Good day, everyone, and welcome to the EOG Resources 2016 Second Quarter Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.
Thank you, and good morning. Thanks for joining us. We hope everyone has seen the press release announcing Q2 2016 earnings and operational results. This conference call includes forward looking statements. The risks associated with forward looking statements have been outlined in the press release and EOG's SEC filings and we incorporate those by reference for this call.
This conference call also contains certain non GAAP financial measures. The reconciliation schedules for these non GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com. The SEC permits oil and gas companies in their filings with the SEC to disclose not only proved reserves, but also probable reserves as well as possible reserves. Some of the reserve estimates on this conference call and webcast may include potential reserves or other estimated reserves not by reference the cautionary note to U. S.
Investors that appears at the bottom of our press release and the Investor Relations page of our website. Participating on the call this morning are Bill Thomas, Airman and CEO Gary Thomas, President and Chief Operating Officer Billy Helms, EVP, Exploration and Production David Treiss, EVP, Exploration and Production Lance Terveen, VP, Marketing Operations and Cedric Berger, Senior VP, Investor and Public Relations. An updated IR presentation was posted to our Web site yesterday evening and we included guidance for the Q3 and full year 2016 in yesterday's press release. This morning, we'll discuss topics in the following order. Bill Thomas will review our shift to premium drilling and the long term growth outlook we introduced in yesterday's press release.
Billy Helms and David Treiss review notable achievements in select plays. I will then discuss E and G's financials and capital structure and Bill will provide concluding remarks. Here's Bill Thomas. Thanks, Tim. Good morning, everyone.
ENG's goal during this downturn has been squarely focused on resetting the company to be successful in a low commodity price environment. We are focused on lowering operational costs and achieving a strong return on capital invested in a $40 oil environment. Our goal is to continue to be the leader U. S. Leader in investment returns and be competitive with the lowest cost producers in the global oil market.
On this call this morning, we have important updates that highlight significant progress towards reaching our goals. First, per unit lease operating costs decreased by 27% in the first half of twenty sixteen versus 2015 and per unit cash operating costs in the first half are down 15% compared to full year 2015 and 30% below 2014 levels. 2nd, with outstanding capital efficiency gains, we exceeded the high end of our 2nd quarter U. S. Oil production target and we are increasing our full year U.
S. Oil forecast by 2% without increasing CapEx guidance. 3rd, we have increased our premium inventory by 34% and increased our premium reserve potential by a whopping 75%. And 4th, we closed on $425,000,000 of non core property sales this year. Along with maintaining our strong balance sheet, we are upgrading our portfolio by investing in high return premium assets.
As a reminder, a premium well is defined by an after tax direct written return of at least 30% at $40 oil. We believe this metric makes EOG unique in the U. S. When it comes to quality of inventory and investment returns. There are a few additional points regarding this definition of premium that I want to be sure are very clear.
Number 1, 30% is a minimum return. This means the average return for our premium drilling inventory is clearly higher. Number 2, 30% was selected as a minimum so that the fully loaded investment, including all indirect costs, generates a healthy all in corporate rate of return. Number 3, 30% at $40 oil is the premium benchmark regardless of what the prevailing market price for oil is, meaning if oil goes to 50 or 60, the returns quickly move into the triple digit range. Finally, premium inventory is a return based metric.
It can be achieved by cost reductions or productivity increases or a combination of both. Because our technical and efficiency gains are sustainable, we are confident that a large majority of our remaining inventory will be converted to premium over time. EMG's shift to premium is a new chapter for the company. Premium Joint establishes a higher permanent standard for capital allocation and therefore will significantly increase capital productivity over time. This shift enables EOG to deliver high return, robust growth using far less capital at a far lower oil price, which leads me to another highlight from yesterday's press release, the 2020 growth outlook we provided.
Due to the sustainable gains and well productivity and cost, we can grow oil production at a 10% compound annual growth rate at $50 oil. At $60 oil, our compound annual growth rate jumps to 20%. And most importantly, we can deliver that oil production growth while covering our capital expenditures and our dividend with cash flow, enabling us to meet our goal of maintaining a strong balance sheet. As prices improve, we expect to incrementally reduce the net debt to capital ratio to our historical norm of 30% or less, generating free cash flow and to a lesser extent through non core property sales. While the shift to Payum Drilling had tremendous impact on EOG's returns, growth and capital productivity, the question remains, is this shift really permanent?
In other words, can EOG continue to replace its premium inventory? And the answer is yes. The 3 ways we add premium inventory are conversion, exploration and acquisition. The first and most immediate way is through conversion. Converting well locations that were on the edge of the 30% hurdle rate is a source of the 1100 new premium locations we announced yesterday.
Furthermore, we have much more inventory on the verge of conversion. By improving well productivity or lowering cost, in both cases, both, we expect much of our current non premium inventory in the top basins to be converted to premium over time. Improvements to well productivity and cost savings are ongoing and never ending. In a moment, Billy Hounds and David Truss will talk more about how productivity improvements, cost reductions and longer laterals will add to premium inventory. The second way we add premium inventory is through exploration.
EOG is a leader in organic exploration growth because at our core, we are an exploration driven company. In this lower commodity price environment, we have not stopped looking. With EOD's decentralized structure, we have 6 experienced exploration teams in the U. S. Generating new ideas, acquiring leases and developing new plays.
EMG is a prospect generating machine and our shift to premium has not slowed that effort down. In fact, it has enhanced the return hurdle by which new plays are evaluated. The third way we expect to add premium inventory is through targeted bolt on acquisitions. Due to the current low commodity price environment, we are actively pursuing opportunities to capture top tier acreage. We were successful on 4 such transactions in the Delaware Basin last year and are optimistic we can execute on more through this down cycle.
I'm confident we can replace premium level drilling every year through conversions, exploration and acquisitions. And as I said last quarter, this shift to premium drilling is a permanent and it's a game changing event for EOG. Now I'll turn it over to Bill Helms to discuss the Eagle Ford. Thanks, Bill. As highlighted in the press release yesterday, we added 3.90 net locations to our Eagle Ford premium inventory.
That's a 25% increase to our original estimate 6 months ago and takes the total premium well count in the Eagle Ford to almost 2,000 locations. 2,000 locations represents 10 years of premium high return drilling. What's more, there are at least 2,000 more Eagle Ford locations that are on the verge of premium designation. To convert these locations, we only need to reduce current well cost by 10% or improve EURs by 10%. Slide 11 of our investor presentation illustrates this.
By making small, very attainable improvements, we can add another 10 years of premium, high return Eagle Ford inventory from our existing acreage. I'm confident we will make this conversion over time. One of the ways we convert locations to premium is by drilling longer laterals. Our success in the Western Eagle Ford as illustrated on Slide 9 is a good example. The trick with longer laterals is to maintain or preferably enhance productivity per foot of lateral.
Due to engineering breakthroughs and EOG's completion design, we have gone out as far as 2 miles with no degradation in productivity per foot. While longer laterals will be one source of future premium inventory, 2 more significant sources will be EOG's focus on performance improvement through advancing our technical understanding and lowering cost. On the technical side, geological and geophysical advancements enable us to refine our precision targeting efforts. For example, we are determining where there may be multiple Lower Eagle Ford targets to support drilling a W pattern. We are also working to understand where the Upper Eagle Ford is prospective.
While the prospective area for the Upper Eagle Ford is geographically limited, there are some sweet spots that may contribute premium well locations. Finally, as we discussed last quarter, we will be completing 7 additional Austin Chalk wells and continue to delineate the play and understand its full potential. On the cost side, we are finding creative ways to drive cost down further. We are drilling more wells per pad with more efficient rigs designed for pad drilling. The rig design allows for simultaneous operations such as conducting drilling and cementing operations on multiple wells at the same time, reducing both time and cost.
On the completion side, we continue to optimize proppant schedules and stage lengths, reduce costs for items like sand and chemicals, while maintaining the DOT high density completion process. Our continuing focus on every facet of our operations has allowed us to drop Eagle Ford total well cost another 11% year to date to $5,100,000 Also, we continue to be encouraged with our enhanced oil recovery or EOR projects. As a reminder, the process is highly economic and provides another way to create premium inventory. It not only increases the recovery, but also provides a means to flatten the field production decline. Finally, I'll draw your attention to slide 23.
We added another line to the chart representing 2016 year to date cumulative production. Year after year, we improved our well productivity in the Eagle Ford. Much of this year's increase can be attributed to our shift to premium drilling. However, as Slide 5 illustrates, just 60% of our 2016 drilling program is premium. So we expect to see this chart show improvement for many years to come.
Now here's David Truss. Thanks, Billy. Like the Eagle Ford, the Delaware Basin also added to its premium drilling inventory. 520 net locations were added across all three plays: the Wolfcamp, Second Bone Spring and Leonard. The new premium total now stands at more than 1700 locations.
That's almost 20 years of premium high return drilling. In the Delaware Basin, the main driver of premium additions was improvement in well productivity through better targeting and completions. For example, Slide 7 of the investor presentation shows EOG's 2016 Wolfcamp oil wells produced more than 200,000 barrels equivalent on average in the 1st 180 days. That's a 17% increase in 180 day cumulative oil production over wells in our 2015 program. More importantly, it shows a 45% uplift over a typical 750 MBOE well, which is the gross per well EUR given our last Wolfcamp update.
Finally, it's worth noting that the data in this chart is normalized to 4,500 foot laterals, meaning EOG's 4,500 foot laterals in the Delaware Basin are as good or better than 10,000 foot laterals in the Middle Basin. In addition to productivity gains, longer laterals in the Delaware Basin are another way we've added premium locations to the Wolfcamp as well as the other two plays. Innovations made to wellbore design in the last 6 months allow us to drill longer while still applying high density completions so that we do not sacrifice long term reserves. The new design will allow us to maintain high recovery rates on the longer laterals while lowering costs and increasing returns. 16 Gross Wolfcamp oil and combo wells were brought online in the 2nd quarter with an average 30 day rate of more than 2,400 barrels of oil equivalent per day and an average lateral length of 6,500 feet.
These are industry leading Wolfcamp results regardless of operator or basin as shown on Slide 8 of our investor presentation. EOG expects to complete 70 Wolfcamp wells in 2016. While the effort in the last couple of years has clearly been focused on the Wolfcamp, we have been able to collect a tremendous amount of data on all of the shallower targets such as the Second Bone Spring and the Leonard Shale. Despite limited drilling this year, results in the 2nd Bone Spring have also been impressive. 90 day cumulative production has increased 27 percent over 2015 wells and 60% better than a typical 500 MBOE well.
The second Bone Spring tends to be more We expect similar or better uplifts to our Leonard Shale results on the We expect similar or better uplifts to our Leonard Shale results on a go forward basis. In the Rockies, we've had great success in the Powder River almost 2,000 barrels of oil equivalent per day. Completed well costs, which include drilling, completion and on lease facilities averaged $5,400,000 or a 6,500 foot lateral, down from $6,500,000 in 2015. These Turner wells are incredibly economic at $40 oil. We plan to drill a total of 20 net wells in the Turner this year.
When we conducted our first count of premium inventory in December of last year, the DJ Basin Codell in Wyoming was slightly below the premium threshold. Due to sustainable cost reductions and better targeting, we added 200 premium locations in this play. Currently, Codell wells cost $5,900,000 for a 9,400 foot lateral. As noted in our press release yesterday, our latest Codell well produced 1400 barrels of oil equivalent in the 1st 30 days. We expect cost and well improvements to continue and are working to expand gas takeaway options in Wyoming.
The DJ Basin Codell will become a larger part of our premium drilling program in the near future. In the East Irish Sea, I'm happy to report that Conway is currently producing approximately 10,000 barrels of oil per day. During the Q2, Conway was down due to issues on the Douglas production platform. While Conway wells were initially tested at daily rate over more than 20,000 barrels of oil, results from recent production testing indicate optimal level of production is 10,000 barrels of oil per day. For the remainder of the year, we expect to average about 4 1000 to 8000 barrels of oil per day to accommodate further tests and potential downtime.
Here's Tim Drewers. Thanks, David. Capitalized interest for the Q2 2016 was $9,000,000 Exploration and development expenditures were 6 $24,000,000 excluding property acquisitions, which is 49% less as compared to Q2 2015, while our total production volumes decreased by just 2%. In addition, expenditures for gathering systems, processing plants and other property plant and equipment were $20,000,000 We have maintained our full year capital expenditure guidance of 2.4 $1,000,000,000 to $2,600,000,000 At the end of June 2016, total debt outstanding was $7,000,000,000 and the debt to total capitalization ratio was 37%. At June 30, we had $780,000,000 of cash on hand, giving us non GAAP net debt of $6,200,000,000 or net debt to total cap ratio of 34%.
Year to date, medium sold $425,000,000 of assets with associated production of 45,000,000 cubic feet per day of natural gas, 3,300 barrels of oil per day and 3,700 barrels per day of NGLs. Assets sold include Midland Basin and Colorado DJ Basin properties. The effective tax rate for the 2nd quarter was 23% and the deferred tax ratio was 214%. Now I'll turn it back over to Bill. Thanks, Tim.
Now I'm brief forward on our macro view and how it relates to our 2016 plan. Even though oil prices have been volatile, our view of supply demand fundamentals has not changed. We believe $40 oil will not provide enough cash flow or investment return to overcome the combined effect of production decline and demand growth worldwide. While EOG can deliver healthy growth within cash flow at $50 oil, we continue to believe the U. S.
Horizontal oil industry as a whole needs a sustained $60 oil price and extended lead time to deliver a moderate level of growth. As we discussed last quarter, the sustainable reduction in capital the substantial reduction in capital investments by the industry since 2014 is causing oil supply to decline in many producing regions worldwide. As production continues to decline, the inventory overhang will slowly work off. The consensus view is the market will balance during 2017. For 2016, given the uncertainty of the current commodity environment, we are maintaining our CapEx guidance at $2,400,000,000 to $2,600,000,000 However, as a result of cost savings, we are increasing our well count to 250 drilled wells and 350 completed wells.
This is an additional 50 wells drilled and 80 completions above our original plan for the same CapEx. In summary, I would like to leave you with the following important takeaways from this call. Number 1, we continue to reduce operating costs. We believe these reductions are sustainable and we have additional efforts underway to reduce future operational costs. Number 2, our shift to Pareum is achieving what we believe are the strongest investment returns at $40 oil in the U.
S. Number 3, our shift to premium is permanent. We are confident we can grow premium quality inventory much faster than we drill it. Number 4, we continue to exceed our U. S.
Production targets by increasing capital efficiency. We believe these efficiency gains are sustainable and give EOG a significant advantage as we enter the next recovery. Number 5, we are maintaining our strong balance sheet through disciplined spending. I'll close this call with our view of BOG's future through 2020. There are 4 goals we plan to achieve.
The first goal is to be the U. S. Leader in rate of return on capital investments. The second goal is to be the low cost U. S.
Producer and therefore competitive in the global oil market. Our third goal is to be the leader in lower 48 absolute oil growth through 2020. And our 4th goal is to maintain a strong balance sheet through disciplined spending. By achieving these four goals, we will accomplish our ultimate goal of creating long term shareholder value, producing growth by consistently outstanding and drilling uneconomic wells is not in EOG's vocabulary. We firmly believe that growth should be the result of strong returns and disciplined spending.
EOG's unwavering commitment to our long term shareholders is to focus on returns first. The company is uniquely positioned to produce strong returns and resume high return growth as commodity prices improve. Thanks for listening. And now we'll go to Q and A.
Thank you. The question and answer session will be conducted electronically. And if you would like to ask a question, And we will take our first question today from Evan Tallyou with Morgan Stanley. Please go ahead.
Good morning, everybody, and good results to close out earnings here. My first question, Bill, is how quickly can you get into that the 10% annual growth rate at the bottom of your new growth at 50%. It looks a little bit back end loaded on Slide 14. And I guess my question is, did the DUCs allow for a faster turn? And what signals do you need to add rigs to move towards these targets?
Yes. Of course, Evan, the driver is oil price. And if oil prices improve above the $50 level, the oil capital will have and the faster we'll ramp up our activity. We're not limited on beginning out very significantly. We have ongoing operations and enough rigs and equipment going now and the DUCs really help us get off to a good start.
But it is, as you can tell from the chart on 14, it's not 10% every year. So 2017 will start off incrementally at a lower rate and then we'll build from there as we go forward. And of course, as volumes grow, cash flow grows too. So the process kind of multiplies itself as we go forward.
What drives that higher growth in the back end of the decade? I mean, does that reflect the EUR based decline management? Or is that all an effect on from premium locations?
It's the whole driver for us being able to grow at these kinds of rates these low oil prices is really the switch to premium and the lowering of the well costs at the same time. The productivity of the wells is just a tremendous uptick from where we were in 2014. And so the capital efficiency, I believe, has more than doubled since that time. We did not put in the outlook, we did not put any EOR investments in there or production response. So that's really not a part of the outlook that we've given you.
Of course, the EOR has great capital efficiency. It's just as good as premium, and we'll work that in over time as it's appropriate.
Great. I'll leave it there for
some else. Thanks.
And we'll go to Doug Leggate with Bank of America Merrill Lynch. Please go ahead.
Thanks. Good morning,
everybody. Bill, it's pretty exciting, obviously, to see the formal change, I guess. I guess the question I have is, you could pretty much assuming you're right on the macro, you could pretty much assume to grow at whatever pace you want
as it relates to inventory. I'm guessing a 10% hurdle is not, for your track record, that difficult to achieve. So what are the constraints that you see to EOG's growth aspirations as
it relates to people, infrastructure and maybe even a switching capital towards EUR or back to shareholders? Yes, Doug. The constraints would be I think the biggest one would be we don't want to lose the capital efficiency gains that we have built in right now. And so we don't want to go so fast that we're bringing in equipment and people and spending money and drilling wells and really lose these efficiency gains that we've done
right now. So if oil, say
went to 70 or 60 or 70 really quick, we can ramp up appropriately, but we wouldn't do it overnight. We couldn't do it overnight and we would have to build up the service quality and we would certainly want to maintain our efficiencies that we've already built in. That's the one thing
we don't want to do. Of course,
we want to focus on our balance sheet and to get that net debt to CapEx down to that below the 30% also. So, I'll think I'll let Gary Thomas kind of chime in on that. He can give us some color on that. Yes. As Bill is saying, the premium drilling is what helps us with the growth forward because it just requires fewer wells and we'll not be having to ramp up to the number of rigs that we had for instance in 2014.
And another reason is because of the productivity by rig that you could look at Exhibit 20 showing that. But we've got kind of a plan in place to be able to ramp up, to maintain our efficiencies and more than likely continue to reduce our costs. Yes. To answer your question on moving to buyback shares, that's really not in our plans at this time. We're not opportunity limited.
I mean that's an important part of the process is that we geologically don't have an opportunity limit there. So we would ramp up appropriately to maintain the discipline and to reduce the debt at the same time. Bill, I
appreciate the detailed answer. Hopefully, my quick follow-up is, I just thought on the balance sheet, clearly, there's going to be some assets that don't maybe don't make it into the premium inventory. So as you now made this permanent shift, rather than get specific, could you kind of quantify for us what impact on your base production do you think disposals could ultimately represent? Because that would amplify the implied growth rate going forward? I'll leave it there.
Thanks.
Doug, on the oil growth rate, I don't believe it's going to impact it significantly at all. The things that we targeted this year are mostly gassy properties to sell. And as we go forward, they would need to be kind of comboist or gas properties going forward. So on the oil growth, property sales shouldn't be a factor much at all. Appreciate that.
Thanks, guys.
Next is Pierce Hammond with Simmons. Good
morning and thanks for the helpful long term plan. My first question is given the rise in completion activity, do you believe you have enough access to enough Texas based finer sands? Or will you need to use more of the white sands potentially requiring you to reactivate your Wisconsin mines?
Pierce, we have both available to us. We've been working on our own Texas mine and plant and expanding there as far as our capability as well as working on our Wisconsin plant being able to reduce cost and put in place improved transportation. So we believe that we have adequate sand and we believe we've been able to lower our sand cost as well and we're seeing that helping our cost here in 2016. So we've got plenty of sand available. We feel like we've got most all of our resources available to us as well.
The thing that's really helped us during this downturn is we've been able to just continue increasing our efficiencies. And before, I probably mentioned that we thought that as far as our cost reductions maybe 2 thirds were sustainable. With what we've seen here from 2015 going to 2016, we've lowered our well cost in all of our areas somewhere 11% to 13%. And that's just due to increased efficiencies. So those will go forward with us.
Thank you, Billy. Very helpful. And then my follow-up. Bill, as you look at the nonpremium inventory, kind of big picture thought, is it does it make sense to divest more of it? Or do you need to hold on to some of it and let technology catch up to that so you can move that acreage into the premium category?
So just want to get your big picture thoughts on how you view that non premium inventory?
Yes, Pierce. I'll let Billy address that, Billy Helms. Yes, Pierce. So in our inventory, as we continue to demonstrate, we can add more and more to our premium inventory. There's some of the inventory that may never make it to that.
So we're looking at what options are best to bring that value forward, whether it's monetize that property or produce it out for a period of time or whatever the optionality is.
We have
a tremendous amount of flexibility. We haven't designated certain properties yet to be put on the market, but we'll just be opportunistic in that approach and evaluate each one independently. We haven't really considered any of those volumes as Bill said in our 4 year or 5 year plan. And so as he mentioned, there will be mostly gas or gas combo type plays. So that really won't affect oil production guidance any.
Thank you.
And we'll now go to Sebastien Szandra with Guggenheim.
Yes. Good morning. So the question was in creating these premium locations, do you find the best rock gets better? Or are you equally successful in converting Tier 1, Tier 2 rock to premium?
I think the rock quality is a very big driver on the premium. And the higher the quality of the rock, the better it responds to the technical advances we make in the completion. There's no question about that. So I think one of the things that's not clearly understood in the horizontal sale industry is that these sweet spots in these plays, especially in the oil plays, are not very large. So capturing the very highest quality rock is extremely important and certainly something that EOG has excelled in and focused on over the years.
And it really is the biggest driver of productivity. Okay.
And my follow-up is, how many completion crews you have active in your basins? And is there sort of a rig count to completion crew ratio that we should think about?
This is Gary Thomas. We have now 8 completion units running and we've got anywhere 11 to 12 rigs and that's a pretty good ratio as far as an average.
Could you scale up the rig count without adding completion units materially?
We could yes, it depends on where you add the rigs. If we added in Eagle Ford, we would have to add fewer completion units, for instance there. They're just so efficient after having operated there for the last 7 or 8 years.
Great. Thank you. Great quarter. Thanks.
Ryan Todd with Deutsche Bank is next.
Thanks. Good morning, guys. Maybe a couple of points of clarity. Can you talk about the incremental 50 wells drilled in 2016 and the 80 completions, does that involve any rig additions? Or are you completing that with the existing rigs and crews that you had on hand?
Yes. This is Gary Thomas. What we've been able to do is just the tremendous efficiency improvements has allowed us to go ahead and do this with the same number of drilling rigs. We will be adding 1 or 2 completion units here through the second half to go ahead and take care of the 350 completions this round. It's all being done within existing capital planned capital.
That's great. Thanks. And then maybe as we look out over the next couple of years, can you talk about the allocation of capital between the Eagle Ford and the Permian? Is there as you look into 2017 2018, what's the expected split between capital going to each basin? And how will that change as you look forward over the next 2 or 3 years?
And is that reflective of the relative rates of return between the two assets?
Yes. As we look into 2017 and forward, the capital will be 45% will be in the Eagle Ford, about 45% of the Delaware and then about 10% of the Rockies. That's kind of a rough balance between each one of those areas. And of course, the one we've increased capital most this year is in the Delaware Basin and that will be increased again kind of going forward. The rates of return that we're getting in the Delaware are just outstanding as the well results we've talked about today.
So is it purely a rate of return driven exercise? Are the Delaware wells have risen to the top? Or is it also a reflection of depth of inventory, infrastructure, things like that? Or is it just returns driven?
It's certainly returns driven. But I would say of those three areas, if we look at our current scorecard, the returns on all three of those areas are about equal. So it has to do with inventory and returns and, of course, operational efficiency.
Okay. Thank you very much.
We'll go
to Charles Meade with Johnson Rice.
Good morning, Bill, and to the rest of your team there. I wanted to pick up on the theme that you've mentioned a couple of times in your remarks about improved capital efficiency. And certainly, we're seeing that in Space Day with you increasing your completed well count or your completions by 30% in your wells drilled by 25% with the same CapEx. But I think I get the theme that this is really driven by your shift to premium drilling. And I'm looking at that left half of the Slide 5 you have where you lay out your plans for the next few years.
Is that ongoing shift to premium a kind of fair sort of weather vein to look at for how capital efficiency will continue to improve in 2017, 2018? Or is it the kind of thing that you think you've seen the big gains and we shouldn't expect a whole lot more from this point forward? Yes. That chart is very indicative of the way the capital efficiency goes. So I believe this year, it's about 60% premium.
Next year it's 81% premium. And then I think from 2018 forward it's 98%. So as we complete more premium wells each year, the capital efficiency will increase. Got it. That's helpful.
Thank you. And then if I could pick up on one of the big things from last quarter, your Austin Chalk activity. I think I heard you mentioned that you're still excited about that play. Can you give us a sense, are any of those locations in your premium count right now perhaps under the overall Eagle Ford heading? Or is this kind of still in the exploration bucket waiting to be promoted somewhere down the road?
Yes, Charles. This is David. As far as the Austin Chalk goes, like we mentioned last quarter, we're still delineating that play. So we're still intending to drill 9 wells throughout our whole acreage position there. And currently, we don't have any Austin Chalk within our premium count.
So but that's clearly a potential for some upside there. Just like Bill had mentioned, one of the ways that we're going to add premium in the future is through exploration. So the wells that we've brought on and as we talked about last quarter are clearly premium. So we're still
excited about that play, but we need a
little more data on it. That's helpful insight. Thank you.
We'll go to Brian Singer with Goldman Sachs.
Thank you. Good morning. Bill, you've recently spoken a bit less on the topic of recovery rates. But given that you are increasing your premium inventory in part because of productivity gains and longer laterals, wonder if you could provide an update on where you see recovery rates, particularly in the Delaware and Eagle Ford And then the opportunity from here for further technology and productivity gains to increase resource in premium inventory and overall recovery?
Yes, Brian, this is Billy Helms. On the recovery rates, yes, we've kind of gotten away from quoting what we think the overall recovery rate is by zone. But needless to say, it's improving. I think a large part of that, a very significant part of that is what Bill talked about earlier is understanding the rock, our shift to better define what targeting is and then deploying our high density completion process. It's really made a huge difference on the recovery rates.
We really don't focus on what that recovery rate percentage is. It really doesn't help us understand our go forward models on these wells will perform. So it's really hasn't been a focus for us. So that's but that's the color I would give to you is that they're definitely improving with time.
Thanks. Maybe I'll ask it in a slightly different way then. Since you talked about the targeting and the enhanced completion specifically. What inning do you think we're in, in terms of the impact that those technological improvements are having on your productivity? Is there still a big gap even if you're not specific on the recovery rates?
Is there still a big gap where there's the opportunity for further use of these technologies to increase recovery? And are the benefits from targeting an enhanced completions fully baked into your premium resource and premium
locations? Brian, this is Bill. We started, I believe, in the latter part of 2014 and I believe in the latter part of 2014 and it's really in different stages in different basins. In the Eagle Ford, it's more mature there. We're probably still in the 6th inning.
I've been saying this for years. But we're probably still in the 6th inning there of understanding what is the best target and working it into our W patterns and our spacing patterns. So as we get more data, even in a very mature area like Eagle Ford, we get more data, we continue to find out more about the rock in this section and we're able to discriminate and pick better rock all the time. So it's an ongoing process even there. In the Delaware Basin, we're probably in the 2nd or third inning there.
There's so much potential pay there and we're still learning and we've got a lot of data together. As we drill the Delaware wells, we're focused on the Wolfcamp for 2 reasons. They're in Camp for 2 reasons. They're fantastic wells. But number 2, you get to see all the Bone Springs, sands and all the pays above you.
And so you're gathering data as you drill these wells and that helps delineating targets and working the stratigraphy out and mapping. So each one of the plays is in a different stand a different position on improvements. But we think there is really a long way to go. We're not anywhere close to the end of being able to make additional improvements in that side of the business or in the cost side too. So it's an ongoing process and it's a very sustainable process.
Great. Thank you.
We'll go to Irene Haas with Wunderlich. Please go ahead.
Yes. Following up on Delaware Basin, your inventory count of about 2,130. I'm curious as to for the Wolfcamp, are they mostly in Wolfcamp A and you doing work on the deeper horizons? And are there more headroom to add locations without really adding more acreage?
Yes, Irene, this is David. In the Wolfcamp, really what we've targeted mostly there, we've got several targets in the Upper Wolfcamp. So there quite a few premium targets. And kind of like Bill mentioned earlier, we're still early in the Wolf Camp. So we still see quite a bit of upside there.
But clearly from the data that we show like on the Chart 7 in our investor book, I mean, we've made some big progress there. And I mean, these are clearly the premium wells. As we go forward, we're going to have the ability to drill more and more of them with longer laterals.
Yes, a follow-up question. I was kind of wondering how far are you along with your database? How many wells you have inputted in your sort of precision targeting model? Do you use existing vertical wells, horizontal wells and core samples? Just trying to get a feeling as to how much more data you might need to really nail it perfectly.
There's a lot of industry data out there, legacy log data and everything that's helped us with that. But really what's going to drive it more than anything is as we drill the wells and complete them and gather the data over time, you'll need to see some improvement there. I mean just like you've seen, I mean we never stop learning. We continue to
test the limits. And so I
still think there's plenty of upside on the Wolfcamp.
Great. Thank you.
We'll now go to Bob Brackett with Bernstein Research.
I had a high level question and then a follow-up. The high level question is it looks like you've added say 34% to your net locations, but the add to premium, but the average EUR went up 75%. What's driving that?
It's really Rob, it's just the combination of better rock and better completions and now we're throwing in longer laterals to that too. So the well results, the productivity of the well increase is just a very, very large and incredible. I think once there's enough of this data out in the big databases where people can analyze it and compare EOG wells versus that surprised and very, very impressed. We do have one chart in the slide deck that compares our Wolfcamp results to other operators. I believe it's slide number 9, 8, slide number 8.
So, you might want to look at that. But the wells are just fantastic wells.
Okay. And then the
follow-up is could you talk a little about the process by which a location moves or gets blessed as premium? Is that done by the asset? Is it blessed by headquarters? Is it statistical? Or is it sort of sticks on a map?
Well, it's a process that really is done in our division offices. So our decentralized culture that's focused on the details right there, evaluating the rock, driving the cost down at the same time and executing on the wells. They know their properties the best and they are constantly working and they are so focused on improving returns and improving productivity and driving down cost. So they're really driving this whole thing and it is an amazing performance that's going on.
And there's sticks on the map there. Those locations are known latlongs?
Absolutely, yes. The well count are absolute sticks on the map. They all have a well name. So they're not like a spreadsheet. Yes.
Great. Thank you. We'll go
to Mike Scialla with Stifel.
Good morning. Bill, you said in your prepared remarks that the minimum 30% IRR for premium wells translates to a healthy corporate greater return. Is there a minimum ROE you can equate that to? Or does that necessarily translate to positive earnings?
Yes. We picked the 30% because when you pull in our full cost capital, which would be infrastructure, land, G and G and things like that, it usually draws a return down to maybe 15%. So we would like to have kind of a minimum full cost, all in capital cost rate return of about 15%.
Okay. And then, Billy, you mentioned in your prepared remarks, you're seeing no degradation in productivity per foot with these longer lateral lengths. I guess, is there anything specific there without giving away the trade secrets that you can talk about maybe bigger casing size or something like that, that's preventing that degradation in recoveries per foot with the long laterals. And I was wondering too, you mentioned the Eagle Ford and the Delaware, where you're going with the longer laterals. On the Eagle Ford side, is that really confined to the western portion of the player?
Does it have any application in the east as well?
Yes, Mike. This is Billy Helms. So on the Eagle Ford, first of all, the well, the Ford and the Delaware Basin, when we drill a longer lateral, we definitely want to make sure that we are maximizing the recovery. We're not losing efficiencies as we just drill longer laterals. So we spent a lot of time.
Our operational groups have spent a tremendous amount of time trying to understand how to accomplish that. And the results we've seen so far have shown they've been very successful at maintaining that productivity per foot, especially when it results in we're talking about EUR per foot mainly. Certainly, the initial production can somewhat be dilutive a little bit just due to longer laterals and flowing larger volumes up restrictions on chokes and surface things surface facilities. But the EUR per foot has been maintaining a pretty steady pace. So that's really encouraging.
Now I won't get into exactly how we're doing that. We do feel like that that is an advancement we've made internally and we want to keep that a little bit proprietary at this time. But on the Eagle Ford and the Delaware Basin, both of those are from that.
And the Eagle Ford, is it really on the western side of the play or does the east have any application?
Yes. Probably more so on the western, but certainly the east side also has opportunities for that. But the east side also has a little bit more geological complexity that hampers that a little bit. But certainly, there are opportunities and we're finding that where we can.
Our final question today will come from Paul Sankey with Wolfe Research.
Yes, just a quick one
I'll add after all you said.
I was asked this morning what would happen at $40 flat to all your assumptions? Thanks.
Paul, at 40 we would adjust our capital appropriately and we would be able to generate what we believe would be the best rates of return in the industry. That's certainly a big separator for EOG. But we would adjust our spending to cash flow and stay balanced and stay disciplined and hunker down and continue to improve. We are optimistic and we have hope. We're not there yet.
But at one day, we would be able to get our capital efficiency to a point where we could actually grow oil at $40 and we're working towards that goal. We're not there quite at the moment, but we're going to continue to focus on that. But our focus, of course, first has always been on returns and capital discipline and keeping the company healthy in that regard.
Yes. I see that's just a couple of minutes and it's a long question, but could I just follow-up? Could you walk us through the progression from the field level returns that you talked about after tax to the corporate level returns? I don't think anyone has asked that one, which is always a conundrum with regards to U. S.
E and P.
Yes. I did talk about that a little bit earlier, but we did put the benchmark of 30 percent rate of return on the direct side, which is the well cost only. We set that at that mark so that we would have room that when we put in full cost, that would be land and seismic and infrastructure. And our capital way of return, ROCE or ROE, but our capital investment rates return would be about 15%. Now that walks down it's a long process, but that walks down to ROE and ROCE.
But the ROE and ROCE are trailing metrics and it takes years to get your base production to the point where it reflects the returns that you're currently drilling. So it's a long process. It takes several years to get there.
It's the top of the hour. I'll leave it there. Thank you.
And at this time, I'd like to turn the conference back to Mr. Bill Thomas for any additional or closing remarks.
Yes. I'm going to ask Gary Thomas to have some remarks on our progress on cost reduction and where we see that headed. And it kind of goes along with the last question there and also, us being competitive on the world market is it requires that we really be disciplined spending and that we just continue to work our costs down. And that is, yes, through just all the primary efficiencies I mentioned earlier with us having the top rigs. And you'll note too that we quite a number of our rigs in 2016 under contract placed a couple of years ago, higher rates at this $26,000 to $27,000 a rig.
Now those are rolling off and we're going to be able to replace those about half of those rigs with rates that are in the $13,000 to $15,000 per day rate. So that allows drilling costs to be down about 20%, 25%. Our tubulars, we depleted their inventory here early 2017. And with the arrangements we have in place, they'll allow those costs to go down into 20% to 25%. With our sand, as I mentioned earlier, we've reduced our production cost, optimized the transportation, just all those sorts of things that allow us to reduce sand cost by about 15%.
Same with rigs, we had many of our frac fleets under long term contract. Half of those are going away, which will allow us again to bring in the lower frac rates. We continue to improve those completion efficiency with faster completions, wireline run times, just our stage arrangements. The water infrastructure is continuing to be enhanced and it allows us to reduce our water costs. Our wheel head inventory, it's somewhat depleted and that will allow us to reduce those costs in the 25% range.
So, all of this and that probably accounts to 50% to 60% of our well cost allows us to further reduce well cost here going into 2017. Yes, we are so pleased with the vendor health service providers. They have we've got the top rigs, top frac equipment. It's a fast changing technology, so we're glad not to have ownership, but just to work and partner with these service providers to have outstanding, say, service or competitive prices. They're not always the same providers, but they're the best and the most cost effective in our arena.
And the other thing is that our rig efficiency is approved such that, yes, we'll not have to have the number of rigs we had back in 2013 2015. As a matter of fact, when we look at our 10% growth and our 20% growth, we think we'll be able to provide this sort of growth running somewhere between 25 to 35 rigs. The number of frac fleets then required with the efficiency we're seeing are going to be in the 15 to 20 frac fleets running for us. And that's on a compound average growth or increased rate. By the time we get to 2020, we're talking, yes, that's the 35 rigs on the 20% growth.
So, yes, the downturn has allowed EOG just to enhance our overall operations. Our divisions are performing especially well, continuing to lower our costs. And during the ramp up, we would expect the same because if we look back and see what has been done by EOG in the period that we were growing volumes, the 30% to 40%, we will continue lowering our well cost, improving our efficiencies. And we expect our divisions continue to do the same, especially with all the ideas we have now for further reduction. Thank you, Bill.
I'd like to end this conference by saying thank you to all of the EOG team. The EOG employees are focused on returns and they're performing at an extremely high level and we could not be more proud of each one of them. So we look forward to the days ahead. So thank you for listening and thank you for your support.
Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.