EOG Resources, Inc. (EOG) Management Presents at RBC Global Energy and Power Conference (Transcript)

EOG Resources, Inc. (NYSE:EOG) RBC Global Energy and Power Conference Call June 2, 2020 8:40 AM ET

Company Participants

Ken Boedeker - Executive Vice President, Exploration and Production

Dave Streit - Investor Relations

Conference Call Participants

Scott Hanold - RBC

Scott Hanold

Thanks and good morning. This is Scott Hanold, Managing Director of U.S. E&P and Research. Glad to have EOG Resources. We are doing our fireside chat here and we are pleased to have Ken Boedeker, the Executive Vice President of Exploration and Production on with us, as well as Dave Streit from the Investor Relations team. What we will do is we will start out and I will let Ken provide some high-level kind of thoughts and then we will get into some Q&A discussion. And as the audience, if you wish to submit a question, there is an opportunity to do that on your Veracast system.

So with that, Ken, I will let you make a few opening comments.

Ken Boedeker

Alright. Well, thanks Scott. I just want to thank RBC and Scott and all of you for joining us today and I hope this finds everybody healthy and safe and their families healthy during this time. So thanks for joining us everybody. I just really wanted to start out I’ve got a couple minutes of kind of high level EOG points I want to get across and then we can jump into some questions, but really the thing to know about EOG is we are a resilient company. I mean, we are resilient for two big reasons. One is our culture, it’s our big competitive advantage, where every person here at EOG is a business person first and we have taken on this latest challenge of low prices in the pandemic with that type of culture in mind. And the second thing is that our premium investment strategy, where you know we make sure at EOG that every dollar that we spend is creating a high return at the prevailing prices. So, that’s really the resiliency of EOG is the culture that allows us to do that.

If we look at kind of the near to medium-term focus that we have right now again we are focused on all the money we spend creating a 30% return at prevailing prices on a well level that’s really for a 20% all-in type of return. We have shown in the past few months and are continuing to show that our operational flexibility where we can cut production and costs quickly as well as turn production back on as needed, times like this really accelerate our technical innovation. If you think about it, we have a chance to really focus on getting better and these times allow us to do that. And really with that, our strategy going into the second half of the last half of 2020 is to really accelerate our production into what we see is the price recovery in the second half of the year. Obviously, having the strong balance sheet has always been one of our main stalwarts and protecting it and protecting the dividend is number one on our mind as well as setting us up for longer term growth, whether it’s exploration, infrastructure, ESG initiatives, we really want to set the company up to come out of this stronger. I have been with the company for 26 years and been through several downturns and one of the characteristics of EOG is we have always come out of these type of situations stronger.

So with that, just leave you with kind of the – what we have done in the past 3 years, we have spent about 80% of our discretionary cash flow on CapEx generated a 14% ROCE, increased our dividend 124%, generated $4.6 billion of free cash flow, paid down $4 billion in debt and increased our proved reserve base by 55% and that’s all at an 80% capital to discretionary cash flow ratio. So we have had an outstanding past 3 years and planned on emerging from this current downturn even stronger.

So with that Scott, I think I am ready to go ahead and we will throw it open.

Question-and-Answer Session

Q - Scott Hanold

Alright, that’s great. And it’s obviously been some very challenging times over the last few months and you know you have had a pretty good long year – long tenure with EOG. When you step back and look at the E&P industry and EOG specifically, what do you all think given this latest downturn and how you look at the future, what does the industry need to do, what does EOG need to do to bring back investors and be more competitive to broad markets and specifically, could you address what kind of production growth rates, free cash flow yields, dividends, leverage levels are appropriate for the industry and EOG?

Ken Boedeker

You bet. I think what this latest downturn has done is it’s driven even further capital discipline into the industry. So, if you look at that as an industry and as a company what we need to do as an industry is we need to spend within cash flow and generate significant free cash flow. We are one of the best in our peer companies, where we have only spent 80% of our discretionary cash flow on CapEx. So not only do you need to generate significant free cash flow, but you really need to invest at high returns, that’s one of our stalwarts of the company is our premium drilling is what we call it’s just a way of allocating capital where on a premium bases are $40 flat, 30% return minimum investment strategy has definitely paid off for times like this and we need the rest of the industry would need to invest and create high returns to be able to pull any capital or any investment back into it. As far as some of the other parameters that you talked about really for EOG, we are focused on creating long-term shareholder value. We believe you can do that with a strong balance sheet that allows you to give you flexibility throughout the commodity price cycles as well as helps to protect the dividend. And our dividend is the primary way of returning that cash to shareholders and we are really focused on a growing and sustainable dividends on generating free cash flow. So after that, if we look at it our other investment opportunities include a lot of high return drilling program. So we look at all that and that’s really how we are going to look at it in the future as well.

Scott Hanold

Okay. Are there any specific targets or marks or goals EOG has when you look at free cash flow yields, dividend rates and leverages, are there specific targets that you know for us to think about?

Ken Boedeker

We really don’t have any specific targets on that. I can just tell you what we have done in the past like I said, we have invested a roughly 80% of our discretionary cash flow over the last 3 years and we have grown our dividend 124% during that time. Now, it’s hard to say how much the dividend will grow in the future, but it’s one of our goals to have that dividend growing through time. So, we don’t have any exact numbers for you to shoot towards. We just know that our strategy is to continue to show the capital discipline and reinvest at higher and higher rates of return and provide a high 14% ROCE over the last 3 years. Our goal is to keep increasing that ROCE.

Scott Hanold

Okay, understood. And you had a pretty strong perspective on your dividend growth rate over the next several years prior to the downturn in oil prices. And sort of two questions, is that goal still achievable in the current commodity and price environment, could you talk about the sustainability just in general of EOG’s dividend at strip prices if we were to look at it that way?

Ken Boedeker

Sure. If you look at our dividend, if you first look at it, we have never cut it in the history of the company throughout any downturn and we haven’t cut it this time either. So, that’s one of our top priorities is to maintain that dividend. We do a lot of stress testing on the dividend before we ever announce it or increase that at several different oil prices. And I believe that you can see and the disclosures that we had at the end of the last quarter that we can maintain CapEx – excuse me, maintain our production levels from the fourth quarter of this year and our dividend at $40 oil. So you can see that maintaining production levels and sustaining the dividend is very doable at a $40 price environment.

Scott Hanold

And what kind of price would it take to get back to a dividend growth rate that you were all contemplating earlier this year?

Ken Boedeker

If we see prices higher than $40, we will look at growing it. I don’t know that you will see it grow with the rate that it has in the past, but we are committed to growing our dividend as prices allow. So, that’s pretty much where we are at this point.

Scott Hanold

Okay. I have got a few questions coming in from investors. One of the questions is that you have recently liquidated your – some of your oil hedge books, can you speak to what this says about your macro view on oil prices?

Ken Boedeker

You bet. From a hedge perspective, we hedge very opportunistically. So, it’s – we have a, I would call it a very sophisticated macro model, where we can look at what we see commodity prices doing in the near to medium term. And if we see those prices going up, we don’t hedge. It’s pretty much that simple. If we see those prices going down, we do hedge. So you can kind of look at our hedge position and see where we think prices are going to go at this point. We closed out our hedges. I think we did that late last week. We see very little capital flowing into the industry and we see higher declines from all the shale players throughout the rest of the year, so supply being down and we see demand coming up and we think that sets us up for increased prices. So that’s really why we liquidated the hedge position when we did.

Scott Hanold

Understood. Thanks for that. And just when you step back and think about you guys took a very sort of approach relative to some of your peers in terms of shutting production that you discussed in the first quarter conference call and certainly with a more bullish view on the macro, can you talk about the levels at which some of that curtailed production, do you plan on bringing back online?

Ken Boedeker

Yes. We look at that. Let’s say first of all, we have a real advantage in our information systems. We can look at every well, everyday, look at the variable and the fixed costs and we can marry that with what we are actually selling the product for, which is important when you consider different things like the differentials that you are seeing from say Houston Ship Channel or the month-to-month roll that you see. So when you marry all that together, we curtailed because our cash margin was getting substantially lower in certain wells in certain areas and we didn’t want to take the risk of it going lower. And then looking at a growing price environment in the second half, if your margins are way down, it doesn’t take much of the price increase to more than double or triple your cash margin. So, we did curtail wells. They were still economic. They were still making cash, but we felt with our strong balance sheet we didn’t need to sell our oil at that low margin that we could curtail it and sell it at a later date at a much higher margin. So that’s what we did. As far as bringing those wells back on, you can see on our guidance that we put out there that we plan on third and fourth quarter just continuing to not only bring on those wells that we had curtailed or shut in, but to bring on wells that we have completed and not turned on yet.

Scott Hanold

Okay. With the latest move with removing the hedges obviously indicating you are more bullish in the macro, does that indicate that the effort to bring on curtailed production as well as wells that haven’t been completed could that happen sooner than originally planned?

Ken Boedeker

You sell a lot of that oil a month out. So, we plan on bringing those wells on in third quarter and we are going to – we are evaluating that, but for right now, I think everybody should use what we have in our third quarter guidance as numbers on what we plan on, how we plan on bringing our wells back on.

Scott Hanold

Understood. Appreciate that. One of the things I want to shift back to is some of the discussion on the balance sheet and you maintained some fairly attractive leverage metrics some of the lowest in the industry, can give us a sense of when you look at the balance sheet and balance sheet management, discuss plans for some of the upcoming debt maturities that you all have, how do you see – what are the options you have with that in this market, how do you see EOG addressing those?

Ken Boedeker

Sure. First of all, let me say that there is never a better time or an example of when a strong balance sheet is really beneficial then right now. I mean, it allows you to make those calls on whether you want to curtail production and maintaining your dividend having a strong balance sheet is just key in this cyclical industry, where you can’t really predict any of the commodity price over a long period. So we think a strong balance sheet is just key [Technical Difficulty] offering about a month ago. We took $500 million of that and paid off our bond that was due in April and then we paid off another $500 million bond yesterday with that. We have one more bond coming due in February of next year for $750 million and we anticipate being able to pay that off or we are planning to pay that off with cash on hand.

Scott Hanold

Understood. Thanks for that. And does the company have a target leverage ratio that you would like to maintain is there a level where if it gets above that you start feeling uncomfortable?

Ken Boedeker

Not really. What we have seen is we have seen higher and lower leverage ratios through time as we need to run the business. It’s never been high enough to be a concern, but obviously having low leverage ratios is a huge competitive advantage to us. If we look at the last downturn, we did the Yates acquisition at that point in time and we would not have got that acquisition done had we not had a really strong balance sheet just because the Yates family wanted a company that had a strong balance sheet to be able to show for their family to be able to show that it was a good deal. So, anyway a strong balance sheet is a huge advantage for us.

Scott Hanold

Understood. And I will key off one of your comments there, talking about the Yates acquisition and how does EOG see the consolidation opportunities or the opportunities on new opportunities during times like these are just things that look more attractive today than they have in recent years and how do you plan to evaluate those?

Ken Boedeker

Yes. I would say that we are always evaluating different bolt-on acquisition opportunities. We are not interested in any expensive corporate M&A opportunities, but we are always evaluating bolt-on opportunities like the Yates acquisition. That was a significant amount of acreage. And we were an operator that a low cost operator to be able to develop that. So that’s where the synergy there was. So we are always evaluating that. As far as the market goes right now, there is a couple of things that are hurting the market in terms of being able to see a lot of consolidation. One of them is we need to see what kind of, if you want to call it a stabilized commodity price or what a more stable commodity price, I guess is the way to say it would be. So, the buyers know they are getting a reasonable deal and the sellers know that they are getting a reasonable deal. And then the other thing that’s hurting a lot of the consolidation in the market is there is just some higher debt levels of a lot of companies out there that should be looking to consolidate really nobody wants to take those additional debt levels on. So, we see that working through the system in say the next 6 to 12 months, but it’s not going to happen immediately until we see what demand looks like after we come out of this pandemic.

Scott Hanold

Okay. And another question coming in that I think kind of plays again right off the idea of sort of consolidation building your portfolio, but you have been very active I think throughout your history and being a leader, finding new plays, developing new plays is there – can you talk about what kind of efforts right now is ongoing in sort of some of these exploration efforts and is there any new updates on some of the new basins that you are working in right now?

Ken Boedeker

Sure. When we saw the decline in commodity prices we did go ahead and high grade both our – I would call it our development drilling program as well as our exploration drilling program. So, we did high grade that. We still have capital going towards that we are still testing several of those plays. It’s just going to take us a little bit longer to get those tested in a lower price environment than it would have been in the price environment from late last year. So, we are continuing to test those seeing results. We will let you know as we get results that we feel we should disclose, but we are right in the middle of that. Our goal with those is exploration plays are to really bring them into our inventory and have him come into the front part or the upper third maybe upper quartile of where our inventory is so that there would be very much returns and finding cost competitive with what we have in our existing premium inventory what we’re focused on our wells are plays that are at a little bit better reservoir quality a little higher firm in existing areas where we should be able to bring them to market and have a little bit flatter declines so we are right in the middle of testing those plays and we will definitely let people know as we get additional results.

Scott Hanold

Yes I mean that’s a pretty high bar to be an upper quartile to be competitive in your in your portfolio I would say and when you think about there’s probably more holes poked in the ground and in the U.S. than anywhere else in the world how likely is that are you going to find something and is there stuff out there with scale that can have scale to EOG and can compete versus your premium portfolio? Is there still stuff out there?

Ken Boedeker

Yes we definitely think so. That’s what we are at. I would say that as far as scale goes we are going to say it’s above a couple of 100 million barrels in that range. So it definitely has a scale we see this as an opportunity. There is hardly anybody else in the industry right now doing any exploration and acreage and entry costs are very, very low. So it’s a prime opportunity in a lot of these plays. And one thing EOG can bring is we have been in this industry for a long, long time and we understand what makes plays work or what we think makes plays work and what doesn’t as well as we can bring the scale which will allow us to have lower costs in these plays and maybe some of our competitors did some of these plays have been tested and they were either too expensive or wouldn’t they have been tested and it was with a significantly previous generation of stimulation technology so we are just going out and trying to apply our best practices from all of our different, different plays to these to these new ones and like I said have sufficient scale to be able to allocate a decent amount of capital to them in the future.

Scott Hanold

Understood. Got a few other questions coming in from the audience and one of the question is certainly there is some indication that you are a little bit more constructive on the oil macro, one other things that we heard from a lot of your peers is that a lot of the production which can be brought back online in the mid $30 per barrel WTI level and maybe not too far north of that to start did you’re seeing some new drilling start to occur by some of your competitors and how do you sort of think about like a bullish context of the macro with a lot of the industry players trying to bring production back in the mid thirties what it seems like those to kind of ideas are in a bit of conflict?

Ken Boedeker

Yes I understood and I think what you’re going to see is you are right in the mid-30s some of the existing shut-in production will be coming back on. There is no doubt about that. And so we are going to see a little bit of a saw tooth on the supply side and you are going to see prices due to a similar thing to pull back until we reach some kind of a balance within the market your comment about starting to drill in the high thirties I am not sure I see that I don’t know that there are many companies out there that can generate reasonable returns in the high 30s and I think that’s what they would be made to generate these returns, because there won’t be any very much cash available in the market for those companies to tap outside of their own generated cash flow to be able to do that. So I guess by not having any – by them not outspending cash flow it’s going to put a cap on how much development that you can do.

Scott Hanold

Okay. So then just as a broad construct, I mean certainly it sounds like you think well there is some saw tooth likelihood in U.S. production it’s just not sustainable at these oil prices and I would assume that’s part of it. And then where does – is there a specific level and this is another question coming in with OPEC+ production are compliant or less embedded into your kind of a macro view at this point?

Ken Boedeker

Yes. I mean, our macro view definitely takes into account where OPEC is and what they might end up doing. We are going to have to see what demand comes back at post-pandemic to help see how that market rebalances. Obviously, there is excess production in OPEC, which is going to put some kind of, I would think some kind of a cap on what – where the prices could be, but we will just have to see how that is. Our longer term outlook is that where prices currently are now they are definitely – they are not sustainable for any amount of time.

Scott Hanold

Okay. I mean, could I ask you what is your view on oil prices in 2021 do you have a perspective of sort of the range where we could be looking at?

Ken Boedeker

Yes, I don’t really want to give you a range. We just think that they as we get into 2021 demand will be back and we will see less capital coming into the industry, because obviously people are going to have to have this is going to force more and more capital discipline. So we see prices being constructive from here and don’t see them going down at this point.

Scott Hanold

Okay, understood. Kind of another incoming question back to the leverage levels, just your thoughts on your credit ratings, are you willing to defend your A minus credit rating, is that something that does matter? And if there is a move by some of the agencies as we have seen some aggressive moves in the past potentially push to a potential downgrade bucket can you talk about what kind of strategies you do and is it something you want to defend your credit position?

Ken Boedeker

Sure. Well, we are four notches into investment grade. So we are not really worried about defending that. That’s more of an output of how we run our business. We run our business to generate free cash flow and high returns and then what you see is when you do that and generate ROCE and keep the balance sheet where it’s at that you will see us maintaining definitely well into investment grade ratings.

Scott Hanold

Understood. Obviously, Ken, your expertise is on the E&P side and so certainly would like to delve into some questioning regarding that area, but maybe to start out with we have talked about curtailing production and how do you think about like adding rigs and frac crews back, I mean, certainly is there a more comfortable oil price when you look at adding the curtailed production versus new activity back online?

Ken Boedeker

Yes. If you look at what we are looking at for the end of the year and into next year, what we put out is that we can maintain our Q4 exit rate at about $40 oil and $3.4 billion in investment. And that would entail adding some rigs and some frac crews for that type of a scenario there. If we see prices go up obviously, we could add a little bit more. In terms of adding whether it’s drilling rigs or frac crews, a number of those are on standby right now. We have the flexibility in their contracts to be able to add them back some of them are still on our locations. Adding them back and getting, it won’t take a long time to get them back on high performing levels of when they left. We would be able to add back the preferred rigs first obviously and the preferred frac crews first. And what we see is at that level it will be easy to add crews and everything back and we should be up and running and continuing to get better on our operational execution side within a month or two.

Scott Hanold

Okay, understood. And when you look at the actions that you had to take in the industry obviously we are seeing the output which is obviously the base decline rates take – really take hold and can you discuss EOG’s decline rate? I guess was a little bit steeper than a lot of investors had expected early on, but it does seem to flatten a little bit more, can you talk about like on your asset base how you see the differences between where outsiders look at decline rates and where you guys see actually things actually are?

Ken Boedeker

Sure. If we look at midyear decline, the midyear decline, it’s 32%. What we published for the first quarter call is I think it was about an 18% drop in that and from one quarter to another and that’s what we see with our wells. We are highly efficient in getting the oil out, which means we have very high IPs and steep declines early on and then they flattened out. Now on a corporate basis, when you are not growing like we won’t be growing this year, our decline will definitely flatten out on a corporate basis second half of this year and into next year. It’s just a matter of that the shape of the wells and of the production that you are adding into the base.

Scott Hanold

Alright, got it. With that, I do see we have just hit our time limit, but Ken have always would like to like leave it open to you, is there any kind of final comments that you like to provide before you finish up?

Ken Boedeker

I just want to thank you Scott and thank everybody for listening in and stay safe. And just remember, with EOG, we have always come out of these downturns stronger than when we went into them. So we just appreciate all of your support.

Scott Hanold

Appreciate your time, Ken. Good luck. Thank you.

Ken Boedeker

Thank you.