EOG Resources, Inc. (EOG) J.P. Morgan Energy, Power and Renewables Conference (Transcript)

EOG Resources, Inc. (NYSE:EOG) J.P. Morgan Energy, Power and Renewables Conference Call June 21, 2023 11:55 AM ET

Company Participants

Billy Helms - President and Chief Operating Officer

Conference Call Participants

Arun Jayaram - JPMorgan

Arun Jayaram

We are going to keep things moving. Very excited to have EOG Resources to present again, they have been long-term supporters of the conference. So I thank David and the IR team for their continued support of the conference. Delighted to have President and COO, Billy Helms to present today. Billy has done a fantastic job, spearheading EOG’s technology and use of new processes to really drill better wells for lower cost more safely and with better emissions profiles. I am going to turn it over to Billy with some introductory comments and then we will continue with a fireside chat.

Billy Helms

Yes, thanks, Arun. First, I’d like to thank Arun and JPMorgan for having the conference and inviting us to participate. It’s always good to be back in New York. I remember last year was the first time I’d been back in New York for a while and I was excited to be here and saying this year, it’s good to see a lot of friendly faces and good people in the industry. So I just wanted to throw out this one slide really just to talk about – this is kind of the starting slide in our investor deck and it kind of talks about the value creation we see in the company. And we are really kind of our mission statement. And that’s to be among the lowest cost – lowest emissions and highest return producers in the industry.

And so that’s what drives us everyday. It’s about trying to always get better at what we do, no matter how pleased we might be with what our results are. And so, we have started the year with pretty good results in the first quarter, certainly generated solid results, a lot of that underpinned by our foundational plays, the Eagle Ford and the Delaware Basin. But on top of that, we have had excellent execution across all of our portfolio of multi-basin properties. And we are seeing the unique opportunity to continue to add to our inventory through our exploration effort. Just looking back the last 4 or 5 years, we’ve added really three key significant growth engines to the company that we see going forward. That being the Powder River Basin, the Dorado play, and now our new emerging Utica oil play. So on top of that, we feel good about our decades of multi-basin inventory that we continue to grow over time. So we are very excited about the future of the company and are going forward are more constructive about the outlook for both oil and gas prices on a long term, medium to long term. And so it’s a good phase to be in, in the industry.

So maybe with that Arun, we will turn it over to the questions.

Question-and-Answer Session

Q - Arun Jayaram

Billy, before kind of digging down deeper into the company, I know you and the whole team at ESG do a lot of macro work. And so I was wondering if you could give us your latest thoughts on the oil market fundamentals and how constructive you guys are on oil?

Billy Helms

Certainly. I think it’s safe to say right now that the market is trading differently than we see the outlook on the fundamental supply and demand balance. I think going forward, we are seeing the market continue to tighten and inventories continue to draw down. This last year, you have to keep in mind the inventories rose largely on the back of the SPR releases. And so without that, the inventory will be a lot shorter than we are today. The supply has been muted in the U.S. I think we are looking at oil supply growth being somewhat similar to last year, about 600,000 barrels per day year-over-year, plus you add the liquids on too it’s a little bit more than that. So U.S. supply growth has been somewhat muted.

And then on top of that, the OPEC cuts are starting to manifest. They had their first month last month of cuts. And that’s going to continue to stay with us for some time. You know, they extended that through the end of 2024. And then Saudi instituted another million barrel per day cut starting in July. So all that to say is that supply will be limited going forward. On the top of that, demand has grown. It’s grown, maybe a little bit muted pace compared to what people were estimating, a lot of that with China demand. Although China is – their there demand is at highest level that’s been and yet it’s not maybe as great as what people anticipated it would be. So when it does start to grow again. I think if you break China down, you really look at it. The manufacturing mode has been somewhat muted and declining. But services sector has been growing quite a bit. So altogether, their demand is about 16 million barrels per day, which is an all-time high for them. So once the manufacturing side starts to pick back up again and it will, demand will continue to rise. So constructively going forward, I think we are feeling like we are a short-term away from seeing the market tighten even further. So I think we are more constructive on where oil prices could go. The market seems to be trading on kind of wait and see mode. We want to wait and see when the market does tighten before they respond with near-term price increases.

Now on the gas side, I think we also see the near term. The rig count is starting to drop and the gas plays in both Haynesville and a little bit in the Northeast that will have an impact on supply. And the demand has been somewhat volatile, with Freeport being offline. Now it’s back online at 2 BCF a day. Sabine Pass is going through some maintenance about 1.6 BCF a day this kind of offline now that should be returning in the next few weeks. So, LNG supply or demand should be at its peak back here in the next few weeks. So going forward, the supply kind of waning from the Haynesville and other plays as you see – should see a little bit more constructive outlook for near-term for gas. Longer term, we are still more constructive medium to longer term once the LNG – next wave of LNG capacity starts to grow back in ‘25 and ‘26, it should be more supportive for constructive view going forward on natural gas. So I think medium and long term, both oil and natural gas were more constructive.

Arun Jayaram

I want to talk a little bit about or asking about a capital allocation as we think about this year, you are relatively flattish in the Delaware. Quite a few more tills in the Eagle Ford, what was driving that kind of relative capital allocation this year?

Billy Helms

So obviously, we always allocate as a return based company, we have to always allocate based on returns. We are generating solid returns in both those plays. In the Delaware basin, though, so in the Permian, in general, that’s the area with the highest level of activity in the country. And that’s not a area that we want to necessarily grow activity, in the sense that’s where you also see the most labor constraints, that’s where you see the most service constraints. And what we want to do is try to maintain a flat level of activity there. We will still grow volumes in that area, but with a flat level of activity. That way, they can continue to work on continuous improvements, drive efficiencies in our business, getting better drilling the wells and completing the wells and overall lower the well cost.

Now in the Eagle Ford, we did increase activity there relative to last year, but it’s back to the same levels of activity we had the year before. And so, it’s just getting to a level in the Eagle Ford where we can maintain a consistent level of production in that play. And I might say on the Eagle Ford, it’s a good example of how all these plays will mature over time. The Eagle Ford unnaturally, we’ve been drilling that field for 12, 13 years now. And we drilled the best wells in that play early on, as you naturally would, you always want to drill your best wells first. But we’ve since that time we have lowered the well cost enough. So if you look at the returns we are generating on that play, the last 2 years have generated the highest returns in the history of that play. And that’s because we’ve lowered the well cost so much, we have gotten a lot more efficient in what we do, that we are generating higher returns today than we did 10, 12 years ago. And that’s the way I think you will see the evolution of these plays work, you will drill your best quality wells first. And then as you improve and get more efficient and drive sustainable improvements in your cost structure going forward, you will move down the ladder and you are lower to your place.

Arun Jayaram

Billy, how should we think about other of your premium plays, capital allocation, you mentioned early on the Utica oil play, you get the PRB which I think is going to have a couple of rig lines early this year?

Billy Helms

Yes. So on top of that, so on the top of the Delaware and the Eagle Ford, what you are going to see is continued allocation of capital towards these emerging plays. So the Powder River Basin is going to have a little bit more activity this year. We will drill about 40 wells and more than half of those will be in the deeper target the Maori formation. And we are pretty excited about what we are seeing there on the early time results from their development program there. And then some of the capital will be allocated to Dorado, we are going to increase activity there slightly on the drilling side. We are choosing to delay some of the completions just to the near term gas prices have fallen back a little bit. But with running 2 rigs in that play, we will probably complete or drill about 30 wells, a few more than last year, but we are starting to see the efficiencies coming through our business by maintaining a steady drilling activity. So we are pretty excited about what we are seeing there early on. And then the newest play, the Utica oil play, as everybody knows, that’s in the oil window of the Utica play. We are seeing tremendous results, early time from some of our initial wells. And we expect that to continue to improve going forward. But we’ve got to build out some of the initial gathering lines to be able to fully develop that property. So it will be a little bit activity this year 15 wells or so. And then now we expect that to grow in the future. So you’ll continue to see increased amount of capital allocated to these emerging players on a go forward basis.

Arun Jayaram

I want to ask you about M&A, you guys have rarely done M&A. I’ve been watching you since the late 90s. But your cash balance is going to swell to above $6.5 billion by year end and that’s versus $3.8 billion in net debt. So you’re going to have a pretty significant net cash position. And so investors have been thinking about well, are they building cash to potentially use for strategic M&A, maybe some thoughts on that?

Billy Helms

Okay. Well, first of all, we do covet a strong balance sheet. That’s one of the assets we really hallmark is the company. And I think having a little bit of extra cash on the balance sheet, when you are in a volatile commodity business is probably a good thing. But yes, we are not really at a point where we are looking at doing a lot of the M&A. We did do the X deal back in 2016. I think most people recognize that as very value added deal that we did back that at that point and largely because it had a tremendous amount of upside. And when we bought that property, we actually increased activity, drilling those properties sooner. So spoke to the fact that we value that inventory at a fairly high margin. So we increased activity there. So I think it was we think about M&A. Does the inventory that we would add through M&A actually compete with what we are drilling today or does it go to the back of our inventory and didn’t get drilled for say 10 years? And in that case, it really didn’t make a lot of sense to be spending that kind of capital on an inventory that we are not going to drill for a long time. So that’s just kind of the way we think about large scale M&A. And the fact that we continue to add high-quality plays that compete with the top of our inventory through our exploration program, it really don’t see the need to add to rush out and added large M&A to our portfolio.

Arun Jayaram

Okay. Let’s talk a little bit about cash return for the generalist in the audience can you discuss your capital returns framework?

Billy Helms

Sure. So we are definitely committed to returning cash to the shareholders. We have come up with a formula that says we will commit to return a minimum of 60% of our free cash flow every year to our shareholders through the form of a regular dividend. And we view the regular dividend is again a very valued part of our company. It’s hopefully growing a sustainable dividend. We have never cut the dividend. We’ve grown it quite significantly over the last several years. And we stress test that at low commodity prices before we decide to increase it to make sure it is sustainable. So that’s our number one form of returning cash to the shareholders. The second one is through making sure we have a strong balance sheet. So we have already talked about that. That’s certainly a priority. And then the third form would be through some form of specials, special dividends or share buybacks. And we will venture into the share buybacks when we see the opportunity to do so at a value-added proposition. So we are also very familiar with the history of our industry in general of buying shares back when commodity prices are high. Correspondingly, that’s when these share prices are high. We want to buy the shares back when we see the opportunity to add it at a disconnected price to what we think the market is indicating. We did so in the first quarter. And I think we will continue to look for opportunities to do that on a go forward basis. So, that’s kind of how we think about it. And then the last part would be for the extra cash is it comes in pretty handy to do small bolt-on acquisitions or do things kind of out of cycle like buying casing at low prices, those kinds of things.

Arun Jayaram

Okay. One thing to think about since 1929, dividends has represented about 40% of the return in S&P, so I do think having a strong dividend is a good value-added proposition for investors. Let’s talk about free cash flow. You guys have outlined $5.5 billion of free cash flow at 80. Obviously, we are a little bit below that level and any broad thoughts in the sensitivity of your cash flow – free cash flow to oil and gas fluctuations?

Billy Helms

Yes. So just on a general rule of thumb, for every dollar price and oil – dollar change in oil price, it’s about $135 million of free cash flow. And for every $0.10 of change in gas price, it’s about $35 million of free cash flow. So in general, as a rule of thumb, but I think the more underlying thing is that the company has been embarking since we adopted this premium strategy back in 2016. The company has been trying to insulate ourselves from the changes in commodity prices. So our breakeven price is now in the low 40s. And so that really helps insulate the company from changes in commodity prices though it knows we can generate solid returns at whatever the oil price is.

Arun Jayaram

Billy, the company bought back I think $310 million of stock in 1Q. Obviously, we had some market dynamics. We had a mini banking crisis, a lot of volatility in the market. As the Board and management team think about allocating free cash flow to special dividends or buybacks, how would you frame the go forward plans for the company?

Billy Helms

So really on that light, the strategy really hasn’t changed. I think we want to continue to look for opportunities to buy the shares back when it makes sense when we see that disconnect from the fundamentals of the business. And so if we see those opportunities, we are going to lean in and try to buy the shares back versus provide special dividends. On the off times when oil prices are higher and the stock is doing well, we think that’s a good time to reward the investors with special dividends. So I think we are going to be flexible on that. But the strategy really hasn’t changed. We are going to be very disciplined when it comes to applying that technique.

Arun Jayaram

Okay. Next topic I want to ask you about just the overall portfolio, how things are going in the field. This year’s guide in terms of well costs will start there was about a 10% increase. Last year, I don’t know how you did it, but you held the line at plus 7%. Can you discuss kind of the state of your supply chain how you are contracted? And what is the potential for maybe CapEx to come in below the midpoint of your guide given some of the deflationary pressures?

Billy Helms

Well, that’s always my goal to come in at or below the guide to be honest. So we – part of that answer is the tremendous amount of flexibility we have with a multi-basin portfolio. We can move things around to make sure we can hit our targets both on the capital side as well as the volume side and hit all of our other financial metrics. So having that flexibility is a unique advantage in the company. We started as you mentioned last year, we probably saw I don’t know 15%, 20% inflation in our business that we were able to keep our well costs within 7% of the previous year. We came in this year believing that we would see rig counts fall off, although I think they’ve fallen more than we thought they would, especially on the oil side of our business. But we saw the rig count peak back in November of last year. And by the time we came out with our plan in January, it already fallen off some. So we expected prices to moderate as we went through the year. So I’d say we are pretty well on target to keeping our well costs from rising any more than another 10% going into this year. We are seeing the service constraints and prices fluctuate between basins. I think some basins we are seeing more deflation, airy pressure than other basins.

Again, speaking to the advantages of having a multi-basin portfolio, we talked earlier that most active area in the industry today is the Permian Basin. And so you are seeing less downward pressure on prices there just because I think there is still a lot of activity there to drive prices. Some of the areas that were – other areas we are seeing, we are definitely seeing prices come down. And we will continue to moderate that or monitor that as we go forward. Our contracting strategy is to try to lock in about half of our well cost each year going into that next year through a variety of different contracts and they are always staggered somewhat some degree. So it leaves us very available to take advantage of opportunity to reduce cost. But on top of that, I think rather than mean substitutes to service costs, pressure, inflationary pressures, what we try to do in the company is really drive sustainable cost savings through our operations. Trying to always get better at what we do drilling wells faster, more efficiently, completing wells faster, more efficiently, those kinds of things, we believe drives sustainable cost reductions. And you have seen that play out in our business. If you look at our financials, you have seen our unit costs come down over the last several years. Our finding costs come down over the last several years. We had a $5 per BOE finding costs last year in the company. So, that rolls through your D&A rate. We have to generate higher margins, both on a cash and on an income basis. So, that’s the kind of sustainable value added we try to do in the company. And we are pretty excited about some of the initiatives we are undertaking this year to do that.

Arun Jayaram

Billy, shale has matured, we have been – you mentioned you have been drilling wells in the Eagle Ford for 12 years or 13 years. So, one of the biggest questions from the buy side is duration and inventory. Can you give us thoughts on how you feel about your inventory depth of premium, double premium and location?

Billy Helms

Yes, thanks for that. I think one of the last things we worry about is inventory depth, to be honest in the company. We have given you a slide I think and ask go and refer to it a minute. I think it’s and you find this right there. Slide 7 in our deck, if nobody have seen this, it gives you a look at not only the inventory and resource potential, and we have switched to a resource potential because as an industry, we are starting to drill longer laterals. And as you drill longer laterals are well count naturally will go down over time, but the resource potential is still the same. So, we have got over 10 billion barrels of equivalent of resource potential at a finding cost of less than $10 a BOE. And then medium F&D cost of $5 a BOE continues to drop over time. Well, why is that, just because we continue to add things that are more competitive today than they were several years ago. So, we are adding things to the top of that inventory, that will compete with our drilling program. That’s coming from our exploration effort, we just talked about the three new plays we have added that are going to be emerging over the next several years. So, those are things that are really competing. So, we are not worried about it being able to continue to add to that going forward. And it’s already a high-quality and multi-decade inventory list that’s high return.

Arun Jayaram

Okay. Billy, as you shift towards newer plays, the Utica, Powder River Basin, how do you think about capital efficiency on a go forward basis, this has been maybe a concern of investors that you go from drilling wells in Lee County, which is some of the best acreages in the lower 48.

Billy Helms

So, first of all, yes, on the on the dollar base, let me just touch on that a minute. So, we are very pleased with our execution and the performance we are seeing from the wells. So, we are not seeing a degradation in well performance there. And we added some slides in our deck this last quarter to address that. I think you have to look at the mix of wells, and the targets to understand the quality of the wells, and the oil mix versus the gas mix. And we are seeing the same level of performance this year and expect that same level going forward by a target to be consistent going forward. So, we are not worried about the degradation of the quality of our inventory. It’s meeting our expectations as we move on. Naturally, as you move to a gassier mix, Dorado will be 100% gas. You will see on a capital basis, you will see that rollout on a BOE basis. We think the capital efficiency will continue to improve going forward because of the quality of the assets that we are adding.

Arun Jayaram

Okay. Delaware Basin, on the 1Q call, you highlighted a new completion design. That could result in a 20% plus uplift in recoveries. I think from select intervals, can you maybe give us a little bit more color on that?

Billy Helms

As a company, we are always trying to provide innovation to our – all of our operations. And we are – I also have been in a multi-basin portfolio. And I have said that many times, but we transfer technology between plays at a rapid pace. So, we take learnings from one play and apply to the other. This new technique we are applying in the Delaware Basin is something we actually generated in the Eagle Ford. And we are trying to apply it to other areas including the Delaware Basin. We have learned that it is not going to work on every type – on every target, it’s going to be applicable to a lot of the deeper targets that we are seeing. But we are seeing dramatic improvements in the productivity. Both near-term and long-term, we think we are seeing about a 20% uplift near-term, and that sustains itself long-term through the play. So, that’s pretty impactful to be able to do this. And it involves understanding the rock mechanics of the target intervals that we are selecting, to make sure this is applicable. And then it involves constructing the wellbore in a way that lends itself to this new technique. So, those two things allow us to be able to execute this program. We are very excited about it. We have done about 40 wells so far this year. And we will probably do about 70-ish wells this year in total. But we expect to expand that going forward. And we are also trying to leverage that technique in other plays as we see it would benefit.

Arun Jayaram

Yes. Two more questions and I will turn it over to the investors. What are the near-term plans in the Dorado play just given the softness we are seeing in the gas strip?

Billy Helms

So, near-term plans Dorado as I mentioned earlier, we are running two rigs there to really continue to gain the efficiencies on the drilling side. And we are seeing the benefits of that as we speak. On the completion side, and while we elected to do rather than have a continuous frac fleet working in that Dorado play, we scaled that back, we are going to share a frac fleet between yet in other areas, namely the Eagle Ford area. And so we still get some economies of scale. We are testing some zones. We are completing a few wells, but we have scaled back the completions there. Just in light of the pullback in gas prices and really allocating that capital throughout the company.

Arun Jayaram

Okay. Just one question on exploration, can you give us an update on how things are going? Obviously, I think we are excited about Beehive, which you could test that next year.

Billy Helms

Yes. I think the safe thing to say is the exploration effort and the company has never been stronger than it is today. We have got a lot of opportunities we are chasing. Some are further along like Beehive, that we in off the coast of Australia. We are excited to test that everybody – I think it’s well known, industry known fact that it’s a large undrilled structure. We are taking some of the expertise we have in the company, outside of drilling horizontal wells. We are also very good at shallow water offshore drilling. We have been doing that in Trinidad for about 30 years. We are leveraging some of that expertise into other offshore areas, Australia being the first one. We expect that well to be drilled sometime in ‘24. But we are also excited about some other opportunities we are chasing. So, I think exploration wise, the company continues to be very pleased with the early signs of success we are seeing in some of these other plays. And that’s encouraging us to look at new ones.

Arun Jayaram

Great. We will turn over the audience for a couple questions. Okay. Let me let me keep going. Can you talk about the Utica Shale? What are some of your delineation activities, some excitement on some of the initial results?

Billy Helms

Yes. We are very excited about the Utica play. It’s just to look back at the play, it’s probably taken us about 3 years to put together the acreage position in that play. We did it at a low cost, which we think is a very value added part of our business. And the early delineation wells we have tested so far are meeting all of our expectations. So, we are very excited about the potential of that play. There is enough well data across the play too that gives us confidence that we will be able to continue to see consistent results throughout the play. This year, we are going to strive to drill and complete about 15 wells, as we build out some of the initial gathering infrastructure there that’s needed. And with success there, we expect to increase activity in the following years.

Arun Jayaram

Got a couple of questions.

Unidentified Analyst

Just on the Utica play, do you own the levels above and below that, or do you just target that one, do you just buy that? I know some operators have the top, but not the bottom and so forth.

Billy Helms

No, we own pretty much the Utica window. We own some other depths as well. But the target really is for the Utica, the point pleasant play.

Arun Jayaram

With one in the back.

Unidentified Analyst

Just to follow-up on that. What’s the oil content, I mean historically was a lot of NGLs, I think and there was historically I think condensate issues that people always…

Billy Helms

Yes. No, that’s a good question. So, just to make sure everybody understands, this is in the black hole window. It is a low gravity 38 to 40 gravity oil. And it’s about a third of oil, third NGLs and third gas. So, these wells come on at a pretty good rate, probably in the order of 2,500 barrels of oil per day, plus 2 million to 3 million to gas. So, the biggest part of the mix is oil early on, which drives the economics of the play. So, it’s not condensate play, and it’s not gas play either that we have to worry about takeaway, it’s predominantly an old play. And so building out the gathering lines is the kind of the necessary part of making sure you produce it more efficiently. But we are very excited about the potential of that play.

Arun Jayaram

Alright. Billy, we are out of time. Thank you so much.

Billy Helms

Alright. Thanks Arun and thanks everybody for the support.