EOG Resources' (EOG) CEO Bill Thomas on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: EOG Resources, (EOG)

EOG Resources Inc. (NYSE:EOG)

Q2 2014 Earnings Conference Call

August 6, 2014 9:00 a.m. ET

Executives

Tim Driggers - CFO

Bill Thomas - Chairman and CEO

Gary Thomas - COO

Billy Helms - EVP, Exploration and Production

Mario Baldwin - VP of IR

Analysts

Amir Arif - Stifel Nicolaus

Doug Leggate - Bank of America Merrill Lynch

Leo Mariani - RBC Capital Markets

Pearce Hammond - Simmons & Company

Subash Chandra - Jefferies & Company

Irene Haas - Wunderlich Securities

Joe Allman - JPMorgan

Bob Brackett - Sanford C. Bernstein

Brian Singer - Goldman Sachs

Arun Jayaram - Credit Suisse

Operator

Good day, everyone, and welcome to the EOG Resources Second Quarter 2014 Earnings Results Conference Call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, Sir.

Tim Driggers

Good morning. I am Tim Driggers, CFO. Thanks for joining us. We hope everyone has seen the press release announcing second quarter 2014 earnings and operational results.

This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and EOG's SEC filings and we incorporate those by reference for this call.

This conference call also contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com.

The SEC permits oil and gas companies in their filings with the SEC to disclose not only proved reserves, but also probable reserves as well as possible reserves. Some of the reserve estimates on this conference call and webcast may include potential reserves or other estimated reserves not necessarily calculated in accordance with or contemplated by the SEC's reserve reporting guidelines.

We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our press release and Investor Relations page on our website.

Participating on the call this morning are, Bill Thomas, Chairman and CEO, Gary Thomas, Chief Operating Officer, Billy Helms, Executive VP, Exploration and Production, and Mario Baldwin, Vice President, IR.

An updated IR presentation was posted to our website yesterday evening and we included third quarter and full year guidance in yesterday's press release. This morning we will discuss topics in the following order. I will first review our 2014 second quarter net income and discretionary cash flow, and then Bill Thomas and Billy Helms will provide operational results, I’ll then address EOG's financials, capital structure and hedge position. Finally, Bill Thomas will cover EOG's macro view and provide concluding remarks.

As outlined in our press release, for the second quarter 2014, EOG reported net income of $706.4 million or $1.29 per share. EOG's second quarter 2014 adjusted non-GAAP net income which eliminates the mark-to-market impacts and certain non-recurring items as outlined in the press release was $796 million or $1.45 per share. Non-GAAP discretionary cash flow for the second quarter was $2.2 billion. At June 30, 2014 the debt-to-total cap ratio was 26%. The net debt-to-total cap ratio was 22%.

I will now turn it over to Bill Thomas to discuss operational results and key plays.

Bill Thomas

Thanks,Tim. Once again EOG had an outstanding quarter. We posted year-over-year U.S. oil growth of 33% with total company production growth of 17%, which drove excellent financial metrics. We increased the dividend on the common stock by 34%, the second increase this year, and we also announced our success in yet another high return US crude oil play.

EOG’s workhouse assets, the Eagle Ford and Bakken continued to meet or in most cases exceed our high expectations. Although we’ve been in the Bakken since 2006 and the Eagle Ford since 2010 we are steadily improving individual well results in both plays through continuing advances in completion designs.

Also due to our ongoing ability to improve efficiencies, we continued to maintain good cost control, which was evident in our second quarter results. Together these plays are continuing to drive high return oil growth and are far from mature. We realized cost reductions during the first half partially due to efficiency gains from the increase in pad drilling in the Bakken and Eagle Ford. In both plays we are drilling longer laterals and utilizing larger fracs because we have secured sand supplies.

With pad completions, a large number of offset wells are taken off-line. Wells take longer to flow back and new wells are brought on production and packages. As a result, production growth can be lumpy rather than linear. As many of you who follow state data have noticed. This doesn't change EOG’s long-term growth profile. As mentioned in yesterday's press release, we announced success of the second Bone Spring Sand which lies beneath our Leonard shale acreage in the Delaware Basin. This is the fifth oil or combo plate EOG has added to its drilling inventory this year.

Now I will turn it over to Billy Helms to discuss this play and our operations.

Billy Helms

Thanks Bill. In the first half of 2014, we were in the exploratory phase on our Delaware basin Leonard acreage. As we mentioned on our May call we were testing various spacing pilots and zones across our acreage. We also tested the potential of the Second Bone Spring Sand. The second Bone Spring Sand sits beneath our Leonard acreage position primarily in Eddy and Lea counties, New Mexico. We drilled our first horizontal wells here 10 years ago and shifted capital to the Leonard and Wolfcamp shale plays and now we’ve gone back to our proprietary completion techniques.

In Southern Lea County we drilled and completed two very successful wells in the Second Bone Springs Sand. The first was a short link lateral and the second was drilled with 4500 foot lateral. The Mars 3 State #1H and the Jolly Roger 16 Sate #1H had initial production rates of 1270 and 1450 barrels of oil per day with 150 and 210 barrels per day of NGLs and 1.1 million and 1.5 million cubic feet per day of natural gas respectively. The production stream is 70%, 45 API gravity oil. We have 73,000 net Leonard acres and estimate the second Bone Spring Sand is highly perspective over the majority of this acreage. We still need additional drilling to test all portions of our acreage, but these initial results combined with the industry data from over 500 wells rate our expectation for the play’s high rate return growth potential. The estimate completed well cost of $6 million with gross reserves of 500 in BOE per well yielding 100% direct after-tax rate of return.

We are very pleased with the addition of the second Bone Spring Sand to our drilling portfolio. It’s a high rate of return black oil play on existing acreage. We plan to drill a few more wells this year and increase activity in the play in 2015. Over time we will determine proper spacing and the ultimate resource potential to EOG.

In the Leonard shale, we are still testing down spacing in the same zones and across zones. Over the last 12 months we tested numerous patterns from 660 foot spacing down to the 300 foot space Gemini wells highlighted in the press release. We are very pleased with the preliminary production results.

We've also had initial results from two recent B-zone wells and from tightly spaced wells drilled in a pattern across the A and B zones. It is a little too early to reach firm conclusions on optimum spacing or the ultimate number of possible well locations from each zone. But we are encouraged by our results today.

In the Delaware Basin Wolfcamp, we’re focused on making improvements in well productivity through the application of completion technology. In Reeves County, the State Apache 57, #11 07H was completed with an initial production rate of 1600 barrels of oil per day with 460 barrels per day of NGLs and 3 million ft.³ per day of natural gas. This is the best Wolfcamp well we drilled to date. We are testing various spacing patterns and the prospectivity of different pay intervals in the play. We are on track to complete 14 net wells this year and have been encouraged with our progress and results to date.

In the Bakken, we've shifted to more multi-well pad drilling this year with most of our activity focused in the core area. We’re encouraged by the very early production flow back results from our first 700 foot spaced wells. As Bill mentioned earlier these are wells -- these are wells drilled from pads and completed with larger fracs. The wells are taking longer to flow back and therefore it is too early to report any individual well results. We've noticed a marked improvement in production rates that reflect changes we’ve made to completion techniques over the last two years. After achieving peak rates, the well production is flattening out nicely, delivering excellent rate of return.

During the second half, we plan to drill both Bakken and Three Forks wells on our Antelope Extension acreage. We also plan to test various benches of the Three Forks formation on both our core and Antelope extension acreage. Later this year we expect to get our first data point after we test the third bench of the Three Forks on our Antelope extension acreage.

In the Wyoming DJ basin we plan to drill 39 net wells this year in the Codell and Niobrara. One notable new well completed in the second quarter in the Codell was the Jubilee 586 – 1705H. It came online in 1145 barrels of oil per day with 445 MCF per day of rich natural gas. We have a 75% working interest in the well. Since May we've added 13,000 net acres in the Codell, increasing our position to 85,000 net acres. In the Powder River Basin, we plan to drill 34 net wells this year in the Parkman and Turner reservoirs. Two recently completed Parkman wells are the Mary’s Draw 404-21H and 468 – 34H which had initial production rates of 1045 and 980 barrels of oil per day respectively. We have 99% and 100% working interest in the wells respectively and we are drilling on multi-well pads in both the Powder River and DJ.

I'll now turn it over to Bill to discuss the Eagle Ford and our international operations.

Bill Thomas

Thanks Billy. In the Eagle Ford, we’re in the sixth inning of understanding and progress in the play and we’ve not yet reached the peak from a learning curve standpoint. We’re constantly experimenting with the completion designs and are seeing improved production responses from these tweaks. We still have ongoing spacing pilots in certain areas. We highlighted multiple high initial production rate wells in our press release.

During the second quarter of the 29 wells we drilled in Gonzales County, 21 had IP rates exceeding 2500 barrels of oil per day. This distinct statement shows our Eagle Ford quality is holding up quite nicely. During the second quarter we drilled a number of lease retention wells. Our drilling plans for the second half include fewer of these one-off wells that we expect to realize efficiency gains from pad drilling and other improvements in costs and logistics. We are drilling longer laterals with a 50% increase in the number of stages from where we were three years ago. We’re also seeing productivity improvements during early flow back, but we need more time to evaluate the results.

We’re on track to drill 520 net Eagle Ford Wells this year. By midyear we had brought 260 wells to sales. On our last earnings call we talked about the depth and longevity of oil growth from our Eagle Ford asset. Nothing has changed in our view.

In Trinidad we have a three well, net well development drilling program planned for 2014, which will allow us to maintain flat natural gas production in coming years. In the East Irish Sea, the Conway project is now expected to be online early 2015 due to certain scheduling matters with the platform operator.

I’ll now turn it over to Tim Driggers to discuss financial and capital structure.

Tim Diggers

Thanks Bill. Before getting into the specifics on CapEx and guidance I want to point out a new IR slide on page 14 using actuals and sell-side estimates we compared EOG’s 2013 and 2014 estimated ROE and ROCE to the average of the majors integrated independent E&Ps for the same period. What stands out from the chart is EOG’s financial returns relative to the other sectors.

In the energy space, there are sectors known for growth and those known for returns. But rarely does the company or sector combine high production growth with outstanding financial returns. We believe EOG is currently exhibiting among the best financial returns in the entire industry combined with excellent production growth. For the second quarter capitalized interest was $14 million. Total cash exploration and development expenditures were $2 billion excluding asset retirement obligations.

In addition expenditures for gathering systems, processing plants and other property plant and equipment were $237 million. EOG made $74 million of acquisitions during the quarter. At the end of June total debt outstanding was $5.9 billion. At June 30 we had $1.2 billion of cash on hand. The effective tax rate for the second quarter was 36% and the deferred tax ratio was 62%.

Yesterday we included guidance table with the earnings press release for the third quarter and full-year 2014. For the third quarter and full year the effective tax rate is estimated to be 35% to 40%. We've also provided an estimated range of the dollar amount of current taxes that we have, that we expect to record during the third quarter and for the full year.

In terms of our hedge positions, for the period August 1 through December 31, 2014 EOG has crude oil financial price swap contracts in place for 194,000 barrels of oil per day at a weighted average price of $96.19 per barrel. For the first half of 2015 we have 69,000 barrels per day of crude oil options that could be put to us at an average price of $95.20 per barrel. For the period September 1 through December 31, 2014 EOG has natural gas financial price swap contracts in place for 330,000 MMbtu per day at a weighted average price of $4.55 per MMbtu. For the period January 1 through December 31, 2015 EOG has natural gas financial price swap contracts in place for 175,000 MMbtu per day at a weighted average price of $4.51 per MMbtu. These numbers exclude options that are exercisable by our counterparties. For the period January 1through December 31, 2015 we have 175,000 MMbtu per day of options that could be put to us at an average price of $4.51 per Mmbtu for each month.

Now I’ll turn it back to Bill to provide the EOG’s views regarding the macro environment and a summary.

Bill Thomas

Thanks Tim. We remain bullish on crude oil prices. We are advocates of free markets and are proponents of condensate and crude oil exports. While the opening up of condensate exports will create more headroom for refiners to process light oil even without exports we still see several years of headroom in the US refining complex.

Regarding North American natural gas, we don't have any plans to reinvest in dry gas drilling opportunities at current prices, as we expect that the strength we saw in gas prices earlier this year was only a temporary and driven by the coldest winter weather in 14 years.

Recent high storage injection numbers again have verified the enormous supply deliverability on untapped Shale gas in the US. This provides solid support for rapid approval of additional LNG export terminals. Our 2014 plan remains consistent with what we outlined at the beginning of the year. We continue to reinvest in high rate of return crude oil weighted drilling opportunities. We increased our crude oil growth forecast in May 29%. And this quarter we are increasing EOG’s total company production growth estimate to 14% from 12%, based on growth from associated NGL and natural gas production from our crude oil plays.

Our CapEx estimate remains unchanged. We have now increased the common stock dividend twice this year. Now let me conclude there are five important takeaways from this call. First, EOG is focused on returns. EOG’s high return production growth is showing up as strong growth in cash flow, net income and through increasing ROE and ROCE metrics. The Bakken, Eagle Ford and Leonard have the potential to sustain above average long-term growth with very high returns. EOG is well-positioned to be a long-term leader in returns on capital in the energy sector.

Second, EOG is a growth leader and it's organic. EOG’s estimated 2014 oil growth on a barrel per day basis is greater than any other company in the peer group and this growth is all organic. We have the assets and the inventory depth to sustain this growth. Please take a look at the new IR slide on page 7, growing oil as we did 33% in the Lower 48 this quarter is a remarkable achievement.

Third exploration and technology focus, we’ve again increased our high return drilling inventory on existing acreage with the addition of the Second Bone Spring Sand. We also reported good preliminary down spacing results from the Leonard A and B zones. The Second Bone Spring Sand and the Leonard Down spacing results are two examples of how EOG generates new plays through exploration and the use of in-house technology.

Fourth, we're committed to generating long-term value for our stockholders. We increased the dividend on the common stock for the second time this year. This combined with net debt reduction has been our plan for discretionary cash flow.

Finally our return on growth profile is unique. As Tim pointed out, based on 2014 estimates we are at the head of the class in terms of combined production growth and financial returns among all upstream sectors including the majors, integrators and independents. That's a powerful statement and our IR slide on page 14 is quite impressive regarding financial returns and we plan to maintain this lead by continuing to reinvest in high rate of return oil plays. Thanks for listening and now we’ll go to Q&A.

Question-and-Answer Session

Operator

Thank you, the question-and-answer session will be conducted electronically. (Operator instructions)

We’ll take our first question from Amir Arif with Stifel.

Amir Arif - Stifel Nicolaus

Good morning guys, a quick question on the Bone Springs. The 73,000 acres that you talked about for the Second Bone Springs, is that just on the New Mexico side? Or does that also include acreage on the Texas side?

Billy Helms

Yeah Amir, our 73,000 acre position both in Leonard and the Bones Springs does cross the state lines. So it is both located in the Mexico and Texas. What’s interesting to note about the second Bone Springs Wells is they are about 5 miles apart, they do help confirm the potential on a lot of our acreage and certainly with the well-control we have in the play. We feel good about the extent of what we've seen so far. We are early in the testing of those zones but it is they do represent two of the most South-East wells in the play as far as wells completed in the Second Bone Springs Sand. So we certainly feel good about what we see so far. But we’ll have to evaluate long-term production to assess the potential to the company.

Amir Arif - Stifel Nicolaus

Okay, and as a follow-up, I know it’s still early days in the play like you just mentioned. But could you just give us how you are thinking about the development right now in terms of the Leonard AP and the Bone Spring in terms of , is one going to be your primary target or infrastructure build out the support one versus the other or each one is given a return, each one could be a primary target.

Billy Helms

Well I think that’s a good way to think about it. I think each one can be a primary target on zone. Infrastructure is certainly in place for our current activity and takeaway capacity and certainly we try to stay ahead of that as we develop the plays. We will be testing as we mentioned in the in the call or in the press release we have tested number patterns for the Leonard, especially the A zone and are Gemini wells that are spaced to 300feet apart in the Leonard A- zone in and certainly we're excited about potential we see there. But we’ll have to determine what the ultimate spacing will be in each zone as we progress. These two wells in the Palm Springs of mentioned earlier they are about 5 miles apart. So there have not been any spacing tests conducted on the Bone Springs yet. And so we’ll have to go through that exercise and it will take care several months to work through that and why additional wells planned in the in the rest of the year to try to assess how we move forward that program.

Operator

We’ll take our next question from Doug Leggate with Bank of America Merrill Lynch.

Doug Leggate - Bank of America Merrill Lynch

I wonder if I could try two quick ones. First of all, Bill, in your prepared remarks you did mention the Eagle Ford. I wondered if you could help dig a little bit deeper into the impact of the need to change to drill retention wells, is the way you put it on the call. And if we might expect to see the growth rate accelerate again in the second half as you get back to your more normal order of business. That's my first question.

Billy Helms

Yeah, good morning Doug. Yeah, the retention wells we talked about, we were mainly in the western part of our acreage where we go out and we drill wells on the initial unit just to the hold the acreage and we’ve completed most of that drilling for this year the first half of the year. So in the second half of the year we will be doing as we talked about in early remarks, will be doing considerably more pad drilling. So that means we come back in and follows retention wells and other areas and we drill multi-well pads and we drill these wells in large groups and we complete these wells in large groups and so they, when we do this , we do get more efficiencies and cost. But the production is a bit more lumpy as we go forward, as we do the more of the pad drilling. So the main benefit is the efficiencies and cost to do the drilling, being able to drill wells on multiple well pads.

Doug Leggate - Bank of America Merrill Lynch

Bill, just to be clear, I'm guessing your average -- we don't obviously have the full disclosure on this, but the average well rates then out of the average well and not in the second quarter would presumably have been lower. But you're basically saying that really was more of an anomaly than something that's changing in the program? Is that a good way to think about it?

Bill Thomas

Yeah, the average rate on the wells have been improving over time. We’re still making in completion improvements. Steady will slide in our IR presentation particularly on the western wells and so the new better completion techniques we’re doing on wells, continue to make better wells. But really we don't see a significant change from the first half of the second.

Doug Leggate - Bank of America Merrill Lynch

My follow-up is really more of a philosophical question. Obviously you've done a terrific job on the returns per your slide presentation compared to the different peer groups. By putting yourself in that -- it's fun to look at those big oil metrics if you like. I wonder how you think about the dividend. Obviously a big dividend bump this quarter again, but it's still a very modest yield. How do you think longer term about what the right level of dividend is for a company of your size with a growth trajectory and calls on capital that you have? Because, again, when you start to compare yourself to that wider peer group, some of those guys have 3%, 4%, 5% dividend yields and obviously you're substantially below that. Longer-term, how should we think about your allocation of capital to the dividend on a go forward basis?

Bill Thomas

That’s a good question, Doug, we don't have a policy, so as we go forward the board will just continue to look at our cash flow and where we are at the company, on what we need to do to continue to grow the company. And we will give dividends appropriately based on the situation of the company. So certainly we’ve had a good track record 16, increases in 15 years and we’re certainly committed to long-term shareholder value creation.

Operator

We will go next to Leo Mariani with RBC Capital.

Leo Mariani - RBC Capital Markets

Just wanted to dive into some of the new plays. Obviously you talked about the Second Bone Springs here today. Last quarter you introduced a number of new Rockies plays as well. Can you give us a sense of how you plan to allocate capital to these new plays this year and next? Is there any plays there that are a priority? Are there any limitations on infrastructure or any need to hold acreage that governs any of that? Maybe talk to how we should see activity levels in those new plays over the next year or two.

Bill Thomas

As far as the new play, they are all in a bit different situation, certainly plays that we talked about in the first quarter call in the Power River basin and DJ basin, we’re moving ahead with the development on those most of it’s on multi-well pad drilling and we’re defining spacing patterns and optimizing our completions and costs and those will get capital allocation as we see the results of the wells and again the plays with the best rate of return will get the most capital as we go forward. On the Bone Springs we are new into that, as Billy talked about, we drilled two really strong wells and we will be evaluating that play as we go forward. But as we look in to the future everything EOG does is focused on return on capital invested, so each play will get rewarded based on that.

Leo Mariani - RBC Capital Markets

Switching gears a little bit, you guys did take your gas and NGL production guidance up here in 2014. You talked about associated gas in liquids from your oil plays. Could you give us a little bit more color on specifically where that's coming from in terms of the incremental associated gas here?

Bill Thomas

Yes, Leo we had a couple things in the first half of the year and the second quarter. We have added infrastructure particularly in midland that’s helped our gas takeaway situation there and deliverability. We did in our Barnett combo play, we had a number of wells on restricted flow rates due to pressure control and we did open up some of those in the second quarter a little bit. But just in general as we stated in the opening remarks we increased our oil in the first quarter and this is kind of a follow up as we have associated gas with all of our crude oil plays, our base decline in our natural gas is slowing due to not much natural – but no natural gas drilling and no property sales and so our associated gas with a crude oil plays is beginning to overcome that decline.

Operator

We will go next to Pearce Hammond with Simmons.

Pearce Hammond - Simmons & Company

Bill, I noticed a change in the completed well costs in the Eagle Ford. Looked like it moved up to $5.7 million from $5.5 million. Is that just more longer lateral, more sand? And does that $5.7 million yield bigger wells?

Gary Thomas

Yes, you are exactly right, we’re drilling the longer laterals, they are about 10% larger -- longer and with that of course roughly $1000 traded lateral, that’s adding quite a bit of additional cost but we’ve been able to reduce that with just continued efficiencies and our number of days per well has dropped quite lot here this last quarter, as a matter of fact, we set a new record this quarter once again with a 4.3 day well to 15,600 feet, so we are seeing improved wells, I think that was placed 20 in our chart shows that the wells are about 15% better this year than last.

Pearce Hammond - Simmons & Company

Then my follow-up is, Bill, can you provide some color on your ‘15 oil hedging strategy?

Bill Thomas

Historically and I think business wise we would like to have a good hedge position going forward in oil and gas, the difficulty has been that backwardation in the forward curve on both gas and oil we don't see as reflective of what’s going to happen in the future, so it's difficult to get a good hedge. But we’re certainly looking for opportunities as we go forward in the second half of the year to add some hedges in oil and gas if they are available.

Operator

We will go next to Subash Chandra with Jefferies

Subash Chandra - Jefferies & Company

A Permian question for my first one. So casual reading of these well results indicate that there's not a vast difference in the IPs that were quoted. Yet Wolfcamp, much higher EURs expected, and a much higher resource potential expected out of the Wolfcamp itself. Could you just add perhaps a bit more color to what you saw after these IPs that indicate that the Wolfcamp is 60% higher in terms of EURs per well than say, a Leonard, and a comp to the Second Bone Springs?

Billy Helms

This is Billy Helms, I will answer this Permian question. For the Leonard and in both the Wolfcamp each one independent zones, the Leonard is more of a oil play, it has a different production profile certainly than that the Wolfcamp which is more of a combo-ish kind of play. So the production profiles although they may start at somewhat similar IPs on oil, production profile is certainly different because they are different types of reservoirs, so the decline rates will be different, the product mix is certainly different. And so it's going to yield different EURs over the life of the well. We’re also -- that will also play into how we develop the field and the ultimate spacing of the wells as well. So the Leonard as you saw we’re testing down to some wells that are at 300 foot spacing and Wolfcamp we’re generally testing closer to 750 foot spacing as we go through the play, so those are just some differences between the two different reservoirs, they are quite different certainly and have different zones of targets but that's the basic difference between the two.

Subash Chandra - Jefferies & Company

And Billy, what do you see happening with the rig count in the various Permian plays over the next year?

Billy Helms

Well certainly I expect this with success we would expect activity to increase in the Permian over time. The luxury we have right now is we have just a large number of really high quality plays in the company where we can allocate capital, so what it does is it gives us the time to go through and make sure we understand the proper completion techniques and the proper spacing before we really start increasing activity in each play. That helps make us a little bit smarter on overall development and still provide long-term growth for the company. So we’re pretty excited about the potential we see there in the Permian and we’re taking our time to really make sure that we understand how to complete and what the proper spacing of each one of those zones will be before we really ramp up activity too quickly.

Subash Chandra - Jefferies & Company

And my follow-up. I don't know if EOG participated in the Turner Mason study or not. I guess the net conclusion is that they're arguing for a riskier packaging number, but essentially no change in the type of railcar to carry Bakken crude. As you're obviously on the upstream and the midstream side of the transportation side of it, what are your takeaways?

Bill Thomas

We are certainly conservative on everything we do or we’re concerned about safety and we’re certainly all in favor of many of the things that have been proposed and I guess the new guidelines didn’t really catch us by surprise, we are prepared for those as we go forward and we’re solidly behind - the activity to increase the safety of rails as we go forward.

Subash Chandra - Jefferies & Company

Or more specifically, do you think there needs to be a change in the 111 railcars to carry Bakken crude?

Bill Thomas

We are very well-positioned there with the contracts that we have and we’re still reviewing these rules but as our cars that go off the least we will be going with the cars of the future, so we really like the way we’re positioned to be able to have the most safe and regulatory compliant rail fleet.

Operator

We will go next to Irene Haas with Wunderlich Securities.

Irene Haas - Wunderlich Securities

My question is on the land that's also called Avalon. You mentioned earlier that is a different beast from the Wolfcamp Shale. So can you shed a little light on whether it's a true shale or is it something else? And then does it have really high IPA and how does it drop off? Because I think it can get pretty steep. And also in your past PowerPoint in July, I think you mentioned about three zones in the Leonard. These are my questions.

Bill Thomas

The Leonard is a shale, and it’s really the third best reservoir in terms of shale we really have in the company. It’s a very high porosity shale with really we've identified at this point two zones, the A and B zone and the content of the reserve is about 50% oil and they start off at very high rates and have excellent rates of return in the shale. So we’re fortunate our acreage position we believe has captured much of its weak spot of the play and we’ve had, as Billy talked about we've had very good success on increasing the per well productivity with our new completion techniques and also been able to test wells at very tight spacing with at least initial good results. So we think we can continue to improve the play and add value as we go forward in our development process.

Irene Haas - Wunderlich Securities

How is the declines?

Billy Helms

I would say the decline in the Leonard play – I would say it's not too different than many of our other shale plays in that they are hyperbolic in nature, they fall off fairly fast and I don't know – couldn’t quote a number right now as far as the initial decline on the well but they are very similar to most of our other shale plays, very hyperbolic in nature but they produced a level out produced for a long time at very good rates. So they do provide excellent economics as we would – as we reported earlier, the current rate of return for that play is over hundred percent as well. So we’re very excited about the potential of development of the play and economics of that play.

Operator

We will go next to Joe Allman with JPMorgan.

Joe Allman - JPMorgan

One quick question on down-spacing, it seems like there's an awful lot of down spacing going on at EOG. So could you run us through the various plays, so for example, on the Leonard shale, I know you did 300 foot inter lateral spacing and you’re doing some additional pilots, are you testing down to 150s and then in the Eagle Ford, you’re doing some additional pilots, are you going down to 20s, there, could you talk about down spacing in the Bakken and in Wyoming, and what the implications are for the increase in locations?

Bill Thomas

Yeah, Bill, let me just go through -- that's a good question -- each one of those plays a bit. So in the Eagle Ford we’re currently developing that play on about 40 acre spacing and there are some areas where – and That’s about 300 feet between wells on average. There are some wells where the well spacing is greater than 300 feet and we are doing a bit of infill field work, in some of those areas we don't have any news to report on that other than the early results look good. And we need some long-term results on that before we can determine if that’s the best way to do those areas.

In the Bakken, we’re on our third set of down spacing in the Bakken and we have had very good success with 1300feet between wells which is approximately 4 wells per section. Now we are testing approximately 700 feet between wells, that would be eight wells per section. And as Billy reported on that we have a few wells that are flowing back and those initial results look good. But we do need quite a bit more time to watch the long-term production of those wells and then also watch additional wells as we bring them on line on those spacing patterns. And in the Leonard, we've gone from 660 foot spacing and we tested various spacing patterns down to 300 feet between the wells. We do not have any plans to go less than 300 feet in the same zone between wells, so where we are on that process is we’re just evaluating all those different spacing patterns to determine what's the proper spacing to fully develop the field.

Joe Allman - JPMorgan

If you could comment on Wyoming as well, that would be great. And then a follow-up question. Then comment on the implication for locations, if you can give us any specifics on that. But follow-up question would be, you're talking about increasing E&P activity in 2015 versus 2014. So is your plan to be free cash flow positive in 2015 and increase the balance sheet as you suggest in some of your comments, or do you plan on matching fairly closely cash flow to CapEx and talk about what the optimal debt level is in that context?.

Bill Thomas

Yeah, Joe, that certainly we’re beginning to think about 2015 but we just don't have any specific guidance on that other than we’re going to reinvest the majority of our growing cash flow. We’re going to continue to reinvest that back into the highest rate return plays that we have and we will be looking at certainly the drilling program this year, and the results and all these different spacing patterns and the well productivity and the return on all these and we will just allocate that to continue to grow the company very strongly. But to really to focus on returns and our net debt to cap ratio continues to fall in the company and we want to continue to strengthen the balance sheet as we go forward and allocate our capital based on those metrics.

Joe Allman - JPMorgan

Any comments on the spacing pilot you're doing in Wyoming?

Bill Thomas

Joe, in Wyoming, in the DJ basin, we’re drilling alternating Niobrara and Codell targets and those spacing patterns on various different spacing between wells but there are approximately 800 feet apart and so we will be looking at those, initial patterns and see how those respond. And then in the Parkman zone, we’re currently developing a 1300 feet between wells and drilling longer laterals in that particular play and in the Turner we’re developing on 1355 feet between zones. And again each one of these we’d like to get multiple patterns established and we’d like to get long-term results to see how much sharing – if sharing the risk between wells and then we make appropriate adjustments as we go forward. So it’s kind of the long-term process. And we’re very focused on maximizing the net present value of each of these properties and to maximize the reserve recovery and the value of the property, so that's kind of the status on those plays.

Operator

We’ll go next to Bob Brackett with Bernstein.

Bob Brackett - Sanford C. Bernstein

Good morning. Quick question on new ventures. Can you talk a little about the lower tests in the Three Forks? And maybe anything on East Texas you're willing to share?

Bill Thomas

Good morning, Bob. Thanks for the question. In the Three Forks we do have some wells planned particularly in our Antelope acreage. We do have a third match plan, the test later in the year and some, I believe, probably first and second batch also test to continue to evaluate that.

Yeah, I would say Bob, on East Texas, you know everybody knows we are drilling a few wells over there and evaluating the play, as well as plays in other parts of the country too. So it's just a part of our continuing exploration effort in the company to define new play potential. As you know we have a very very high cut-off for new play. So we’re not interested in pursuing plays that have a 20% or 30% rate of return potential, we’ve really set the bar high and we’re looking for plays and only would be able to generate say north of 50% rates return going forward and we’re still – we’re very focused on crude oil plays. So the East Texas is just a part of that mix, and we will continue testing that and when we get some information that’s meaning, and something that we will go forward on, we can talk about that later but right now that's all the information we have.

Operator

We’ll go next to Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

I wanted to follow-up on a couple of earlier topics, starting with the Leonard. The potential for a 300-foot spacing in the Leonard would seem to imply tighter spacing, at least at your base case lateral length relative to some of the other plays out there. Can you just talk about unique characteristics you see in the Leonard relative to other plays in other parts of the Delaware basin? And how you're thinking about both recovery rates and the trade-off of longer laterals versus tighter spacing?

Billy Helms

Yeah, Brian, this is Bill Helms. On the spacing for the Leonard, this is the same approach we’ve really taken in every play that we undertake. It’s to try to understand what’s the right spacing given the current state of our completion technology in each lateral to maximize the net present value of every acre that we have under lease. And so for the Leonard, we started out with 660 foot spacing and we continue to test tighter spacing in each one of our subsequent patterns to understand what is the right formula to maximize our net present value and certainly the Gemini wells that we highlighted in the press release are encouraging for 300 foot space well. I would say that we need a little bit more production time to really understand what the optimal spacing pattern is going to be for that Leonard A zone as we go forward. And then similarly we will do the same thing for the Leonard B zone as well as the Wolfcamp zones in the Delaware as we start through the development in each one of those.

So it’s a similar process we go through in each play. For the Leonard it's just -- it's really – as Bill mentioned earlier it’s a high quality shale across the good mechanical properties, that allows us to really focus the fracs near wellbore and maximize recovery of each well and that's different than some of the other plays. Of course each play has its own characteristics and mechanical properties that dictate what the proper spacing will be and that's why these very methodical spacing tests are needed to try to determine what the optimal will be on each pattern.

Brian Singer - Goldman Sachs

And then in the Eagle Ford, you have a slide -- slide 20, where you're showing further improvement in well performance this year relative to last year. You talked about the greater, the more complex fracs and slightly higher well costs. Is that what's reflected here or is there further upside to EURs? Are you just getting oil out of the ground earlier via completion efficiencies? And are there any changes to your thoughts on recovery rates in oil in place in the Eagle Ford?

Bill Thomas

It’s a little early to determine what recovery factors is now with these enhanced completions. But, yes, we’re really excited about what’s transpired here just this year in the Eagle Ford, because more of our wells are being drilled in the West side which previously thought -- we thought was maybe less productive. But with more wells there, then we’re drilled longer laterals, enhanced completions, then overall – the average of the wells drilled in 2014 is quite lot better than the wells – the average of the wells drilled in 2013. It’s just improved completions.

Brian Singer - Goldman Sachs

And are you seeing any change in the decline rates being greater? Or should one expect that these greater rates should carry into, and well performance through 60 days, should carry into EUR?

Bill Thomas

We would expect – that we would see with the same kind of IPs, and the wells even holding up better 60, 90 days that we would see improvement there as well, as far as long-term production. We do have longer laterals and we just need additional time on these.

Billy Helms

Yeah, I think the important thing on that Brian is that it is really critical that we get long-term data on each one of these plays and that goes for the Eagle Ford in particular is that we just want to see more than 90 days production to determine what the ultimate EUR will be, and especially as we continue to work the spacing issues, it’s very critical to take our time and to get enough data before we can say whether there is an EUR the increase or not.

Operator

We will take our next question from Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

I did want to talk to you a little bit, maybe a follow-up to Joe's question. But as you sit here today, Bill, you have a bigger opportunity set than you had perhaps 6 or 12 months ago, given the Rockies oil opportunity. The Delaware Basin opportunity looks bigger. So I just wanted to get your thoughts on potentially, as you look forward to perhaps increasing CapEx beyond cash flows. You're pretty bullish on oil. Your debt to cap is down to 21%. And you did have a big dividend increase. So just some thoughts, given the increasing opportunity set at EOG, to take that CapEx to accelerate your returns profile even more.

Bill Thomas

Arun, I think what you can expect from EOG going forward is discipline -- capital discipline is at the top of our list and so we are really focused on operating the company relatively within our cash flow going forward. We’re very focused on keeping the balance sheet solid as we go forward, at net debt to cap at a low level and really discipline -- each of these plays, as you focus on rates of return, capital rates of return and maximize the value of the plays, it’s important not to grow or accelerate them too fast. And so we’re really focused on doing that correctly and continuing to focus on crude oil, not interested in gas drilling and that we’re really focused on growing the cash flow of the company forward, of investments in our crude oil really.

Arun Jayaram - Credit Suisse

And that would, again, suggest maybe staying within cash flows?

Bill Thomas

I think we want to operate the company with discipline in spending and certainly not outrun the cash flow of the company.

Arun Jayaram - Credit Suisse

And just a quick follow-up, switching gears to the Delaware basin. Bill, you talked about 550 million barrel resource opportunity in the Leonard, two zones there. Just wondering what the spacing assumptions were that underpin that. And perhaps, given the successful downspacing tests, you're perhaps looking at maybe even 16 wells for each of the zones. I was wondering if you can comment on what that 550 was underpinned by from a spacing perspective?

Bill Thomas

So I will ask Bill Helms to give some color on that.

Billy Helms

The Leonard, we originally arrived at our EURs the ultimate recovery from that field, from that play, using a 660 foot spacing for all the Leonard wells and certainly we have potential for some multiple pay zones in some areas, although we will need to consider all the targets perspective over all the pay zone, over all the acreage but in general it's a 660 foot between wells which is roughly an 80 acre spacing per well, and as mentioned we're – our Gemini wells, we did test down to 300 and while it’s still early we still need some production time to understand what the ultimate spacing will be for that play.

Arun Jayaram - Credit Suisse

And that would be for the A and B zones?

Billy Helms

Yes, that’s what we used in our initial estimates, yes. I would mention too that we wouldn't have considered all the zones perspective over all the acreage, so I caution you there .

Arun Jayaram - Credit Suisse

And I know it's early days, but how is the Bones Spring -- little bit more oil content. Are the returns compared to the Leonard, at least on your initial wells, similar?

Billy Helms

Yeah, I would say they are very similar as far as returns, we’re -- honestly we just had the first two wells down this acreage position and we’re very excited about it. But as you mentioned it is early and we will certainly need to watch production for a while and as Bill mentioned we like to have a little more than 90 days of production, I’d say more than 90 days production to evaluate the ultimate recovery from all these wells.

Operator

At this time I would like to turn it back to Mr. Thomas for additional or closing remarks.

Bill Thomas

Well thank you for listening and thank you for all the good questions, and just know that EOG as we go forward is a company that's unique, we’re focused on returns, continuing to improve our ROE and ROIC numbers and strong crude oil growth. Thank you for listening.

Operator

This does conclude today’s conference. Thank you for your participation.

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