We're gonna keep things moving. Very excited to have EOG Resources to present again. They've been long-term supporters of the conference, so I thank David and the IR team for their continued support of the conference. Delighted to have President and COO Billy Helms to present today. Billy's done a fantastic job, you know, spearheading EOG's technology and use of new processes to really drill better wells for lower cost, more safely, and with the better emissions profiles. I'm gonna turn it over to Billy with some introductory comments, and then we'll continue with the fireside chat.
Thanks, Arun. First, I'd like to thank Arun and JP Morgan for having the conference and inviting us to participate. It's always good to be back in New York. I remember last year was the first time I'd been back in New York for a while, and I was excited to be here, and same this year. It's good to see a lot of friendly faces and good people in the industry. I just wanted to throw out this one slide, really just to talk about... This is kind of the starting slide in our investor deck, and it kinda talks about the value creation we see in the company, and really become kind of our mission statement, and that's to be among the lowest cost, lowest emissions, and highest return producers in the industry.
That's what drives us every day. It's about trying to always get better at what we do, no matter how pleased we might be with what our results are. We started the year with pretty good results. In the first quarter, certainly generated solid results. A lot of that underpinned by our foundational plays, the Eagle Ford and the Delaware Basin. On top of that, we've had excellent execution across all of our portfolio of multi-basin properties, and we're seeing a unique opportunity to continue to add to our inventory through our exploration effort. Just looking back the last four or five years, we've added really three key significant growth engines to the company that we see going forward, that being the Powder River Basin, the Dorado play, and now our new emerging Utica Oil play.
On top of that, we feel good about our decades of multi-basin inventory that will continue to grow over time. We're very excited about the future of the company and are going forward or more constructive about the outlook for both oil and gas prices on a long term, medium to long term. It's a good phase to be in the industry. Maybe with that, Arun, we'll turn it over.
Yeah.
To questions.
Billy, before kinda digging down deeper into the company, I know you and the whole team at EOG do a lot of macro work. I was wondering if you could give us your latest thoughts on the oil market fundamentals and how constructive you guys are on oil.
Certainly, yeah. I think it's safe to say right now that the market is trading differently than we see the outlook on the fundamental supply and demand balance. you know, I think, going forward, we're seeing the market continue to tighten and inventories continue to draw down. This last year, you have to keep in mind, the inventories rose largely on the back of the SPR releases. Without that, the inventory would be a lot shorter than we are today. The supply has been muted in the U.S. I think we're looking at oil supply growth being somewhat similar to last year, about, 600,000 barrels per day, year-over-year, plus you add the liquids onto it's a little bit more than that.
U.S. supply growth has been somewhat muted, and then on top of that, the OPEC cuts are starting to manifest. They had their first month, last month, of cuts, and that's gonna continue to stay with us for some time. You know, they extended that through the end of 2024, and then Saudi instituted another 1 million barrel per day cut starting in July. All I have to say is that supply will be limited going forward. On the top of that, demand has grown. It's grown maybe at a little bit of muted pace compared to what I think people were estimating.
A lot of that with China demand, although China is their demand is at a highest level that it's been, and yet, it's not maybe as great as what people anticipated it would be. When it does start to grow again. I think if you break China down, you really look at it, the manufacturing mode has been somewhat muted and declining, but services sector has been growing quite a bit. Altogether, their demand's about 16 million barrels per day, which is an all-time high for them. Once the manufacturing side starts to pick back up again, and it will, demand will continue to rise. Constructively, going forward, I think we're feeling like we're a short term away from seeing the market tighten even further.
I think we're more constructive on where oil prices could go. The market seems to be trading in a kinda wait-and-see mode. We're in a wait-and-see when the market does tighten before they respond with near-term price increases. Now, on the gas side, I think we also see the near term, you know, the rig count is starting to drop, and the gas plays in both Haynesville and a little bit in the, in the Northeast, that will have an impact on supply. Demand has been somewhat volatile with Freeport being offline. Now, it's back online at 2 Bcf a day. Sabine Pass is going through some maintenance, about 1.6 Bcf a day. That's kind of offline now. That should be returning in the next few weeks.
LNG supply or demand should be at its peak back, you know, here in the next few weeks. Going forward, the supply kind of waning from the Haynesville and other places, should see a little bit more constructive outlook for near term for gas. Longer term, we're still more constructive, medium to longer term. Once the LNG, next wave of LNG capacity starts to grow back in 2025 and 2026, it should be more supportive for a constructive view going forward on natural gas. I think medium and long term, both oil and natural gas were more constructive.
I want to talk a little bit about or ask you about, capital allocation. As we think about this year, you're relatively flattish in the Delaware.
Mm-hmm.
Quite a few more tills in the in the Eagle Ford. What was driving the kind of relative capital allocation this year?
Obviously, we always allocate as a return-based company. We always allocate based on returns. We're generating solid returns in both those plays. In the Delaware Basin, though, in the Permian in general, that's the area with the highest level of activity in the country. That's not an area that we want to necessarily grow activity in the sense that's where you also see the most labor constraints, that's where you see the most service constraints. What we wanna do is try to maintain a flat level of activity there. We'll still grow volumes in that area, but with a flat level of activity.
That way, they can continue to work on continuous improvements, drive efficiencies in our business, get better at drilling the wells and completing the wells, and overall, lower the well costs. Now, in the Eagle Ford, we did increase activity there relative to last year, but it's back to the same levels of activity we had the year before. It's just getting to a level in the Eagle Ford where we can maintain a consistent level of production in that play. I might say on the Eagle Ford, it's a good example of how all these plays will mature over time. The Eagle Ford, naturally, we've been drilling that field for 12, 13 years now, and we drilled the best wells in that play early on, as you naturally would. You always wanna drill your best wells first.
Since that time, we've lowered the well cost enough, so if you look at the returns we're generating on that play, the last two years have generated the highest returns in the history of that play. That's because we've lowered the well cost so much, we've gotten a lot more efficient at what we do, that we're generating higher returns today than we did 10, 12 years ago. That's the way I think you'll see the evolution of these plays work. You'll drill your best quality wells first, and then as you improve and get more efficient and drive sustainable improvements in your cost structure going forward, you'll move down the ladder in your lower-tier plays.
Billy, how should we think about other of your premium plays? Capital allocation, you mentioned early on.
Mm-hmm.
the Utica oil play. You got the PRB, which I think is gonna have a couple of rig lines there this year.
Yeah. On top of that, on the top of the Delaware and the Eagle Ford, what you're gonna see is continued allocation of capital towards these emerging plays. The Powder River Basin is gonna have a little bit more activity this year. We'll drill about 40 wells, and more than half of those will be in the deeper target, the Mowry formation. We're pretty excited about what we're seeing there on the early time results from their development program there. Then some of the capital will be allocated to Dorado. We're gonna increase activity there slightly. On the drilling side, we're choosing to delay some of the completions just till the near term gas prices have fallen back a little bit.
With running two rigs in that play, we'll probably complete or drill about 30 wells, a few more than last year. We're starting to see the efficiencies coming through our business by maintaining a steady drilling activity. We're pretty excited about what we're seeing there early on. The newest play, the Utica Oil Play, as everybody knows, that's in the oil window of the Utica Play. We're seeing tremendous results early time from some of our initial wells, and we expect that to continue to improve going forward. We've got to build out some of the initial gathering lines to be able to fully develop that property. It'll be a little bit of activity this year, 15 wells or so, and then we expect that to grow in the future.
You'll continue to see increased amount of capital allocated to these emerging plays on a go-forward basis.
I want to ask you about, you know, M&A. You know, you guys have rarely done M&A. I've been watching you since the late '90s. Your cash balance is gonna swell to above six and a half billion dollars by year-end.
Mm-hmm.
That's versus $3.8 billion in net debt. You're gonna have a pretty significant net cash position. Investors have been thinking about, are they building cash to
Mm-hmm
... potentially use for strategic M&A? Maybe some thoughts on that.
First of all, we do covet a strong balance sheet. That's one of the assets we really hallmark as the company. I think having a little bit of extra cash on the balance sheet when you're in a volatile commodity business is probably a good thing. Yes, we're not really at a point where we're looking at doing a lot of M&A. You know, we did do the Yates deal back in 2016. I think most people recognize that as a very value-added deal that we did back that, at that point, and largely because it had a tremendous amount of upside. When we bought that property, we actually increased activity, drilling those properties sooner.
It spoke to the fact that we value that inventory at a pretty high margin. We increased activity there. I think as we think about M&A-... does the inventory that we would add through M&A actually compete with what we're drilling today? Or does it go to the back of our inventory and then get drilled for, say, 10 years? In that case, it really doesn't make a lot of sense to be spending that kind of capital on the inventory that we're not gonna drill for a long time.
That's just kind of the way we think about large-scale M&A, and the fact that we continue to add high-quality plays that compete with the top of our inventory through our exploration program, I really don't see the need to rush out and add a large M&A to our portfolio.
Okay. Let's talk a little bit about cash return. For the generalists in the audience, can you discuss your capital returns framework?
Sure. We're definitely committed to returning cash to the shareholders. We've come up with a formula that says we'll commit to return a minimum of 60% of our free cash flow every year to our shareholders through the form of a regular dividend. We view the regular dividend as, again, a very valued part of our company. It's hopefully a growing and sustainable dividend. We've never cut the dividend. We've grown it quite significantly over the last several years, and we stress test that at low commodity prices before we decide to increase it, to make sure it is sustainable. That's our number one form of returning cash to the shareholders. The second one is through making sure we have a strong balance sheet. We've already talked about that. That's certainly a priority.
The third form would be through some form of specials, special dividends or share buybacks. We'll venture into the share buybacks when we see the opportunity to do so at a value-added proposition. We're also very familiar with the history of our industry, in general, of buying shares back when commodity prices are high. Correspondingly, that's when your share prices are high. We wanna buy the shares back when we see the opportunity to add it at a disconnected price to what we think the market is indicating. We did so in the first quarter, I think we'll continue to look for opportunities to do that on a go-forward basis. That's kinda how we think about it.
The last part would be for the extra cash, is it comes in pretty handy to do small bolt-on acquisitions or do things kind of out of cycle, like buying casing at low prices, those kind of things.
One thing to think about, since 1929, dividends has represented about 40% of the return in S&P. I do think having a strong dividend is a good value-added proposition for investors. Let's talk about free cash flow. You guys have outlined $5.5 billion of free cash flow at $80. You obviously were a little bit below that level. Any broad thoughts on the sensitivity of, you know, your cash flow, free cash flow to oil and gas fluctuations?
Yeah. Just on a general rule of thumb, for every dollar change in oil price, it's about $135 million to free cash flow. For every $0.10 of change in gas price, it's about $35 million of free cash flow. In general, that's a rule of thumb, but I think the more underlying thing is that the company's been embarking since we adopted this Premium Strategy back in 2016. The company's been trying to insulate ourselves from the changes in commodity prices, so our break-even price is now in the low forties. That really helps insulate the company from changes in commodity prices. It knows we can generate solid returns at whatever the oil price is.
Billy, the company bought back, I think, $310 million of stock in 1Q. Obviously, we had some market dynamics. We had a, you know, mini banking crisis, a lot of volatility in the market. As the board and management team think about allocating, you know, free cash flow to special dividends, or buybacks, you know, how would you frame the go-forward, you know, plans for the company?
Really, on that lot, the strategy really hasn't changed. I think we want to continue to look for opportunities to buy the shares back when it makes sense, when we see that disconnect from the fundamentals of the business. If we see those opportunities, we're gonna lean in and try to buy the shares back versus provide special dividends. On the off times, when oil prices are higher and the stock's doing well, we think that's a good time to reward the investors with special dividends. I think we're gonna be flexible on that, but the strategy really hasn't changed. We're gonna be very disciplined when it comes to applying that technique.
Okay. Next topic I want to ask you about, just the overall portfolio, how things are going in the field.
Mm-hmm.
This year's guide, in terms of well costs, we'll start there, was about a 10% increase. Last year, I don't know how you did it, but you held the line at +7%.
Mm-hmm.
Can you discuss kind of the state of your supply chain, how you're contracted, and what is the potential for maybe CapEx to come in below the midpoint of your guide, given some of the deflationary pressure?
Well, that's always my goal, to come in at or below the guide, to be honest. Part of that answer is the tremendous amount of flexibility we have with a multi-basin portfolio. We can move things around to make sure we can hit our targets, both on the capital side as well as the volume side, and hit all of our other financial metrics. Having that flexibility is a unique advantage in the company. We started, as you mentioned, last year, we probably saw, I don't know, 15%-20% inflation in our business, we were able to keep our well costs within 7% of the previous year.
We came in this year believing that we would see rig counts fall off, although I think they've fallen more than we thought they would, especially on the oil side of our business. We, you know, we saw the rig count peak back in November of last year, and by the time we came out with our plan in January, it had already fallen off some. We expected prices to moderate as we went through the year. I'd say we're pretty well on target to keeping our well costs from rising any more than another 10% going into this year. We're seeing the service constraints and prices fluctuate between basins. I think some basins, we're seeing more deflationary pressure than other basins. Speaking to the advantages of having a multi-basin portfolio.
We talked earlier that most active area in the industry today is the Permian Basin. You're seeing less downward pressure on prices there, just because I think there's still a lot of activity there to drive prices. Some of the areas that other areas we're seeing, we're definitely seeing prices come down, and we'll continue to moderate that or monitor that as we go forward. Our contracting strategy is to try to lock in about half of our well cost each year, going into that next year, through a variety of different contracts, and they're always staggered to some degree. It leaves us very available to take advantage of opportunity to reduce costs.
On top of that, I think, rather than being subject to service cost pressure or inflationary pressures, what we try to do in the company is really drive sustainable cost savings through our operations, trying to always get better at what we do. Drilling wells faster, more efficiently, completing wells faster and more efficiently, those kind of things, we believe drives sustainable cost reductions. You've seen that play out in our business. If you look at our financials, you've seen our unit costs come down over the last several years. Our finding costs come down over the last several years. We had a $5 per BOE finding cost last year in the company. That rolls through your DD&A rate, helps you generate higher margins, both on a cash and an income basis.
That's the kind of sustainable value added we try to do in the company, and we're pretty excited about some of the initiatives we're undertaking this year to do that.
Billy, shale has matured. You know, we've been, you know, you mentioned you've been drilling wells in the Eagle Ford for 12 or 13 years. One of the biggest questions from the buy side is duration and inventory depth.
Mm.
Can you give us some thoughts on how you feel about your inventory depth of, you know, premium, double premium locations?
Thanks for that. I think one of the last things we worry about is inventory depth, to be honest, in the company. We've given you a slide, I think. I'll just go ahead and refer to it a minute. I think it's. Let me find this. Right there. Slide seven in our deck, if nobody's seen this, it gives you a look at not only the inventory and resource potential. We've switched to a resource potential because as an industry, we're starting to drill longer laterals. As you drill longer laterals, your well count naturally will go down over time. The resource potential is still the same. We've got over 10 billion barrels of equivalent of resource potential at a finding cost of less than $10 a BOE.
That medium F&D cost of $5 a BOE continues to drop over time. Why is that? Just because we continue to add things that are more competitive today than they were several years ago. We're adding things to the top of that inventory that would compete with our drilling program. That's coming from our exploration effort. We just talked about the three new plays we've added that are gonna be emerging over the next several years. Those are things that are really competing. I'm not worried about being able to continue to add to that going forward, and it's already a high quality and multi-decade inventory list that's high return.
Okay. Billy, as you shift, towards newer plays, the Utica, Powder River Basin, how do you think about capital efficiency on a go-forward basis? This has been maybe a concern of investors...
Mm.
That you go from drilling wells in Lee County, which is some of the best acreage in the Lower 48.
First of all, yeah, on the Delaware Basin, let me just touch on that a minute. We're very pleased with our execution and the performance we're seeing from the wells. I'd say we're not seeing a degradation in well performance there, and we added some slides in our deck this last quarter to address that. I think you have to look at the mix of wells and the targets to understand the quality of the wells and the oil mix versus the gas mix. We're seeing the same level of performance this year and expect that same level going forward by target to be consistent going forward. We're not worried about the degradation of the quality of our inventory. It's meeting our expectations as we move on.
Naturally, as you move to a gassier mix, Dorado will be at 100% gas. You'll see on a capital basis, you'll see that roll out. On a BOE basis, we think the capital efficiency will continue to improve going forward because of the quality of the assets that we're adding.
Delaware Basin, on the 1Q call, you highlighted a new completion design that could result in a 20%+ uplift in recoveries, I think, from select intervals?
Mm-hmm.
Can you maybe give us a little bit more color on that?
You know, as a company, we're always trying to provide innovation to all of our operations. We're also being in a multi-basin portfolio. I've said that many times, but we transfer technology between plays at a rapid pace. We take learnings from one play and apply to the other. This new technique we're applying in the Delaware Basin is something we actually generated in the Eagle Ford. We're trying to apply it to other areas, including the Delaware Basin. We've learned that it's not gonna work on every type, on every target. It's gonna be applicable to a lot of the deeper targets that we're seeing in. We're seeing dramatic improvements in the productivity, both near term and long term.
We think we're seeing about a 20% uplift near term. That sustains itself long term through the play. That's pretty impactful to be able to do this. It involves understanding the rock mechanics of the target intervals that we're selecting to make sure this is applicable. Then it involves constructing the well bore in a way that lends itself to this new technique. Those two things allow us to be able to execute this program. We're very excited about it. We've done about 40 wells so far this year. We'll probably do about 70-ish wells this year in total, but we expect to expand that going forward. We're also trying to leverage that technique in other plays as we see it would benefit.
Two more questions, and I'll turn it over to the investors. What are the nearer term plans in the Dorado play, just given the softness we're seeing in the gas strip?
Near-term plans, Dorado, as I mentioned earlier, we're running 2 rigs there to really continue to gain the efficiencies on the drilling side, and we're seeing the benefits of that as we speak. On the completion side, what we elected to do, rather than have a continuous frac fleet working in that Dorado play, we scaled that back. We're gonna share a frac fleet between it and other areas, namely the Eagle Ford area. We still get some economies of scale. We're testing some zones. We are completing a few wells, but we've scaled back the completions there just in light of the pullback in gas prices and reallocating that capital throughout the company.
Okay. Just one question on exploration. Can you give us an update on how things are going? Obviously, I think we're excited about Beehive, which you could test then next year.
You know, I think the safe thing to say is the exploration effort in the company has never been stronger than it is today. We've got a lot of opportunities we're chasing. Some are further along, like Beehive, that in, off the coast of Australia. We're excited to test that. Everybody, I think, it's a well-known, industry-known, fact, that it's a large undrilled structure. We're taking some of the expertise we have in the company. Outside of drilling horizontal wells, we're also very good at shallow water, offshore drilling, and we've been doing that in Trinidad for about 30 years. We're leveraging some of that expertise into other offshore areas, Australia being the first one. We expect that well to be drilled sometime in 2024. We're also excited about some other opportunities we're chasing.
I think exploration-wise, the company continues to be very pleased with the early signs of the success we're seeing in some of these other plays, and that's encouraging us to look at new ones.
Great. Why don't we turn it over to the audience for a couple questions? Okay, let me keep going. Can you talk about the Utica Shale? What are some of your delineation activities? I sense some excitement on some of the initial results.
Yeah, that. We're very excited about the Utica Play. It's, you know, just to look back at the play, it's probably taken us about three years to put together the acres position in that play. We did it at a low cost, which we think is a very value-added part of our business. The early delineation wells we've tested so far are meeting all of our expectations. We're very excited about the potential of that play. There's enough well data across the play, too, that gives us confidence that we'll be able to continue to see consistent results throughout the play. This year, we're gonna strive to drill and complete about 15 wells as we build out some of the initial gathering infrastructure there that's needed.
With the success there, we expect to increase activity in the following years.
Okay, got a couple questions.
Pardon me. Just on the Utica play, do you own, do you own the levels above and below that, or do you just target that one? Do you just buy that? I know some operators have the top but not the bottom and so forth.
No, we own pretty much the Utica window. We own some other depths as well, but the target really is for the Utica, the Point Pleasant play.
We have one in the back. Sorry, pardon.
Just to follow up on that, what's the oil content? I mean, historically, it was a lot of NGLs, I think, and there was historically, I think, condensate issues that people always struggled with.
Yeah. No, that's a good question. Just to make sure everybody understands, this is in the black oil window. It is a low gravity, 38-40 gravity oil, and it's about a third oil, third NGLs, and third gas. These wells come on at a pretty good rate, probably in the order of 2,500 barrels of oil per day, plus 2 million-3 million in gas. The biggest part of the mix is oil early on, which drives the economics of the play. It's not a condensate play. It's not a gas play either, that we have to worry about takeaway. It's predominantly an oil play, and so building out the gathering lines is the kind of the necessary part of making sure you produce it more efficiently.
We're very excited about the potential of that play.
All right, Billy, we're out of time. Thank you so much.
All right. Thank you, Arun, and thanks, everybody, for the support.