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.”

Apache 1Q16 Earnings Call Notes

Apache (APA) John J. Christmann on Q1 2016 Results

Targeting cash flow neutrality at $35 oil

“Apache is targeting cash flow neutrality in 2016 under our current budget, which assumes flat $35 oil and $2.35 gas.”

Well costs are down 45-60% from 2014

” in key areas of North America where Apache was actively drilling, our average drilled and completed well costs were down approximately 45% in the first quarter compared to average 2014 levels. Notably in the Delaware Basin, our most recent well costs are now down approximately 60%.”

Ready to increase our capital program

“Recent improvements in oil prices are encouraging. We are now looking for a sustainably improved pricing structure that would generate the cash flow visibility for us to confidently increase our capital program. The potential timing and magnitude of this increase is the topic of significant planning and discussion right now at Apache and with our board.”

Well prepared to ramp up activity

“Apache has maintained the organizational capacity and personnel to operate a significantly higher number of rigs and we are well prepared to ramp-up activity when appropriate. ”

We’re going to want to see some cash flow accrue before we start putting things back to work

“If you go back a year ago, everybody started ramping up and adding rigs quickly and expecting prices to hold. And unfortunately, those that outspent significantly in anticipation of what I’ll call visibility into more flat, longer sustainable price environment, ended up having to go back to the debt markets or the equity markets, that sort of thing. So I mean we’re going to be cautious. We’re going to be very thoughtful and disciplined. And like I said, we’re going to want to see some cash flow accrue before we start putting things back to work.”

Stephen J. Riney – Chief Financial Officer & Executive Vice President

We will increase capital spending if oil stays at these levels

“if the current oil price environment prevails, it’s more likely that we will maintain or even increase drilling and completion activity from current levels, which would result in increased capital spending.”

Things are starting to look pretty darn attractive

“At this point, the environment’s getting much better. I mean, we like the direction on the cost, we like the direction on the oil price, so I think we’re at a point where things are starting to look pretty darn attractive. But right now, our best hit is we haven’t committed to a lot of rigs or a big program at this point. So it’s one of those things we will be discussing as we start to look at plans, but at this point, we’re not quite where I would feel good about locking in a scenario.”

Anadarko 1Q16 Earnings Call Notes

Anadarko Petroleum (APC) R. A. Walker on Q1 2016

Things feel better than they did 90 days ago

“I think it almost goes without saying that things feel better today than they did 90 days ago, both for our industry and for investors. The very fragile energy capital markets we’ve seen for most of the first quarter appear to be stabilizing, the outlook for commodity prices are improving and I think for industry our operating environment is definitely strengthening. ”

You’re better off buying from a good operator so you don’t inherit legacy problems

“I think the fact that we’ve been a good, prudent operator for a long time, we’re a brand name, if you want to call it that, in our space, when we choose to redeploy capital by exiting a particular property, you’re not taking on problems that you might with a smaller, less well-known company. And that to-date has inured to our benefit, as you’ve seen a very successful effort in the last two years to monetize properties into what I think anyone would describe as a very difficult environment.”

Seeing private equity firms who believe that natural gas is a better place to invest than oil

” If you’ll recall, both in March as well as when we reported our fourth quarter and prior-year results in January, we said at that time, and still believe, that depending upon the private equity firm, there are firms that have a very fundamental view that natural gas is a better place to invest than oil. They look at the activation costs of liquids and oil versus what they think is a fairly good market for natural gas and a good market for those folks, as I listen to them, as they feel very good about ability of natural gas to run to $3 or more from where we are today.”

Robert G. Gwin – Executive Vice President-Finance & Chief Financial Officer

Seen an improvement in asset prices with the environment

“Charles, the only thing I’d add is that the economics you asked about is that Al’s comments on the improving environment is we’ve seen that read-through, I think in particular, yes, on the gas side. We’ve mentioned that a number of the assets that we’re focused on considering the sale of today are gassy. And with the improvement of the forward curve, we’ve seen some strengthening in the interest for those assets. And it doesn’t take a whole lot of improvement on the price side to get some materially better economics at the asset level.”

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.”

Apache 3Q15 Earnings Call Notes

Getting balance sheet in order

“So far in 2015, we have paid down $2.5 billion of debt. Currently our net debt is less than two times annualized 2015 adjusted EBITDA. We have extended our nearest long-term debt maturity to 2018, with only $700 million maturing prior to 2021. We have restructured and refreshed our current credit facility at $3.5 billion, which now matures in June 2020. And we have retained $1.7 billion of cash liquidity.”

Repatriation has triggered tax payable

“I would like to remind everyone that as previously discussed, the repatriation of proceeds from some of our foreign asset sales has triggered a U.S. income tax payable of approximately $560 million. Actual cash payment of this liability will occur in the fourth quarter of this year, thus some might consider our net debt of $7.1 billion at the end of the third quarter as closer to $7.7 billion.”

Plan capital program to keep us cash flow neutral for 2016

“we will plan a capital program, which we believe will keep us cash flow neutral for the year. We will not attempt to balance cash flow within each quarter, but instead to level-load activity for the year. We will fund the capital program from operating cash flows; we will not use asset sales.”

We’re going to live within cash flow

“I think the best thing we can do given this price environment; the commodity price is going be a big driver. As Steve mentioned, we’re going to live within cash flow.”

Looking to purchase acreage that will require application of science and technology

“we are looking at some things that would be significantly lower than what I’d call the retail prices that are being paid. And it’s where we’re applying technology and science and we think we’ve got some things that could be material. It is new ventures acreage, so there’s always risk with that and that’s why we wouldn’t want to talk about it now. But we’re talking significant multiples lower in terms of what that acreage might be viewed as and what it potentially could be worth. And I think that’s the zip-code that we feel like makes the most sense in this price environment because we can pick it up and we can work the science and you can have something that could be material.”

Anadarko 3Q15 Earnings Call Notes

Reduced per well costs at Wolfcamp by 4m per well and could cut another 2m

“At our Wolfcamp oil play, this year alone we’ve reduced our per well costs by $4 million, to $7.5 million, with direct line of sight to another $1.5 million to as much as $2 million per well in expected savings at a time we choose to pursue growth and migrate towards pad drilling across the field.”

Planning for the worst hoping for the best. Maybe a little more pessimistic than the forward curve

“we don’t have any better crystal ball than anybody else on what prices are going to be in 2016 and 2017. And our approach is plan for the worst and hope for the best. Consequently, we have a fairly low expectation, not much different than the forward curve, maybe even a little more pessimistic than that in terms of how we might plan for capital.”

Trying to decide how to allocate capital

“like all of our companies in our sector right now are trying to decide how we want to allocate capital next year, looking into very, at best, fuzzy picture of what that’s going to look like.”

There’s $100B in capital that’s been raised to invest in the sector

“I think, like most people, we still see this extraordinarily large amount of private equity that’s been raised. And most people seem to gravitate around $100 billion as the number that’s been raised and prepared to be committed to the sector over the next couple of years for investment if the right opportunities present themselves.”

We’re getting outbid by private equity backed teams in purchasing properties

“unlike the public markets, where you have a little bit different dynamic at work, where we see ourselves today trying to bid on properties in markets where we have interest, we are being pretty consistently outbid. And most oftentimes, we’re being outbid by private equity-backed management teams. And so I’m not sure I’d call that a seller’s market quite like I did previously, but I would say it’s a healthy bid-ask in terms of exactly what’s happening with properties when they come into the market and the receptivity they’re getting.”

There may be 95 management teams out there with PE backing

“there are a number of management teams, the number that I’ve heard most recently is maybe as many as 95 of them out there that have private equity backing, that haven’t deployed capital yet in the market. And the types of assets that we’ve been selling, both earlier this year, the three EOR, East Texas and CBM that we’ve announced, we’re in a size range that’s a sweet spot for those types of buyers.”

The buyside has rewarded capital efficiency

“My early read on, say, the first nine or so months of this year is we’ve seen the buy side reward capital efficiency probably better than they historically have…those companies that have good wellhead margins that are being able to improve those margins through the cost efficiencies, like we’ve been talking about this morning, that are on top of that good allocators of capital, I do believe in the I’ll call it the intermediate term that we probably will see the market, the buy side reward companies that can achieve that.”

Growth doesn’t maximize value

“Onshore in the U.S. everybody’s going to drill their Tier 1. They’re going to focus on producing that Tier 1 and then they’re going to redeploy the capital into their next best assets. And frankly that’s not the way to maximize, in our opinion, that’s not the way to maximize value unless your shareholders are really telling you that growth matters more than value and what we’ve heard and what we continue to believe in is that value preservation on the onshore and value building in the other parts of our portfolio to be positioned for a more constructive commodity price environment is the right way to approach it today.”