EOG Resources, Inc. (NYSE:EOG) 2019 JPMorgan Energy Conference Call June 18, 2019 8:00 AM ET
Ken Boedeker - EVP, Exploration and Production
Ken Boedeker - 执行副总裁，勘探和生产
Arun Jayaram - JP Morgan
Arun Jayaram - 摩根大通
Good morning, everybody. Welcome to JPMorgan's Fourth Annual Energy Conference in New York City. My name is Arun Jayaram, and I'm the lead analyst on the large-cap E&P coverage effort at JPMorgan. I really delighted for each of you to attend today. Obviously, delighted to have EOG to kick-off today's day-one presentation.
I'd also highlight a couple of other key presentations this morning. One, JPM CEO, Jamie Dimon will have a presentation with Mike Wirth, the CEO of Chevron, at 10:00 a.m. For our keynote lunch speaker, we'll have Ryan Lance. He's the CEO of Conoco. And to round-off the day, me and Michael Glick, will be hosting an E&P CEO panel with Dave Hager from Devon, Dave Stover from Noble Energy and Doug Suttles from Encana. And again, if you guys have any questions throughout the conference, reach out to me or a member of my team for any help.
Today presenter from EOG will be Ken Boedeker, who is promoted to be the EVP of E&P and moved from Denver to Houston back in December. He was previously the General Manager of the Denver office from 2016 to 2018. He has a background at EOG. I think Ken joined EOG back in 1994. So he has been there throughout the time period, and really has been helpful as you think about them articulating their premium drilling strategy.
With that, I'll turn it over to Ken.
我今天上午还要重点介绍其他一些重要的演讲。其中一位，JPM首席执行官Jamie Dimon将于上午10点与Chevron首席执行官Mike Wirth进行一次演讲。对于我们的主题午餐发言人，我们将有Ryan Lance。他是康菲的首席执行官。为了完成这一天，我和Michael Glick将与来自Devon的Dave Hager，来自Noble Energy的Dave Stover和来自Encana的Doug Suttles一起主持E＆P首席执行官小组。再说一次，如果你们在整个会议期间有任何问题，请联系我或我的团队成员寻求帮助。
Well, thanks, Arun. I appreciate that. And I'd like to thank Arun and JP Morgan for having us here today to kick-off the conference. And also thank each of you for coming out early on a drizzly Tuesday morning. So thank you very much.
If we look at EOG, really our strategy or our goal is simple. We want to be one of the best companies across all sectors in the S&P 500. We can do that by generating double-digit returns, double-digit growth and free cash flow throughout the commodity price cycles. So what we're really talking about is decoupling our financial performance from the ups and downs in the commodity cycles. Or another way to look at us, we're insulating our returns from the low side in oil prices. And this is the best way to deliver long-term shareholder value.
So over about the next 20 minutes, I'm going to talk about three main topics. One is returns and how we're confident we can deliver those throughout the price cycles. The second one is our assets. Those assets obviously generate the returns and the growth that we're talking about. And then lastly, talk about the financial performance. So, if we get started and look at the 2019 game plan, this game plan was generated to provide double-digit returns. It targets about a 14% midpoint target growth rate. And it was designed to give us free cash flow below $50 oil.
And if you look at how we've done through the first quarter on that plan, we've had an outstanding first quarter. We've been able to generate more production for less capital than what our guidance targets were. And our expenses have come in at 8% below where they were in the same quarter of 2018. Not only that, our price realizations are over $1 above our target and our marketing group has been able to secure dock capacity in Corpus Christi of 100,000 barrels a day and in 2020 and 250,000 barrels a day in 2022, which gives us a lot of optionality in the market for being able to maximize the price that we receive for our product. Not only that, but we raised our dividend 31% at the end of the first quarter. So outstanding execution to-date, and we anticipate carrying that momentum forward.
If we look at returns through the last 20 years for EOG, we've always been a returns-focused company. And if you look at about the first 10 years, the way we generated those returns is we were a gas company where we had gas growth in a high priced environment. We made a strategic shift to oil in 2008 and 2009, as we saw gas prices beginning to decline in the market. And then we began to generate significant returns with oil, both with oil growth and with high prices.
Then the downturn came in late 2014 and 2015. And we realized that we had to reset the company again to be able to maximize our returns. So we reset the company to basically a premium drilling strategy. And that's more than just saying we drill good wells. That premium has a definition with it. That definition is a 30% return, direct rate of return at $40 oil and $2.50 gas flat. So with $40 oil pricing and $2.50 gas pricing flat throughout the life of the well, we can generate 30% return.
And that strategy has begun to pay off as you can see. In 2017 and 2018, we generated significant returns. And in fact, 2018, we generated the highest return we've had since our shift to oil in one of those most moderate years for oil price that we've had in the last several.
Really what this has done is it's reduced our cost basis to the point where the price of oil required for us to generate double-digit returns has dropped from $81 three years ago to last year it was $55 a barrel, and it will be less in 2019.
If we look at that premium inventory that we have when we started this reset to the premium strategy, in 2016, three years ago, we had about 3,200 premium locations. We've now raised that to over 9,500 premium locations in a three year time frame, and increased the potential from about 2 billion barrels equivalent to over 9 billion barrels equivalent. But most importantly, we've increased the quality of those premium wells. Our average well in 2016 reached premium status was about 625,000 barrels equivalent. We’re up almost 1 million barrels equivalent now on our premium inventory.
But one thing I'd like to say about this premium drilling strategy is really that's the minimum of 30% return that it takes to make our drilling schedule. The majority of our wells have much higher returns than that. The majority of our wells are almost double that. They'd provided 60% return, direct rate of return at $40 oil and $2.50 gas.
So, if we look at one of the outputs of this premium drilling strategy, those wells have a low, low finding cost. Most of those wells have a sub $10 finding cost. You can see that on the chart on the left. And we've driven that finding cost down from $17, $18 a barrel in 2015 to a little less than $9 a barrel in 2018. One of the big outputs of that is as you invest more and more capital, you'll lower your DD&A rate and we've lowered it by over 31% over the last few years and that translates directly into higher returns.
One of the stalwarts of EOG in our business is that we need to continue to bring new assets in the door for development. So the way we do that is with new organic exploration. There’s two ways that you can bring those new assets in the door; you can either acquire them in the market, or you can explore it for them. What we've found is, is if you try to acquire them, the price is too high. It's not competitive with how we bring in our organic exploration. So you'll notice later that we've allocated capital this year towards additional organic exploration.
Then we have the growth phase. This is the way that we look at the business model. So when you look at this growth phase, that growth phase can be a substantial amount of time depending on your asset base in each of these premium areas. And then you have your mature phase where you allocate significantly less capital to those assets.
So I’d like to think of this as a baseball game as I go through these assets. I'm going to talk about three of those assets today. I'm going to talk about the Eagle Ford, which is really a baseball game and about the fifth inning in the long game. We're going to talk about the Delaware Basin, which is really in about the third inning of an even longer game. And then we're going to talk about the Powder River Basin, which is in the first inning of a long game as well.
So moving on with the South Texas Eagle Ford, it's a bellwether asset for EOG. It's a great example of the first mover example, or a first mover advantage that we have by bringing these assets in the front door on an organic exploration basis. Our lease position there is really about $450 an acre. And we've grown that asset for the last 10 years. And we're capable of growth in that asset for the next 10 years.
Not only that, but it's an asset where we have a footprint that we can try to enhance our recovery. And we're doing that with an enhanced oil recovery project. We've converted about 150 wells in the area to enhance oil recovery, to actually get more than our primary recovery out of these wells. And we're seeing results that lead us to believe we will continue to grow that as we finish primary development in the area.
Really if you look at the Eagle Ford, you can think of it as an Eastern area and a Western area. And if you look at the Eastern area, that's the area that had high or large wells early on, and high growth. And that's what really kicked the Eagle Ford off. And that area has great rock quality, good fluid properties and it's fairly structurally complex. If we look at the Western area, that area is less structurally complex, it doesn't have quite as good a rock quality, but it also has good fluid properties. So what we saw early on was the capital efficiency in the East was substantially better than what the capital efficiency in the West was.
Over the last several years, we've worked on increasing the capital efficiency, both in the East and the West. I'm happy to report that we've been able to reduce both of them substantially as you can see on this chart. But the news is that we've reduced the capital efficiency in the West where it's almost on par with what the East is. And it's actually substantially better than when we were drilling those really good wells in the East just a few years ago. The majority of our drilling program in the future will be focused on the West. So that's outstanding news for the future growth of the Eagle Ford.
If we turn now to the Delaware Basin, at the Delaware Basin, we have a large acreage position in. We have about 416,000 acres within the Basin and 163,000 acres up on the Northwest shelf. We like really in like the Delaware Basin, because it's a target rich environment. There's 4,800 feet of stacked pay to develop there. We're currently developing the Wolfcamp, which are the lower zones. This is a really geologically complex basin. So being able to see those additional zones, those upper zones as you're developing the lower ones, gives you a real advantage when it comes to ultimate development in that area.
One of the advantages that the Delaware Basin had is EOG had been in the shale game for a long time when we began to develop it. We've had the Bakken ahead of us. We've had the Eagle Ford that we had exploited. And so we could really bring what we felt was optimizing spacing, targeting, stimulation, design, to really maximize the recovery in this area. And this is really a chart of how EOG spacing versus cume production is versus our peers. What it really shows is EOG spaces its wells closer together than most of the peers, but continues to have some of the highest cumes that you see. So what we're talking about here is maximizing recovery and maximizing capital efficiency in this area.
So as we move on to the Powder River Basin, as Arun said, I was Vice President and General Manager in the Denver division when we brought this forward to premium status. We've been working on this asset for several years, and had the advantage of again spacing, targeting, stimulation design, as well as cost improvements in this area over the last 10 years that we've seen in some of the other shale developments. So really, this ended up being a significant premium inventory addition to us. And the majority of what brought this into premium inventory was the improvements that we made in both cost and stimulation technology.
We used to refer to this as the Delaware Basin of the North. It also has 4,800 feet of stack pays, and is a real target rich environment. We have about 1,600 premium locations in this area, the majority of which are in the Niobrara and Mowry. We also developed the Turner which is sandwiched in between those. But, that 1,600 locations, is really just focused on the acreage that we're showing to the south here. We have a significant amount of acreage to the North that we think has a lot of potential that we will be developing up in the near future, or testing in the near future.
So if we look at the Powder River Basin, these are really just big wells and we're getting big wells for low cost. This is a plot of profitability ratio. So how much oil and gas revenue you make divided by what it costs you to make that. So as you can see, the Niobrara and the Mowry has some of the highest profitability ratio of any in our premium inventory.
So really it wouldn't be fair to talk about EOG without talking about a relentless focus on costs. This slide really just shows the reduction in operating costs that we've seen over the last five years. And that doesn't just happen, that's a lot of work. It’s looking at each individual cost in the production of a well and trying to optimize that cost.
Not only do we have a focus on our operating costs, but we also have a focus on our well cost reductions. So the graph on the left shows the Eagle Ford that we've been developing for over 10 years that we're continually reducing the well cost on those wells. And a well that would have cost us $7.2 million in 2012 for a 5,300 foot lateral, we would have drilled an equivalent 5,300 foot lateral well in the first quarter of 2019 for about $4.4 million.
The way you do that is you look at each individual cost of the well manufacturing process and try to optimize that cost. And this is really an example of that on the Wolfcamp to the right. What we see is year-end of 2018 we were about $7.5 million for a Wolfcamp well. We anticipate we will be at the end of 2019 at about $7.2 million. And that even includes a slight service cost increase. But what we're really talking about that are sustainable are these operational efficiency gains. The advantage of really working on your operational efficiency gains is that if it takes you less days to drill a well, even if service cost go up, you're insulated for many of those increases.
So if we tie all that back into the 2019 plan, this is a really busy slide and I've decided to narrow it down to just three points. One, we should see a significant improved capital efficiency in 2019 over 2018. We have allocated additional capital to bringing in new plays through the front door, the organic exploration plays that we talked about earlier. And third, we will not increase the capital budget if oil prices increase.
So if we talk now on the financial side on how we're doing -- let's see -- that Slide didn't come through. There we go. Our plan was made to generate free cash flow below $50, and significant free cash flow above $50. And the real question ends up, what are you going to do with that cash flow? And really, we have that cash flow allocated into several buckets. The first one is to fund high return premium drilling. And this year, we will fund about 740 completions. The second one is to focus on dividend growth. And we anticipate being able to grow that dividend, or our goal is to grow that dividend higher than the historical average of 19%.
We want to strengthen the balance sheet. And we've targeted a $3 billion debt reduction from 2018 through 2021. And then we will look at additional bolt-on acquisition opportunities, as long as they are competitive on a returns basis with what we see on our premium drilling program and also, value-accretive to share repurchases. And really we want to make this clear that we don't see any expensive M&A corporate acquisitions. So this is how we're doing on those cash flow priorities.
We recently paid off a $900 million bond in early June. So that's a $1.25 billion debt reduction in the first two years of our four-year target. And then the dividend increase at the end of the first quarter of 31% is our second in a row. That's a 72% dividend increase over the last two years and it's our primary method for returning cash to our shareholders. And all this is possible really because of EOG's culture.
If we look at EOG's culture, it’s really made up of the employees. And that culture is rate of return driven where every employee is a business person first. So what we have is we have a decentralized organization, where we have an employee out near the well head where the value is created that we give data and tools to, to be able to make good real time decisions to enhance the value of that well and then empower that employee to make that decision.
We really look at ourselves as leaders in four different areas. We’re leaders in exploration, which gives us a first-mover advantage or a low cost basis for play entry. We're leaders in operations, both on the technical operations side we’re known throughout the industry for stimulation design, as well as technical leaders on the operational execution piece. And really, we’re leaders in information technology.
So we talk about, we generate a significant amount of data. We have to capture that data. We have to transport that data. We have to get that data in a mobile form to that person on location that can make that decision to go ahead and change the well, or change the process on that well to maximize the efficiency of that well, minimize the cost.
因此，如果我们现在就财务方面谈论我们的工作方式 - 让我们看一看 - Slide没有通过。我们走了。我们的计划是产生低于50美元的自由现金流，以及超过50美元的重要自由现金流。真正的问题最终结束了，您将如何处理现金流？实际上，我们将现金流分配到几个桶中。第一个是资助高回报溢价钻探。今年，我们将资助约740次完工。第二个是关注股息增长。而且我们预计能够增加股息，或者我们的目标是将股息增长高于19％的历史平均水平。
And then lastly, we're leaders in sustainability. Our people work in decentralized areas like Jal, New Mexico or Gillette, Wyoming. Those people, we want those people and those communities to be safe, to be environmentally good stewards. And as Arun had said earlier, I've been out of the divisions and in the corporate headquarters for about the last six months. And I can attest, I’ve spent 25 years in the divisions, that, that culture is strong at the area in those divisions, which are near to the well head. And that's really what is going to give EOG its competitive sustainable -- sustainable competitive advantage going into the future.
So with that, Arun, I’ll turn it back over to you.
最后，我们是可持续发展的领导者。 我们的员工在分散的地区工作，如新墨西哥州的Jal或怀俄明州的吉列。 那些人，我们希望这些人和那些社区是安全的，成为环境友好的管家。 正如阿伦早些时候所说的，在过去的六个月里，我已经离开了部门和公司总部。 而且我可以证明，我已经在这些部门工作了25年，那些文化在那些靠近井口的区域中很强大。 而这正是EOG将为其带来具有竞争力的可持续竞争优势的未来。
So let me maybe kick-off the Q&A session. Ken, you spoke a little bit about exploration. Can you give us, maybe at a high level, some of the things that you're doing from an exploration standpoint? And also, just give us any updates, particularly in the Powder River Basin, how some of your delineation efforts are going?
所以，让我开始问答环节。 肯，你谈了一些探索。 从勘探的角度来看，你能否给我们一些你正在做的事情，也许是高层次的事情？ 而且，只要给我们任何更新，特别是在粉河盆地，你的一些划分工作将如何进行？
Sure. High level on an exploration standpoint, we look for acreage that we think will be actually better than what our premium locations, or premium inventory is right now. So it has to have the potential, first of all, to actually be accretive and move it to the front part of our inventory. Secondly, we look in basins that really have a low cost of entry, as well as some existing infrastructure, just because that helps our capital efficiency. So really that's the majority of what we look for on an exploration basis.
In the Powder River Basin, we're currently adding to our infrastructure up there. One of the keys in Powder River Basin is to get additional water, gas and oil infrastructure in place. And as we're doing that, we're delineating some other areas in play.
当然。 从勘探的角度来看，我们寻找的是我们认为实际上比我们的优质地点或现在的优质库存更好的种植面积。 因此，首先必须有潜力实际增加并将其移至我们库存的前端部分。 其次，我们看看真正具有低成本的盆地，以及一些现有的基础设施，只是因为这有助于我们的资本效率。 所以，这是我们在勘探基础上寻找的大部分内容。
在粉河盆地，我们目前正在增加我们的基础设施。 粉河盆地的关键之一是增加水，天然气和石油基础设施。 正如我们正在做的那样，我们正在描述一些其他领域。
Great. In some of our written research, we’ve highlighted how EOG appears to be exploring in the Louisiana Chalk. Without giving us your secret sauce, can you just give us maybe an update on some of the industry activity, what EOG is doing there?
非常好。 在我们的一些书面研究中，我们已经强调了EOG似乎是如何在路易斯安那州的粉笔中探索的。 如果没有给我们你秘密的调味品，你能不能告诉我们一些行业活动的更新，EOG在那里做什么？
Yes, there is additional industry activity in that area. We really don't comment on any of our exploration plays until they reach our premium status, and until there's something material. But we can say that there are additional exploration plays going on in that area.
是的，该领域还有其他行业活动。 我们真的不会评论我们的任何探索剧，直到他们达到我们的优质地位，直到有一些重要的东西。 但我们可以说在该地区还有其他勘探活动。
Okay. Let me keep moving. One of the things that we learned actually sitting down with you, Ken, just a month or so ago. There're some interesting things you guys are doing on the completion side of the business. You highlighted how your spacing is tighter than your peers, and your productivity is at the top end. I was wondering if you could maybe to the audience give us some insights on that next generation of completion design, what you're doing to unlock some of the resources.
好的。 让我继续前进。 我们学到的其中一件事实际上和你在一起，肯，就在一个月左右之前。 你们在业务的完成方面做了一些有趣的事情。 您突出显示了您的间距比同龄人更紧密，并且您的工作效率处于最高端。 我想知道你是否可以向观众提供关于下一代完成设计的一些见解，你正在做些什么来解锁一些资源。
Sure. On a big picture basis, what we're using is we're using some diverter material that actually allows us to touch more rock with our frac jobs than what we've been touching in the past. So that's about the extent of what we want to talk about with that. But at the end of the day, with your stimulation, you really want to be able to touch more rock and touch more rock near the wellbore to maximize the recovery that you see.
当然。 从大局出发，我们正在使用的是我们正在使用的一些转向材料实际上可以让我们用我们的压裂作业触及更多的摇滚，而不是我们过去所感受到的。 这就是我们想要谈论的内容的程度。 但是在一天结束时，通过你的刺激，你真的希望能够触摸更多的岩石并触摸井眼附近更多的岩石，以最大限度地恢复你所看到的。
Okay. The next question I wanted to ask you about is in the Northwest Shelf area, about 163,000 acre position. Can you give us an update of industry activity there and what you guys maybe testing up there? I think you've had a rig there testing maybe the Abo, but maybe an update along those wells?
好的。 我想问你的下一个问题是在西北大陆架区域，大约163,000英亩的位置。 你能告诉我们那里的行业活动的最新情况以及你们在那里测试的内容吗？ 我觉得你有一台钻机测试可能是Abo，但也许沿着那些井进行更新？
Yes. Us and other people in the industry have been, I would call it, poking around and testing some of that area. And as we get anything material, we will bring that up.
是。 我和其他业内人士，我会称之为，探索并测试其中的一些领域。 当我们得到任何重要信息时，我们会提出这一点。
Okay. Just two more from me. You talked a little bit about the ability of EOG now to take advantage of barrels for waterborne barrels. Can you give us maybe an update on your overall marketing efforts to continue to have this -- to have premium for your realizations? And maybe how you're responding to some weakness we've seen in some of the gas and NGL side of the business?
好的。 还有两个来自我。 你谈到了EOG现在利用桶装水性桶的能力。 您是否可以向我们提供有关您的整体营销工作的最新信息，以便继续实现这一目标 - 为您的实现获得溢价？ 也许你是如何回应我们在一些天然气和NGL方面看到的一些弱点？
Sure. Really, the way we look at our marketing effort is, is there's several facets to it. One of them is we really need to have control, or a surety of flow for our product. The other one is we need to be able to have diverse outlets for it, as well as diverse markets, because the market changes fairly quickly. And you want to be able to react to maximize the product price that you're seeing. And then lastly, we want to minimize the amount of commitments that we have, or the amount of committed dollars. So it's really a matrix of all that. And I would say on the marketing side, having them so well integrated within our planning department allows us to plan ahead and be able to get out ahead of any bottlenecks, potential bottlenecks that we see.
当然。 真的，我们看待我们的营销工作的方式是，它有几个方面。 其中之一是我们真的需要控制，或确保我们产品的流量。 另一个是我们需要能够拥有多样化的渠道以及多样化的市场，因为市场变化相当快。 而且您希望能够做出反应以最大化您所看到的产品价格。 最后，我们希望尽量减少我们的承诺金额或承诺的金额。 所以它真的是所有这一切的矩阵。 我想在营销方面，将它们很好地整合到我们的规划部门中，这使我们能够提前计划，并能够摆脱任何瓶颈，我们看到的潜在瓶颈。
And my final question, Ken, you guys had a really -- the company had a really good start to the year when you exceeded consensus forecast for oil and CapEx came in below expectations. I was wondering if you could give us a feel of how you think the rest of the year is shaping up from a capital perspective.
我最后一个问题，肯，你们真的有一个 - 当你超过石油的共识预测并且资本支出低于预期时，该公司有一个非常好的开始。 我想知道你是否能够让我们感受到你如何看待今年剩下的时间从资本的角度出发。
We really haven't given any guidance on that, except for full year guidance. But I would say this, that being able to bring in the high performing rigs and high performing frac crews that we secured in 2018, is really helping us carry a lot of that operational momentum forward into 2019.
Do we have any questions from the audience?
We have about three minutes left I guess.
Okay. Ken, thank you very much. Appreciate it.
好的。 肯，非常感谢你。 欣赏它。
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