehold, farm-in or tactical acquisitions.”

Take advantage of low service costs

“Delaying completions will also provide an opportunity to take advantage of lower service costs that will likely materialize in the coming months. ‘

40% decrease in capex from 2014

“Our 2015 CapEx estimate is $4.9 billion to $5.1 billion excluding acquisitions. The expiration and development portion excluding facilities will account for approximately 80% of the total CapEx budget.

2015 CapEx represents a 40% decrease from 2014. As Bill mentioned earlier, we’re not interested in growing oil production in a low price environment.”

The supply imbalance is not that large

The current supply demand imbalance is not very large and current prices are far short of what is necessary to sustain the supply need to meet world demand growth. When prices recover, EOG will be prepared to resume strong double-digit oil growth. For now, EOG is intentionally choosing returns over growth. In fact that’s the way it’s always been here at EOG.”

It makes economic sense to slow production until supply response is realized

“As we compare today’s oil prices to our expectations for a more balanced market, it makes economic sense to slow production until an industry wide supply response is realized and prices respond accordingly. This strategy maximizes the value of our assets and it’s the right strategy to create long term shareholder value.’

Keep our powder dry

“we want to keep our balance sheet clean and low and we want to keep our powder dry so that we will be able to take some advantage of what could be some unique opportunities in this downturn. 2016, yes if we – if things go as we think they might could and we would have say a $65 oil environment in 2016 and we believe that we could return to our very strong double-digit oil growth that we have been marching towards a last few years and that we will be able to generate very high rates of return on our capital and we would be able to stay free cash flow neutral.”

We agree with consensus that production will durn flat to negative by the end of this year

“I don’t think that I’ve talked about our shape of the recovery. But, our view now is that we really believe with the consensus opinion that as we go forward due to the response of the industry that we could have flat to maybe even negative U.S. production growth on a month-over-month basis by the end of this year, and that certainly going to slowdown U.S. production growth this year.

So, as that slows down there should be a price response and I’m not going to predict whether it’s going to be V or U or W o really what the price is, certainly the forward curve is very indicative that prices will increase in the future and we’re just going to wait and see how that goes and we’ll respond accordingly.’

Completion costs 60-65% of the well

‘our drilling cost is roughly 25% to 30% of the cost of the well. So that gives you the completion, of course, I guess we could put facilities in there so the facilities would be somewhere around 10%. So, the balance being completion’

EOG 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Liquids production up 33%

“Total company crude oil and condensate production was up 27% for the third quarter and 33% compared to the first nine months of 2013. Total liquids production, including NGLs increased 27% for the third quarter and 31% for the first nine months.”

Eagleford is great

“In the Eagle Ford, I can characterize our current activity in three points. One, the Eagle Ford is on track for multiyear growth; two, we continue to make enhancements in completion; and three, the Eagle Ford is the industry’s best crude oil asset and we’ve captured the sweet spot”

Still generate positive returns on capital even at $40 oil

“At $80 oil, the eagle ford will still generate direct after-tax rates of return in excess of 100%. At less than $40 oil, we would still achieve a minimum 10% direct a-tax rate of return.”

Problems with using Texas Railroad Commission’s data

“we would caution those who used monthly Texas Railroad Commission’s state data as a measure of company current production and a forecasting tool for future production. Remember, the State Data tends to lag and it’s potentially incomplete on a month-to-month basis for a variety of reasons.”

Sufficient cash flow for growth at $80 oil

“At $80 oil, we should have sufficient cash flow to fully fund our Eagle Ford, Bakken and Delaware Basin plays and sustain double-digit oil growth through 2017 and beyond. We plan to invest in our highest return crude oil plays and reduce our activity in our combo plays. We still expect to be a leader in organic growth — crude oil growth next year.”

We would cut back spending in some combo plays in an $80 oil environment

“What we would cut back on is the combo plays certainly the Barnett Combo, some of our drilling in South Texas, in the Mid-Continent, in East Texas and even in the Permian where we have the Wolfcamp Combo. We would not spend as much money in those.

But we need to be thinking that we would fully fund the Eagle Ford, the Bakken and the Delaware Basin plays and that we would have very strong double-digit production growth next year, oil growth and we would continue to be a leader in organic oil growth in the U.S.”

Not really interested in making acquisitions of distressed companies

“the acquisition businesses as you all know, historically, there is a lot of competition in M&As and acquisitions and usually they turn out to be very, very low return. So we are going continue to maintain our focus on growing the company organically through exploration and low-cost, acreage acquisitions in that process”

World oil supply demand is not an area we have a lot of expertise in

“We are pretty good at some things, but the world oil supply demand situation is not an area that we have a lot of expertise in. And a special insight and we read a lot of the same reports and follow the same analytics that many of you do and we are going to kind of leave it up to them, to kind of give direction to others, a lot of opinions out there on what oil prices could do.”

The company is an organic prospect generating machine

“the company is a very prolific organic prospect generating machine. And we think it’s — we can continue to do that as very, very low cost. As we — in the last few years our exploration costs have been relatively low in the company and a very small part of our budget.”