William Thomas - Chairman of the Board, President, Chief Executive Officer
Thomas Driscoll - Barclays
EOG Resources Inc (EOG) Barclays CEO Energy-Power Conference Call September 11, 2013 7:45 AM ET
Very accurate on the report. We certainly review those and look at them, but pre-conference report on EOG and while my quotes are coming from you, Tom, as we talk about this stuff. So excellent job and they are really experts in the whole business. I know much of you all are very familiar with the company and following the company for years and certainly you have recognized that we have had extremely strong numbers in the last couple of years in terms of oil, cash flow and earnings growth. But what I want to just communicate with you this morning is that we certainly feel very strong, have a very high level of confidence that we are going to be able to continue that trend for many years to come.
We are certainly confident because we truly believe we have the strongest horizontal oil asset in the business, probably in the world in terms of the shale plays and we have three core assets that are kind of the founding and the building blocks of our good confidence as we go forward, certainly the Eagle Ford is the hallmark play of the company. Hallmark play, really, of horizontal oil in the whole world and EOG is the largest acreage holder there, 569,000 acres and certainly the leader in production and a leader reserve potential as we go forward.
The Bakken/Threeforks, we have made a horizontal discovery well there back in 2006 in the Parshall field and we have built upon that and have a really strong position there. We have got a technical renaissance going on in the Bakken and with new frac technology and that's now turned into a very high rate of return play for us and we have increased the drilling inventory to 12 years there. So a lot of solid things there left to do.
In the Delaware Basin, a bit of new plays of Leonard play and then the Wolfcamp. In the Wolfcamp, we announced earlier in the year, is a new play for EOG. Those plays are just emerging. They have got a lot of upside, increasing recovery factor, increasing reserve potential and the drawing [ph] potential there. We are already generating very high rates return in those additional wells in those plays. We have 1.35 billion barrels of oil equivalent when we combine just the Leonard and the Wolfcamp and over 2,700 locations already identified there. So a lot of growth potential there too.
So our production growth in EOG, it's really easy. It's oil. We are an oil company now. It's a very strong production growth and it's very high margin production growth and it is really hitting the bottom line in earnings and cash flow. So what you can expect from EOG as we go forward through 2017, we can clearly see that we are going to be best-in-class, strongest in our peer group in crude oil growth and then certainly we have had a very good track record of seven years of really strong crude oil growth. That average is at 38% compounded annual growth rate. So our track record, our current assets, gives us a lot of confidence that we can continue that really strong trend as we go forward.
In the natural gas liquids, with associated gas, with these plays are very rich, obviously. So we are going to have a lot of NGLs and we will be in the top tier group on that part of the thing. Then, as we talk about natural gas, we have been selling properties over the last few years of gas properties, non-core properties. We don't need to do that anymore. We actually turned positive free cash flow in the second quarter of this year and that's going to grow as we go on further. So as we look at 2014 and beyond, we are going to grow gas again. We are going to grow associated gas with these plays we were drilling and we are going to be able to grow our gas volume. So total growth for EOG is going to be very strong as we go forward.
So when you think about 2014 and 2017, and you think about we are going to have four years just in those years, we think it will go beyond that but four years of very high margin oil production growth profile. When you have coming in and that accelerating, with very high returns, certainly the cash flow growth is going to be extremely strong for the company. That's high margin production is going to go to the bottom line. It is going to the bottom really quickly. So earnings per share is going to be really strong, going forward in those years. We are going to be generating enormous amounts of free cash flow as we go forward.
So what are we going to do a cash flow? The worst thing you can do is generate a lot of cash and then waste the money. We are not going to do that. We are going to be very disciplined as we go forward. The first thing we are going to do with the first part of that money is we are going to continue the healthy dividend increase that we have established in the company. We have 14 years of good dividend increase. So as we go forward, we are going to continue that.
The second thing we are going to do is, we have always been a low debt company. We are going to continue to reduce the debt of the company. Not to extremely low levels but certainly at a net debt to cap ratio. We are looking at about somewhere in the low 20s as we go forward. We work it down to that.
Then the biggest part of the money, we are going to use to accelerate our best plays. So you can expect us to spend more money, drill more wells each year in the Eagle Ford, more money, more wells in the Bakken/Threeforks and certainly the same thing in the Permian as we go forward.
We are generating basically in excess of 100% direct rates of return on those plays, certainly there is not a better place to put your money when you are generating those kind of internal return. So that will be the focus as we go forward, an enormously good picture, certainly through 2017 and we think, beyond.
So what's new in the company? Our In the second quarter call, we increased our crude oil projections this year from 28% to 35%, our NGL from 10% to 14% and total company growth from 4% to 7.5%. So we did that without increasing our CapEx. The reason that's happening is, number one, the wells continue to get better in everyone of our plays. Our completion technology is driving well performance and it is astounding. We internally have been surprised that how these horizontal plays continue to respond to improvements in completions. We will talk about it maybe a little bit more of that in a minute.
The other thing is, we have reduced the cost of wells. So our well costs keep going down. So we are actually able to drill more wells with the same amount of money. So more wells, better wells, certainly is the reason that we are able to do that with no CapEx addition.
Then we talked about in our Eagle Ford western acreage, we have had really good success and a strong first part of 2013. We drilled a large number of wells in the western part of our acreage. We have been working diligently on getting the cost down on those as well as getting the productivity up with the completion style. So now we have brought the rates of return on our western acreage drilling up to 100%, which is more on par with what we have been achieving in the eastern part of the acreage. We also drilled the record well of date in the Eagle Ford with a 7,500 barrels a day in the east side of the play too. So great results, all across the board on every part of our acreage position in the Eagle Ford. Certainly, the western part was a very big part of our growth story and a very big contributor and it will be as we go forward.
In the Bakken and Threeforks, again we have had a renaissance in completion technology there. We have had very good success on the downspacing. So that allowed us to add additional locations to our inventory. So our inventory has growing from seven years to 12 years of inventory and our rates of return on the current Bakken drilling, we are drilling in the core and antelope is in excess of 100% rates of return. So very, very strong results there. Our average wells have continued to increase over time. Now they are up to 940 Mboe per well of our core and antelope on the downspacing. So excellent go forward. That is a growth area for EOG.
Then, in the Delaware Basin, particularly in the Leonard, we have had good results there. Same thing, lower well cost, better results on the completions, and now our rates of return in the Leonard for the first half of 2013 are in excess of 100% rates of return. So another place where we have got 1,600 potential locations ready to drill there. You will that accelerate over the years as we have more money to invest in that. So that's' at least what we talked about in the second quarter call.
If you look at our 2013 game plan, it's really simple. EOG is all about oil. When oil prices are in such a high disparity, the natural gas prices, why not focus oil. We have the assets and that's where we are focused. Certainly, on the big three plays talked about, the Bakken, the Eagle Ford and the Permian plays.
Improving the recovery factor. We have steadily done that in each one of these plays and the advantages of the existing plays is that they have enormous amounts of oil and gas in place. So in Bakken and our Eagle Ford, we have 26 billion barrels of oil net to EOG in place in the rock. Every time we increased that 1% this 260 million barrels net to EOG as we add to that. So we are very focused on that. We got upside in everyone of our plays including the Eagle Ford, the Bakken, the Permian, going down the road.
We have always been a first mover in greenfield new plays and we have a nice list of those working all the time. We currently do. We have a lot of confidence that we are going to bring some new greenfield plays in the play in the drilling mode in the future. Fe are focused on oil. Certainly the culture of the company has not ever changed but we are never satisfied. We know we never have enough. So you can count on EOG to be a first mover as we go forward.
We haven't focused any money this year in dry gas drilling with gas prices like they are. Although we do have a huge amount of dry gas in inventory that we basically have in the vault in HBP status. When gas prices turn around, we will drill good dry gas oil. But right now we have plenty of really good oil to drill. Certainly the debt of the company has been able to do this transition without increasing the debt of the company and we are in great shape going forward.
So if you talk about EOG. Who are we? Obviously, we have been talking about, we believe, we have the best horizontal oil assets in North America. I think that's proven up with the growth and the performance of the company. As you see, we have had four years of peer leading growth in oil and an average of 40% per year over the last four years. We can't continue at 35% or 40% per year because as the crude gets bigger, the base gets bigger, that certainly is going to be very strong as we go forward with the asset we have.
The differentiators, of course, are oil. We are not focused on the lower product. Condensate windows are the NGL, the wet gas kind of plays. We are not focused - we are focused on money on the crude plays where we are getting the premium parts of that crude. Then on top of that, we have been able to achieve very premium net backs with our crude because of our crude-by-rail system. We were first movers in getting that going. So we have a lot of flexibility to move our crudes to the highest priced markets. It's a differential for the crude shifts over time.
On the cost side of it, certainly EOG, I think, is the lowest cost driller in these shale plays. We have a nice lead and most plays that we are involved in, we compare against other operators and we are significantly lower. Part of that is, we have our own sand. The EOG own sand is a very significant reduction in cost. It is also a nice technical advantage that helps us make better wells at the same time.
Then our unit costs, our operating unit cost, have certainly been trending downward. Our guidance is downwards as we go forward. In part, most of that is because our oil growth has been so strong and certainly our guys in the field have done a really good job at keeping cost under control.
I will talk about crude-by-rail marketing really quick. Certainly we were the first mover. We started over five years ago in the Bakken. We now have loading facilities in the Bakken, the Permian, the Eagle Ford and the Barnett. We use from time to time but most of our oil right now is being, in our harbor railcars, most of it is from the Bakken at the moment because that's where we need it. The unloading facilities, we own these unloading facilities as well as the loading facilities. It gives us a significant cost advantage as they are all paid out, paid forward. So we continue to work on the cost, operating cost side because they are self owned.
So we have a big unloading facility in Cushing, Oklahoma and at St. James, Louisiana. Currently, most of our crude, from all of our crude, I think that nearly all of our crude from the Bakken is shifted to St. James. We continue to get the best price there. We will be able to shift, you know, the flexibility. We have already sold some oil to the East Coast and to the West Coast and we are establishing markets there and very much in tune with what's happened in the differential across the market and we will be able to shift our crude as needed.
Improving returns is high margin oil. Certainly is hitting the bottom line. So when you are talking about ROE or ROCE, those are going up over time. They have gone up nicely from 2012 to 2013. I think that you are going to continue to see those improve over time.
Talk, just a minute, about U.S. horizontal crude oil growth. Everybody knows that it has been really strong over the last few years. Some people worried, maybe we are going to overload the system and find too much oil like we did with gas. Certainly we don't believe that. We believe the amount of really very premium crude oil plays is small compared to gas and certainly oil is much more difficult to get out of these tight rocks than gas has been So the potential really is not there to do the same thing as what happened in gas.
But as you look at the current production, 80% of the current horizontal oil production in the U.S. is coming from two plays. It is coming from the Eagle Ford, which is 821,000 barrels a day and it is coming from the Bakken which is 750,000 barrels a day. That's 80% of the production. The reason it is, is those two plays are the highest quality plays. There is no question. The rock are better. They respond better to horizontal drilling and the completion practices and the wells, when they get on their decline rates, when they level out, they are at higher rate in other plays. So those are the two best plays. There is really no other plays that are going to be found like those.
In third place, and it is really in a distant third place, is the Permian. Permian is not a bad play. It has a lot of oil there. There is a tremendous amount of potential oil underground but the Permian, quality of rock and the wells are at much lower than the Bakken and the Eagle Ford. It is going to be more difficult for that kind of a play and then all the plays below. There is a bunch of other plays. They are all in distant thirds and fourths and fifth place.
The next chart shows the differences in the well. On one side of the chart, we are talking about the production rate. At the bottom is the number of wells being drilled in each one of those plays. Sot he red line is the Eagle Ford. So the reason it's a steeper curve is because Eagle Ford wells, when you compare the three plays, the Eagle Ford, the Bakken and the Permian, the Eagle Ford wells are better than the other two.
The next play for the quality of wells is the Bakken. That's the blue line. In the green line is the Permian play. So it takes 2.6 Permian wells to equal one Eagle Ford well. That means it's going to take 2.6 more wells. It is going to take a lot more wells. It is going to take a lot more of capital. It is going to take a lot more of time to grow Permian production than it does to Eagle Ford or Bakken. Then if you take the other plays and you put them on this chart, the would go, like, lower and lower as you go down the road. So that's the way you differentiate the plays and that's the way we look at it as we go forward.
We talk about EOG in each one of these plays. This is a cumulative production chart versus time. EOG is in red there. We have better than a 2:1 margin in current production in the Eagle Ford and you can see the slope of the line. It gets steeper towards the end and it's steeper than the peer group in the Eagle Ford. So we have a big lead and our lead is getting bigger over time. If you look at where we are in the big three plays, where that would be the Eagle Ford, Bakken and the Permian, you put all those together, the same thing.
The peer group is down below than those three plays in a big way. EOG is in the red. More than a 2:1 lead already and the slope is much steeper for EOG in the end there. So we are growing our production much more rapid than the rest of the group. That's why we believe and we are very, very confident that we are going to lead the peer group in crude oil production as we go forward. There is no question about it with our inventory and the way the company can execute.
We have strong record of growing oil. These are just a couple of charts to show seven years of progress there. So oil or total liquids is very, very strong. That gives us certainly the confidence to be able to talk about the future. Then the inventory of EOG is extremely deep. It is very high quality and the best plays and it is extremely deep. Again, when you look at, in the Eagle Ford, 12 years of drilling inventory. In the Bakken, we just raised that to 12 years of drilling inventory. If you look at the combo plays in the Delaware it's multi-decades of inventory. We have just started, scratched the surface on the Permian plays. So when you take that all and look at that all and combine we have 15 years of very high quality inventory as a drilling company. So we are not running down of places to put all this cash flow that we are generating. A very bright future ahead of us.
Production growth. This is kind of the guidance that we have given through 2014 through 2017. We are certainly going to be the best-in-class, double-digit production growth in 2014 through 2017 and it is not going to be 10.5% or 11%. It is going to be a strong double digit growth as we go forward. Then we talked about gas. We are going to be growing gas again with all the associated gas that we have got. So you are going to see a very strong total growth from EOG as we go forward.
This is a chart. Quickly this shows the transition of EOG. We were first movers in the horizontal shale gas, Bakken, ten years ago. We grew that really rapidly. So our revenue was gas. We shifted. We had the foresight to see a bit ahead of the industry that you can get oil out of these rocks and so we made the shift quick and we captured a lot of very strong acreage that we have been talking about. So our revenue mix has shifted at the same time. So now we are, 80% through 88% of our revenue is through liquids and 76% of that is oil.
This chart shows, because of the margins on this oil is really high, our margins on the dollar per Boe is increasing over time. I think we can continue to expect that to grow. The red part of the bar there is the percentage of our revenue in oil. So as oil revenue goes up, our margins go up and it is really hitting the bottom line.
This is our 14 year history of our dividend growth. It has been very strong, very consistent. We increased it 10% last year and we want to continue that healthy increase as we go forward with the first part of our money.
Then we talk about the Eagle Ford. We have an enormous position there, 659,000 acres in the oil window. We were first movers there. We could have bought acreage in really any parts of the play but we chose to focus on the crude oil part of the play. Our acreage is about 120 miles long and 10 or 15 miles wide and it is focused on the black oil. We didn't want to get in the wet gas window. We didn't want to get in the dry gas window. We didn't want condensate. We didn't want NGLs. We wanted oil. So our production is 78% oil.
Certainly that's the premium oil and that's getting the highest price on the market. We are the largest producer at 173,000 barrels of equivalent. Our current estimate, we are estimating of the 26 billion barrels we have in place we are going to get about 8%. We have 4,900 locations on a map, sticks on a map, identified secure locations that we got ready and we are getting ready to drill over the next two years. That represents about 8% recovery factor. We are in the process. We have done two iterations of downspacing.
We are currently drilling on 40 acre spacing on the East side and 65 acre spacing on the West side. We are doing our third iteration of downspacing. So if that works, we will have additional recovery factor that will go up. Every 1% of 260 million barrels and we will have additional locations. We are adding more locations and more reserve potential across the company in all of our plays than we are drilling every year. So it's a big - this is certainly a big focus for the company.
We talk about our Western acreage. We are now getting rates of return of 100%. It has been a big contributor to the oil growth story of the company. So that is just to prove that all off our acreage is very highly productive and is going to be strong contributors as we go forward. We did lower the well cost. It is now in our guidance, second quarter, it is down to $5.5 million from $6 million. So guys on the ground are doing a great job. They are really getting the efficiencies on the wells. Faster wells and more stages per well. Everything is doing really well.
This is a couple of slides on just our Western acreage. You can see the initial production rates have been going up due to the completion technology and then the cost have been going down. Even though we have been drilling a bit longer laterals, we have been able to certainly use the EOG sand a lot of mechanisms to continue to reduce the well cost. That's really what brought the rates of return on the wells.
Then the Bakken/Threeforks. As we talked about, we are continuing to make significant improvements, whether it be in the core area, the antelope position that we have, acreages, or even out in, what we call, the state line in the Western part of the play. The completion technology that we are using really applies across the board. It is the completion technology that we brought from the shale plays in to the Bakken. The Bakken started a little before than a lot of the other oil plays.
So we had a renaissance there and it is really paying off big. We have very good downspacing from 160 acre downspacing pilots in the core and antelope area and those wells are responding really well. Initial rates, anywhere from 2,000 to 2,500 barrels a day. With the new completion technology, we are connecting more rocks to the well. So the initial rates and the initial part of the curve are much higher than they were with the old completions. So the rates of return of the wells are just really strong, like I said, in excess of 100%. Again black oil, 78% and 92%.
Then, this is couple of charts that show the average EUR per well. As lateral length went up in the core and antelope area, the EURs went up. But the big juncture in the last year or so has been due to completion technology. It has been outstanding in making the wells better. Then as we have got the longer laterals, the cost went up but now are making significant improvements on the efficiencies on the drilling. So we are driving the cost back down on these wells and we are also shifting the EOG sand there, like we do on the Eagle Ford and the other plays and that's driving the completion cost down. So the rates of return are again going to remain very strong for us in the Bakken.
This is an independent chart of the top 10 wells by peak oil rates in the Bakken and the reds ones are EOG. So seven out of the top 10 wells in the Bakken are EOG wells. I think as we go forward, that maybe 10 out of 10 with these new completion techniques. So that certainly shows the quality of the work we are doing there.
In the Permian basin, as you all know, there is two sides of that. There is the Midland basin, where we have the Midland Basin Wolfcamp. Then in the Delaware basin, we have had better results, quite frankly than we have had in the Midland basin. So we have the two plays in the Delaware side. That's the Leonard play and the Wolfcamp play. The Wolfcamp play we introduced as a new play for the company in the February call of this year. It has 800 million barrels equivalent at a very low recovery factor right now. 1,100 locations left to drill. Just getting started there but already generating very high rates return. Then on the Leonard, we have 73,000 acres and over 1,600 wells to drill there and we are generating 100% rates of return.
The Midland Basin Wolfcamp, we are really still trying to figure it out. Technically it's a much more difficult part of the play for us. We are not getting as high returns there. It has just got some challenges. Not that we are not making money. Not that it does not have a lot of reserve potential. Not that it is not a good play. It is just more difficult than the other plays. It ranks pretty low on our inventory of things internally in EOG to drill.
So Delaware, just a little bit more there. Again we have been able to drive the well cost down and the productivity up and we are generating 100% rates of return and the wells are typically 1,500 to up to 2,000 barrels a day on the initial production rate. That's just on the oil. The product is a bit combo-ish but a 50% of the product is oil. That's a pretty oily play. So again we have 1,600 locations left there to drill. So you will se us continue to increase our activity in the Leonard as we go forward. It's an excellent, very thick shale package, very large amounts of oil and gas in plays and a lot of upside to the numbers that we have here.
Then in the Wolfcamp. We are just getting started on the Delaware side. We have only drilled four wells. They are all excellent wells. The initial well costs are lower than expected. So we can easily say with the initial well, and looking forward that we are already at a 60% rate of return. It's a true combo play. Pretty much a third, a third, a third on oil and gas and NGL. But it has a really nice high oil rate and the rock quality is good and the wells hold up really well. So we are already at a 60% return on the first wells. And that's pretty strong as we go forward. We have an enormous amount of work to do there and that's recovery is going to go up overtime and more wells and more potential.
Then in the Midland Basin Wolfcamp. We have to drill longer laterals because the good quality rock is not as good as the Delaware. So our rates of return are not as strong there. It is at about 30% to 35% rate of return on the Midland Basin. When we complete the wells and it patterns they tend to communicate with each other, both vertically, they communicate with each other when you try to do stack plays close together. Then laterally, you have to drill the wells quite a ways apart to keep them from communicating with each other. So just the quality of the play, it is just a more difficult play. It has enormous amount of oil in the play. It is just going to take a lot more money and time to grow production there than it does in some of the other plays.
Then in the combo, Barnett Combo play. We have been in that for years and done a great job of just making incremental better wells as we go over time and certainly that our cost on our well, we have been able to drive that down over time. It is down to $2.7 million and we are at about 30% to 35% rate of return there and certainly the initial revenue is driven by oil. It is about 46%.
Then international. We don't have a lot going on international. But Trinidad, we have a nice gas contract there. It's a very profitable business for us and our plans going forward is just to hold that at that contract level, not grow volumes there. We are completing off a platform there now called Osprey. We completed the first well at 30 million a day. We have got additional wells that we will be completing throughout the year, just to keep our volumes flat.
Then in the U.K. and the East Irish Sea. We are working diligently to get our Conwy discovery, oil discovery online. We expect that to be online hopefully sometime next year. That will start up at about 20,000 barrels a day net to the company.
So time to conclude up and in the financial strategy at EOG, whether you are talking about how we book our reserves or how we use successful efforts of accounting. We have always been very conservative. Certainly our debt rating from Moody's and S&P is very, very, very strong. Again we talked about our dividend increase over time. So very conservatively, very well-managed company.
Then our hedging position. We have always - we have been targeting over the last year or so. This year we target about 50% of our oil, just to lock in the floor there to make sure that we - if something happens, we have plenty of cash to continue to grow our property. And that's what we will do. We are targeting about 50% as we go forward.
On the gas side hedging, pretty minimal hedging there just because the opportunity has not been there. So anyhow, hopefully you feel a little bit better about EOG. We are certainly confident in our future forward. We have been able to deliver in the past and I guarantee we are going to deliver in the future. So that's our story.
Well, thank you very much. Bill will be available
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