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.”