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’