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EOG Resources, Inc. (EOG) Management Presents at Barclays CEO Energy-Power Conference (Transcript)

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About: EOG Resources, Inc. (EOG)
by: SA Transcripts
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Earning Call Audio

EOG Resources, Inc. (NYSE:EOG) Barclays CEO Energy-Power Conference September 4, 2018 9:45 AM ET

Company Participants

Billy Helms - COO

Conference Call Participants

Jeanine Wai - Barclays Capital

Jeanine Wai

All right, good morning everyone. We are very pleased to have Mr. Billy Helms, EOG's Chief Operating Officer with us here today. EOG is an oily multi-basin large cap E&P with operations in all of the core shale plays in the U.S. EOG has been a longtime technology leader in the sector, and has been among the best execution stories this year in our opinion.

So, without further ado, I'll turn the mic over to Billy. Billy?

Billy Helms

Thank you, Jeanine. Yes, I'm happy to be here today to talk about EOG and our track record. This year is working out fantastically. We're executing our plan almost flawlessly. Actually, I think, results are exceeding our expectations that we laid out at the start of the year, and it's given us a lot of confidence, not only in the inventory that we've been able to develop, but also our ability to execute.

Our operational capability is continuing to improve, which is really a hallmark of EOG is our ability to continue and our drive to continue to make improvements in the company. And so, that's why we have confidence to go ahead, and I'll go ahead and mentioned one of our primary goals that we announced earlier this year, is we want to be one of the best companies as compared to any company in the S&P 500, and our ability to execute our strategy has given us that confidence to go ahead and make this a goal for the company. And what we're targeting is to be able to generate double-digit returns, and returns come first, and also generate double-digit growth, and this is organic growth through the company, it's not through M&As or those kind of things.

We as a company focus on exploration and that's a hallmark of the company, and we're pretty excited about the potential we're seeing to continue to grow the company double-digit, but also generate double-digit returns. In addition, we also want to generate free cash flow, and we think we have a unique combination, and if we do all those things it'll help us compete with any company in any sector in the S&P 500.

So how are we going to do that? Our shift to our premium inventory has been a change in the company; it's starting to show itself in our financials, but basically, EOG's culture and our culture to consistently make improvements year-over-year is really propelling the company financially to be able to compete with the other companies in the S&P 500. And we're starting to see those results show up in the company today. And our goal is to continue to lower the breakeven price needed to generate at least a 10% ROCE. And we're targeting ROCE as a measure that everybody can look at through our financials, it's not a wellhead return measure, it's an all-in corporate return that you can see in our financials. And so we're trying to focus on properties and plays that will continue to lower breakeven price we need to generate a double-digit ROCE.

Also, the free cash flow is important, that's allowed us to not only maintain our dividend as we did during the downturn, but we've increased it 72% in the last two years, so free cash flow generation is the important thing to be able to continue to do that. So some of the ways we're doing that is really just sticking to our disciplined reinvestment in our premium inventory. That high reinvestment hurdle is what's driving down refining costs. And as we drive down refining cost it lowers our DD&A rate, and generates more net income for the company. So the properties we're doing now has such a low refining cost it's lowering the average DD&A rate in the company, allowing us to get in target that lowering the breakeven ROCE in the company, lowering the price we need to generate a double-digit ROCE.

The disciplined growth is a factor. We're only going to grow if we can continue to get better, so it's not growth for growth sake. We target returns first, and growth is really a byproduct of the returns. And you can see on the chart how it's playing out in our financials. You can see the price that we need to generate a double-digit ROCE is declining year-over-year, and we're targeting something less than $50 in a few years, so that's the goal. How that's happening, you can see on this chart, the defining cost as it's dropping on the chart on the left, is also a lower DD&A rate. I mentioned that earlier. We're targeting - a midpoint of our guidance this year is about $12.75 DD&A rate, and that's down substantially from last year. So, there starting to see the results of our shift to this premium inventory strategy buyout in the performance of the company.

We're also committed to two other goals; one is having a strong balance sheet. We already feel like we have a decent balance sheet, but we want to make it better. And we targeted a $3 billion debt reduction program over the last several years, and we're about halfway through that. We, just in the second quarter, paid off a $900 million note, and we have two more years of that to reach our goal. And then also, as I mentioned earlier, we're targeting continual growth on our dividend. In the last two years we've increased it about 72%, and it's been a good story. We're committed to continuing to increase that at a rate that's faster than our history, to somewhere in the 19% or 20% as we go forward, so again, a strong commitment to the dividend. And we're targeting a 2% yield on a go-forward basis.

So, a little bit about the second quarter. The second quarter was an outstanding quarter for us for the year. During the second quarter, despite really a 12% decline in oil prices, we generated about $350 million of free cash flow, we paid down a $900 million note, so reduced our debt, and paid a larger dividend, and grew oil production about 18% or 20% above the second quarter of the previous year. So, pretty solid outstanding results. And we have a lot of confidence in our inventory and our ability to execute that program that we think we can keep up the momentum.

Just an example of how we're doing that. We built our plan this year based on our type curves that we generate for each play, as we normally do in every year. But the results in this example, in the Wolfcamp, are showing that our productivity is improving. In the Wolfcamp example it's about 12% increase over the pervious year. We're also completing more lateral feet per day, so the completion efficiency is improving. We're drilling the wells faster, and our cost is coming down. So, all that translates into higher capital efficiency, which is our goal. Another couple of examples on the cost reduction side, you can see on the chart on the left how we continue to decrease the cost in the Eagle Ford. Eagle Ford has been an active play for the company for a decade, and we're still finding ways to continue to drive down the cost.

The same example in the Wolfcamp slide shows that we're, while it's still an earlier play, we're still driving down our costs there. And as much as we drive down the cost, and as good as we seem to get on drilling these wells, we see things every day that can continue to get better, so we're not satisfied with where we are today, but we know there's still opportunity to find ways to improve. And that really drives the culture of the company. We're doing the same thing on the cash operating side; we're driving down our unit costs. G&A, transportation, and LOE throughout the company, and that translates again to the net income of the company. So we're focusing on all cost aspects of the company.

Another area we spend a lot of time focusing on is making sure that we get the best price for our product. We have a marketing team, a highly talented marketing team that's focused on several different things. All of our commodities are important to us, whether it's oil and gas or the NGLs. We want to control basically the gathering system that provides us a lot of flexibility to be able to take the product to different markets, so it's a diversified approach. And then we try to keep those contracts in short duration so we're not signing up for any long-term commitments over a long period of time. So, through that effort you can see how we generate really high commodity prices relative to our peers, and it's been a great success story over the last several quarters, and we hope to continue that trend on a go-forward basis.

And it's really, it's just the talented team that's focused on it every day, just like our operating teams. So all those things is what gives us a lot of confidence that we can continue to drive shareholder value through the commodity cycles. We're focused on a disciplined reinvestment into our premium plays that's driving high returns, it's generating low refining costs, it's driving higher net income, and lowering the breakeven price we need to generate double-digit ROCE. We want to target a dividend that's competitive with the S&P 500, and as a company we think we can do that. We're committed to strengthening our balance sheet, we've got an active program and we see line of sight to be able to do that. And then beyond that, other cash flow opportunities, we're going to continue to look at ways to reinvest our capital, and in those opportunities certainly presenting themselves today.

But let me just point out that we're not going to do any expensive corporate M&As. We think we have the ability to generate inventory through our exploration program. We're very excited about that program, and that's a fairly low cost way to continue to add to the long-term productivity and profitability of the company. We don't need to go out and do expensive corporate M&As to be able to grow the company for the future. We see our ability to continue to do the exploration and add to our inventory to continue the sustainability of the company for the 10 or 20 years in the future. And our goal is always to improve capital efficiency every year. Every year, we strive to make sure all of our plays are improving. It's just the hallmark of the company. And we think we're well on our way to be able to demonstrate that improvement this year. And you can see how we've allocated capital to be able to achieve that goal.

So, in summary, we're focused on several things. First of all, we want to be a leader when it comes to generating returns in their industry, but also compete with the general with the wider market. We want to be a leader when it comes to discipline, growth, and discipline, growth means you continue to invest, where you can always get better. If we start destroying capital efficiency, we're going too fast. So that's our commitment. We also want to be a low-cost producer. That's how we maintain our advantage. And certainly a commitment to sustainability, but we're going to demonstrate our leadership in all those key areas.

So, thank you for your support, and now we'll go to some Q&A.

Question-and-Answer Session

Q - Jeanine Wai

All right. [Indiscernible] Okay, so I'll kick it off with a couple of questions, and then we'll open it up for Q&A. So I guess, Billy, you mentioned a couple of times about your target of about a 2% dividend yield, and I just wanted to dig into that a little bit further on how you pick that, and the reason why I'm asking about the 2% is because we've received feedback from both sides of the fence that investors, they need more than the average of the S&P for dividend yield, given the volatility in oil prices. So, how are you thinking about kind of that, and then what your target for EOG, I know Rome was not built in a day, but how are you thinking about that?

Billy Helms

Well, first of all, we are committed to the dividend. We've demonstrated a history of -- we didn't cut our dividend during the downturn, and we've increased it substantially in the last two years. We set the 2% hurdle is just when we look at the average for the companies in the S&P 500, that was about the average dividend yield. How fast we get there will depend on how we view the market. And as I showed earlier, we're driving down the breakeven cost we need to generate double-digit returns with our reinvestment in our premium program. If we want to continue that and the pace at which we do that will depend on our ability to continue to get better at what we do. So that's really the governor on how fast we get there. We think by targeting lowering the breakeven cost to continue to generate double-digit returns would give the investors a little bit more certainty about the risk profile in our company that we can sustain strong returns through the cycles, and that's our goal, focus on returns first.

Jeanine Wai

And you mentioned through the cycle, we've heard a lot more talk recently about being countercyclical, and offensive and pricing is good, and so you've got your $3 billion debt reduction target by 2021, I believe, you have a strong balance sheet, it's getting stronger, do you have any desire to kind of keep going and reducing debt further than that?

Billy Helms

No, we really haven't set a target on further debt reductions beyond that. I think at that point, we're pretty comfortable with the debt level, and really, the reason we picked that, it was that -- that was around the debt level we had before we went into the downturn back in 2008. So, it's a debt level that would set the company up to be able to take advantage of opportunities when they arise too. To be honest, one of the reasons that we were able to do the only transaction we've done recently, the H transaction was because we had a very strong balance sheet. As a family, they wanted to make sure they were investing in a company that would be sustainable and weren't worried about them, and not being here in the next year. So that's the comfort that allowed them to do the deal, and hopefully that would be the same comfort our investors would have.

Jeanine Wai

Okay. And then always a hot topic with EOG considering the tremendous amount of free cash flow, we actually envisioned for you, can you just talk about whether anything has changed in your priority or your usage of free cash flow, so reinvestment, balance sheet, dividend growth, share repurchases, has anything kind of made you rethink about bumping up share your purchases in that list?

Billy Helms

Not at current time, we still feel like the returns we're generating from our investment program are generating the most value for the shareholders on a go forward basis. And we've done a lot of looks to see how we drive that metric, and still our returns we are generating through our program or growing the company faster and generating solid returns is going back to the shareholder through the dividend increases. So, that's the driver right now, but we don't really see the priority changing at this moment, it doesn't mean that it won't change in the future. But at this moment, we're very happy with the priorities, we've laid out.

Jeanine Wai

Are there any questions from the audience? We're going to grab you a mic.

Unidentified Analyst

As you benchmark yourself against the S&P 500, and the other high quality companies, one thing that does stand out is that there's not a lot of high quality companies that are generating 2% dividend yields with better than that free cash flow yield and growing 15% that actually call that a unicorn, it doesn't happen, maybe spend a second on why the 15% the right number too, and why not balance it with more free cash.

Billy Helms

So first of all, the 15% roughly is a, I'd say we're not really targeting growth number except that is double-digits. So we first focus on returns, can we generate double-digit returns, the growth is really a byproduct of the other returns, and this year is growing about 14%, as in our guidance is 12%, 16%, 14% being the midpoint, and we're well on our way there to hitting that number. On a go forward basis, we feel like the S&P 500, there's very few companies in the 500, that actually can do both generate double-digit returns and generate double-digit organic growth. So it would be a very unique subset of companies that can do that probably the only NP company, maybe one or two, they can actually do that, then targeting a 2% yield in the future would again, put us in a category that would be attracted to not only the companies that invested in the E&P industry, but across -- across the broader market. So that's kind of the vision for why we're doing that. We feel like the inventory that we've created, is allowing us to see a lot of side and been able to achieve that goal. And on top of that, we're not having any problem identifying areas to continue to expand our inventory, to grow that inventory to perpetuate that growth into the future. So it gives us a lot of confidence in being able to maintain that. That metric of double-digit returns double-digit growth and target a 2% yield.

Jeanine Wai

Any other questions? All right, I'll let you sit on it. I'll keep going. So maybe just sticking to the subject of growth? Have you done any sensitivities, I love that slide with the breakeven going from 55 to less than 50. And have you done any sensitivities on the rate of change on that if you did higher or lower growth?

Billy Helms

Obviously, the rate of that change is dependent on how fast you bring that inventory to production. And we're seeing that effect as we mature on the slides where it's lowering our DNA, right? Grabbing net income and lowering that breakeven price. So what we've modeled in that slide is basically if you are look forward and see a fairly sustainable lower process, like we're seeing today, even, we can achieve those kinds of growth rates that allow us to get to that number thinner. If oil prices retreat, obviously, we're going to stay cash flow positive, and we'll pull back on our rate of growth.

However, if oil prices increase doesn't mean automatically, we're going to jump out and pick up a bunch of rigs and grow faster. And make that caveat because we're all going to continue to increase our rate of growth if we can get better. So we've demonstrated in the past, we know from past experiences that you can grow too fast in these plays and you can destroy capital efficiency. So we're really guarded against making those quick changes and quick decisions. We've got a very comfortable level of activity now and will only increase and decrease from that based on what our outlook on commodity process might be, and our ability to continue to get better.

Jeanine Wai

Okay. This may be a strange question and since we keep talking about growth, but I kind of want to ask you anyways. So, have you ever considered taking your more mature assets and doing a plateau by production model and the only reason why I ask is because some of your more mature peers have taken this approach where they grow to a certain amount and EOG certainly has scale and spinning off good free cash flow, so they grow to a certain amount and then they plateau it or either drop the rig and just kind of harvest it. And I feel like EOG has talked a lot about exploration plays and making sure that you grow at a measured pace. So does that kind of fit into what you're talking about?

Billy Helms

We don't see a plateauing at this point. I guess we don't think of ourselves as a mature business yet. And when we think about a mature business, it's a business that's not growing at double-digit paces. And we don't see a lack of inventory or our lack of our ability to continue to add to our inventory. And not just to add to the inventory, it didn't really do us any good to add to the inventory, if it's not going to be drilled for 15 years. So the things we're adding to our inventory, the prospects that we're chasing or things that will compete with the top of our inventory. So as long as you can continue, that's inherent in our ability to continue to get better and so it yields back to our culture. We don't want to just maintain status quo. And we don't see a lack of inventory for us today, though, it just makes sense to continue to grow that at the pace that you can do that efficiently and get better every year. And that's the best return for the investment we're making today. As long as, we can see lot of stuff to do that we're going to continue that trend.

Jeanine Wai

Questions from the audience? All right, I'll keep going. So we really like EOG stacked growth model, especially as it relates to device diversifying risk. And we've seen fits and starts and bottlenecks and certainties. And so, we like that type of model. Also, it allows for more moderate pace, and learning, like you talked about, how many different plays are too many. Because I feel like there's a lot of exciting things on the exploration front coming our way. And just when is it too much?

Billy Helms

We still have a lot of capacity in the company, we have golf course active plays in the Permian Basin, in the Delaware basin, or Eagle Ford is an active play, our Powder River Basin and Bakken are active plays, run out of our Denver office, but we have other offices that have a lot of capacity that have the ability to continue to grow activities, we have seven different division offices in North American and one International, that are all have capacity to continue to grow activity. So we want every one of those offices to be able to demonstrate very high return growth. And so, we've still have capacity left to run. And the benefit of having the multiple basins, you're -- I think you're seeing that in the performance of the company. We can shift capital and growth to different areas, depending on what limitations or bottlenecks you might see, either on the takeaway side or differentials popping up one way or the other on the marketing side. And so, I talk a little bit about our marketing strategy and been able to move those products to the most favorable markets. And that all plays part of that portfolio approach too, just be able to maximize the returns and the shareholder value for all those assets.

Jeanine Wai

Okay. And then, moving specifically to the Delaware, I think rigs are becoming kind of irrelevant in terms of a metric on your activity, because everybody keeps doing more with less. I thought I heard a comment once that maybe once you get past 20 rigs or so in a certain play, that's kind of the limit and those 20 will keep doing more and more. As you think about your Permian, you're kind of there now. But is the Permian, such a big area that you think of it almost as different sub areas and the 20 doesn't really apply? How are you thinking about that?

Billy Helms

Yes, I don't think the 20 is an absolute number, I think, that certainly 20 provides you a lot of activities to manage, and you have to be able to do that efficiently. And it's not. Yes, it's not all concentrated in one area. So it's almost like a mini portfolio within a division, the way we think about it, so you have to be able to first understand the details about the rock, it all starts with the geology. And so we spend a lot of time and effort trying to make sure that we target the best zones within each area. And so that it's not blanket geology, it's not spreadsheet math, you can't just apply the same zone across the entire basin. And you have to be able to understand the changes graphically across the play and develop those patterns in the right manner. So it takes so you can't just, so that keeps you from ramping up too fast. I'd say that's more of the limitation. The understanding that you have about the area and have a code develop those zones, the right way is the limitation. We're pretty confident with our operating team that we could pick up new activity and operate very efficiently, and it'll continue to get better. One thing about our operating team, they've just done an outstanding job finding ways to not only do things more efficiently, but drop down our cost. This year we had set our goal at the start of the year to be able to lower our well cost about 5%. We've already lowered well cost 4% halfway through the year. So, tremendous capability, and that's not through service cost reduction, that is strictly efficiency gains. So we feel like -- and even though we're executing at a high-level, we are seeing there're so many more things we can do better every day. So we don't see a limitation yet on our ability to get better.

Jeanine Wai

We have a question over there from the audience.

Unidentified Analyst

Thank you for the presentation, and first of all, appreciation for showing DD&A and looking at it for this capital-intensive industry actually; somebody's focusing on that, but a different question on Eagle Ford, you've been doing oil recoveries there for a while and just trying to get a sense, how are you seeing that evolving, what you're learning and as this program matures, kind of what are your thoughts are going forward?

Billy Helms

So, yes, the Eagle Ford EUR program has been very successful. It was really contemplated a few years ago when we started the program, and it's proved to be as successful as we thought it would be. Just a brief summary of what the results are, it generates a really good competitive return. First of all, it meets our premium hurdle, it's a 30% return at a $40 flat oil price. It takes a minimum and take the investment, small investment of about $1 million of oil. So what's different in most large scale EER projects is it requires a large upfront investment and years to pay out. This is a million dollars well, and it pays out in less than a year. So the return is pretty good.

And on top of that, it generates an uplift in the EUR, the expected reserves for that well about 30% -- somewhere between 30% and 70% uplift in the EUR. So, very profitable program, it gives us increased recovery. We've done pilots across the field, so we have the confidence that it's going to work in a lot of different operating areas. We've converted now a large project about 150 wells in one single area into an ongoing project, but what you want to do on EUR is first you have to go through the development phase, and we're still -- we've only drilled maybe little over a third of the wells in the Eagle Ford year-to-date, so the Eagle Ford still has a line of sight into continued growth for the company. Even though it's a fairly matured asset, it still has quite a bit of growth potential. And so, we need to finish the full development first, and then as we develop out these units, we will continue converting more wells to EUR. It does have a lot of enhances longevity of the field certainly, it gets more value out of the field, and we've learned a lot about how to forecast the ultimate productivity. Remember, this has never been done, EUR on shale reservoir before, so there's no textbook you can go look at and determine what the expected recovery ultimately is going to be. So we're learning as we go, and we're developing technology about what that looks like, but we're confident it continues to work throughout the field.

Unidentified Analyst

Is there an optimal point at which you should do EUR in the life of the well, have you done some work on that?

Billy Helms

We've done some work to show that it really gets it -- you still get the uplift, no matter if you converted the pattern to develop -- if it's been developed and you convert a well in the six months, or you wait two years to convert a well, we've done both, it still gives it uplift. Obviously there is more gas injected needed if it's further completed, but the uplift is still the same.

Jeanine Wai

I'll stick on that one for EUR. One of your larger peers talks about doubling the amount of recovery from the Permian, just getting more out of the resource, and part of that relates to secondary recovery in EUR. So, is there anything in the Permian, I know you just said that it's kind of uncharted territory in the sales, but is there anything in the Permian and the rock that would tell you that it's harder to do that, or that you would need to develop something differently, it seems like some people just think that there's a lot being left behind in the reservoir, and as the industry has just prosecuted tighter and tighter spacing, we've seen some up spacing, and so, people are just looking at other ways of getting more efficient oil out of the ground.

Billy Helms

So I'd say that what we're doing in the Eagle Ford won't work in the Delaware Basin. It doesn't mean that something won't work in the Delaware Basin or in the Midland Basin either, but the mechanism we're using in the Eagle Ford won't work there, because what works so well in the Eagle Ford is the containment we have. It's a miserable process where you inject gas, and it becomes miserable with the oil that drives incremental recovery. In the Permian Basin, pretty much either the Midland Basin or the Delaware Basin you don't have that containment per se. And so, it may be a different mechanism you have to use than what we're doing. So we're always looking for those, but we haven't unlocked that yet.

Jeanine Wai

Is that something you're actively researching, or that's further down the line?

Billy Helms

That's further down the line, yes. First of all, you have to go through development first. We're still [technical difficulty] development.

Jeanine Wai

Okay. And we've got two minutes left, so okay, I'll keep going. We've had a lot of questions, and we think there's a lot of buzz on what we've been calling the majors Mojo in the Permian. If you look at EOG, you've got quite a lot of scale there as well and very efficient operation. So, from your opinion, do you think that the majors or just generally other larger players have a structural advantage in the operations by bringing scale, balance sheets, project management, whatever you want to call it, into the Permian?

Billy Helms

We're not worried about the majors impact on our operations at all. We've had an active program. We have a great plan of how we're going to continue to develop that. We have the access to the services, the products we need, the takeaway, the infrastructure, really didn't even enter into our thought process, it's -- they have a different way of approaching the problem than we do. Our cultural advantage that we think we have is our continued innovation and drive to always get better at what we do is going to continue to drive capital efficiency gains, those kind of things. So, you'll never see us get into a manufacturing mode, because we try to learn from every single well we drill, and how to make the next well better. And I think they just have a different approach in general. So we're very happy with our position, and it's only going to improve with time. So, it's just a different approach.

Jeanine Wai

We've got 30 seconds, and I'm going to use them.

Billy Helms

Okay.

Jeanine Wai

So, I'm going to close on just consolidation. You said earlier, no expensive corporate consolidations, or corporate M&A for you guys, can you just talk broadly about your thoughts on that? Recently, we saw a deal that most people were waiting for, which was kind of a mergers of equal no premium type deal, how do you see this evolving?

Billy Helms

First of all, any capital we spend on an acquisition would have to be competitive with our inventory that we're drilling. So it has to be able to compete, it has to be accretive day one. So it takes premiums off the table. So it wouldn't say that we'd never do anything. We're always looking. Obviously, we did the H deal. It was a very good piece of business for the company, and we do another one in Heartbeat [ph] if we could find one. So we're always looking, and we're going to move on opportunities, if we see them out there, but we won't be doing expensive corporate M&As.

Jeanine Wai

All right, we're out of time, but we have the breakout in Riverside room. Billy, it's been such a pleasure. Thank you very much.

Billy Helms

Well, thank you, Jeanine, and thanks for all your support.