All right, I think we'll move on to our last E&P Fireside Chat of the day. I'm very pleased and delighted to welcome Ezra Yacob, Chairman and CEO of EOG Resources. EOG certainly needs no introduction. You have been a leading operator of unconventional since the beginning of shale era, and remains a leading innovator in the space today. So Ezra, thank you for being here. It's really an honor. And let's get started with the conversation. I think given EOG's stature in the E&P space, I want to start with a bigger picture question. I think the E&P space is in a very different spot than where it was three-five years ago. You have a industry overall are in better balance sheet, more capital discipline, a lot of return to shareholders.
Yet, the S&P weighting is not nearly where it used to be, and we're still a lot of trying to get investor back. So I think for maybe perhaps the new investors who are maybe coming back into the space, how would you characterize the value proposition for E&Ps today, and then, more importantly, where the value proposition for EOG?
Yeah, that's a great way to start off, Betty. And let me first say, you know, I appreciate you hosting us and appreciate Barclays for putting on the conference. I think it's a good turnout, and it's very timely in the space. As you're right, I think investors should be excited about the story right now because the industry really has changed and matured. For us, our value proposition, I'd say, has evolved over time. But one thing that's been consistent with is, it really begins with our multi-basin effort. We've been committed to organic exploration, and we've put together over the decades, what we think is the industry's, one of the industry's at least, most valuable, deepest, highest return inventory levels across multiple basins.
That's where it all begins, and part of it starts with our commitment to premium drilling, which is we weigh every one of our investment decisions on a $40 oil and $2.50 natural gas price through the life of the asset. And that's the basis for the inventory level that we've put together. The second piece of the value proposition is our commitment to being a low-cost operator. And when we say that, we don't mean negotiating hard or taking advantage of market pricing. We'll do that when it's available, but ultimately, we mean sustainable cost reductions. We try to encourage our engineers through utilization and technology to innovate.
We look for opportunities to grab different pieces of the value chain, the supply chain, whether it's drilling mud, drilling motors, sand, water reuse, things of that nature, to really be committed to being a low-cost operator. The third piece of the value chain, I would say, is our cash return strategy and our financial discipline. Working in multiple basins, the most important thing is you don't want to be overcapitalizing or undercapitalizing any of these basins. You want each of them to progress at its own pace, whether that means one rig or 15 rigs in each of these basins, you want to make sure that each one is getting better year after year.
That can be just one penny less on a cost of reserves of finding and development costs, but you want to make sure that each of those assets is developing at the right pace. That's the financial discipline piece of it. Our cash return strategy, as you mentioned, which is important for the industry right now and for the shareholders, it's simple, it's transparent, it's easy. It's a minimum of 60% of our free cash flow return to shareholders. It really starts with our regular dividend and commitment to growing a sustainable regular dividend. We still think that that's the most important thing, that's the hallmark of a great company. That kinda should indicate the future capital efficiency and ongoing capital efficiency of a company, but we do supplement that.
We supplement it with special dividends, or share repurchases, and ultimately, we underpin that with a pristine balance sheet. I think we've got one of the best balance sheets really across not only industry, but the S&P 500. The fourth piece of our value proposition is our commitment to safety and environmental performance. And I'm happy this year, on our last earnings call, we were able to announce in concert with our upcoming sustainability report that will be published later this month, that we've actually achieved some of our near-term targets that were originally set for 2025. Both our GHG emissions intensity, our methane emissions percentage intensity targets have been met a couple of years ahead of schedule. And we've also announced that in 2023, we've already achieved zero routine flaring, which was ahead of our internal 2025 target.
It's in concert with the World Bank initiative, which really targets 2030. And lastly, what really makes it all possible is the culture of the company. You know, the culture of the company, running a decentralized organization, pushing the opportunity for value creation into the deep end of the organization where the people are really touching the wells every single day, that's really the one and only durable competitive advantage that I think any company has. And EOG's had it going on in the unconventional space for close to 20 years now.
Great. So those are five points that a lot of them, I think, will expand on. The inventory depth. I think there's been more discussion and question around the duration of Tier 1 inventory, not necessarily EOG, but in, you know, for the space in general, that we basically towards the end of Tier 1 inventory, and there's years of quality degradation. Do you think that perception is true? And do you think it's well understood? And how you mentioned just go through some of the EOG's inventory process to de-risk your premium inventory locations?
Yeah. I think, you know, parts of that, parts of that are well understood, by the investment community, by industry, and I think other parts, not so much. A lot of it comes with experience. For us, you know, if we start with the Permian, that's kinda in the sweet spot right now, in the heyday of investment. You know, our wells are actually showing productivity improvement year-over-year. And our inventory is really baked, like I said, across multiple basins. It's one of the important things of being an organic exploration company and focused on that is, you're actually exploring for the sweet spots of new basins. You're trying to capture something that's better and additive to the quality of your preexisting inventory.
Remaining focused on a single basin, I think it naturally happens, what you're saying, is that as basins mature, people should be, operators should be drilling their highest quality rock first. Maybe it doesn't happen in the first couple of years as you're delineating, but pretty early on, everyone should figure out where the sweet spots are. I think everybody in the room kinda understands where the Permian sweet spots are, plus or minus, and that rock is getting drilled up. So what happens then? What does that mean with the rest of the inventory and quality? Well, at an industry level, it's kinda two different questions. You know, the first is, if you're drilling up all the highest productivity rock, what happens to U.S. growth? Well, that's one question.
Productivity per well, as you move into less productive rock, it's probably gonna go down, and that'll roll up to, you know, less U.S. growth than before. But what does it mean for the operator, the company level? Well, I think in the next few years, what you'll see is, you know, you'll see a segregation in the industry and the operators. You'll see the haves and the have-nots really start to become apparent to everybody. And it used to be, you know, 10 years ago, we used to talk about have and have-nots as the companies that had grabbed acreage in the right basins. It was contiguous acreage. It was in the sweet spots of these basins, and the have-nots were either on the fringes of the basins, or they had scattered acreage, or they were in the wrong basin altogether, or something like that.
I think in the next few years, what you'll see between the have and the have-nots are, who, what companies have taken the steps to make that less productive rock economic? There is no reason that a less productive rock cannot deliver high return. And so there, what it requires, though, is it requires a commitment to learning about the reservoir, understanding how to make wells better. It's a commitment to driving down sustainable well costs, grabbing different pieces of the value chain, again, drilling mud, sand, water, cement sometimes, but also learning how to do things more efficiently, drilling faster, completing wells faster. And a great example, I know it's not as exciting sometimes as the Permian, but it's our Eagle Ford. And the reason I say that is 'cause we've been drilling in Eagle Ford now for, almost 15 years, basically.
The rock we're drilling today is not as productive as the rock we were drilling 10 years ago. You know, we still have some of the Tier 1 locations, Tier 1 rock quality left, but a lot of the stuff that we're drilling right now is a little bit less productive. But we've learned over time how to drill these wells longer, how to cross faults. We've learned how to drill them faster. We've learned how to complete them faster. We've grabbed different pieces of supply chain that has driven down our well costs. What we're left with today is even in lower productive rock, we're actually developing lower cost reserves than we were 10 years ago in higher productive rock. So is it a growth story? Well, no, it's not necessarily a growth story.
That's part of the productivity question, but it's really gonna come down to what companies have taken the time, the effort, the expertise to collect the data and apply the data to understand how to make Tier 2, we can call it that, Tier 2 rock, still be highly economic. I think that's what you'll see in the next few years.
That's a great framework to think about the on the cost side of things and assume that because of that, your return of your wells has not deteriorated, even if the productivity side is not the same. So that's a great point. I think with the inventory, well, that supports the sustainability of your development program, and now it's about cash flow generation and returning that cash to shareholders. You've mentioned 60%, at least 60% of the free cash flow getting returned to shareholders. Just would love to understand what-- how did you come up with that threshold? And I think within the industry now, there's different targets. There's percentage of operating cash flow, percentage of free cash flow. Naturally, I think, why free cash flow?
If there's commitment to returning cash to shareholders, so do you think a percentage off of operating cash flow is a greater commitment to, to maintain that, regardless of commodity prices?
Yeah. So our commitment to the shareholders is to create shareholder value, both optimizing near-term and long-term free cash flow generation. What I'm really talking about is margin expansion. You know, we've captured, as we were just talking about, about 10 billion barrels of equivalent across multiple basins that have less than a $10 per BOE finding cost, right around our DD&A rate right now. As we continue to bring these lower-cost reserves into the cost base of the company, we continue to drop that cost base of the company, thereby expanding the margins, really, without doing anything to top-line growth. At times, the best thing we can do for the shareholders is invest in the company, and that's one reason that we've based it on free cash flow as opposed to cash flow from operations.
Ultimately, 60% of free cash flow is simple, it's transparent, and it's very durable over a number of different pricing scenarios, and that's really why we came out with it. It's a nice, clean, and simple way to really express our, our intent to our shareholders.
And in terms of the specific methods of how you're returning cash, I think the last, it's been two consecutive quarters where EOG made a decent share buyback. And which before was more of opportunistic buyback. So am I sensing a shift there in your preference towards leaning more towards buyback versus dividend? Just how you think about why or the value of buying back your share at any given time?
Yeah, no, nothing's changed. We actually saw in the first half of the year, great opportunities to do it, so I think it actually fits right in line with the definition of being opportunistic. You know, we bought back approximately $600 million worth of our shares at an average price of roughly 107 and change between the first and second quarters. And you go back and look at that share price, and you can kind of figure out the times that we were in the market, and there were dislocations. They didn't last very long, and really, what was going on at the time, we felt didn't really have anything to do with the underlying business, the underlying fundamentals of our industry, global supply and demand.
We still think in a cyclical industry like this, you want to be cautious not to get into a programmatic buyback mode that is ultimately gonna end up looking very procyclical. That's, you know, not all companies have done it that way, but historically, I think when you look at any cyclical industry that's leaned in on buybacks, that's typically what has happened. So we measure buybacks at the end of the day, the same as any of these investment decisions we're talking about, is how are we gonna create the most value for the shareholders? As far as that 60%, you know, it really starts with the emphasis on the regular dividend, raising that with our ability to lower the cost base of the company so it's sustainable, and then excess cash flow to be or achieve that minimum 60% return.
It's either buybacks or special dividends, kind of where we see the macro environment taking us.
Mm-hmm. So, from the sound of it then, any decision at any given quarter is not directly reflecting the free cash flow that you generate during the quarter, but you can be procyclical about or being more aggressive at different prices or being more opportunistic. I think that brings me to your cash balance. I think EOG has a net cash balance at this point, and the best balance sheet in the large cap E&P space. So this is more of a philosophical question. I personally have not seen this great of a balance sheet from the E&P industry. Has the approach towards balance sheet really changed? Like, meaning, is no debt, no net debt, the new no debt for the E&P industry?
Is it because of what you're seeing with ESG or other pressure, like, just the philosophy towards that has changed?
No, I don't think the philosophy has changed. It's really the strength of the company where we've arrived at. It doesn't have anything to do with ESG pressures or anything like that. What we've always been committed to is trying to maintain a very strong balance sheet, and the strength of the company has continued to improve upon itself. You know, we've been drilling on this premium price deck for nearly 10 years now, and it continues to strengthen the company to the point where we've been able to retire a lot of bonds without refinancing and collect some cash on the balance sheet. The cash on the balance sheet, you know, we use to be opportunistic again, in what we've been talking about, to create shareholder value. And it comes about in different ways. It's really countercyclical opportunities that we look for.
In 2020, we pre-purchased a lot of casing for all, you know, at all-time low pricing. In 2021, we were able to step in and buy some pipe from a canceled pipeline project. We're actually installing that pipe right now in our Dorado gas play for, you know, a discounted price to what market would sell the pipe for today. Last year, in the Utica oil play, we actually stepped in and purchased minerals, not just leases, but we actually own 130,000, roughly, mineral acres in that play. So that's how we kind of view the opportunity of having a strong balance sheet. And then we should point out that we've utilized that balance sheet before.
It's one of the ways that we underpin the company being able to continue to maintain countercyclical investments, but you know both in 2014 and 2020 we leaned in on that balance sheet. And so again, it's one of the ways that we support a sustainably growing regular dividend.
Mm-hmm, mm. So actually, that tees up to with my next question about how should we view the cash on the balance sheet? As, is it dry powder, gives you more flexibility for M&A? Is it a completely different type of conversation? And then now that you have how much cash, like, are you actually getting pretty good interest, saving—not savings, but, being paid on the cash that you currently have?
Yes, it is for flexibility, cash on the balance sheet. It's not for an M&A. You know, the goal of the company is not to, not to change our strategy. We built this company on the success of organic exploration, and we see that, that opportunity for full cycle returns. We're not collecting cash on the balance sheet to do some sort of M&A. And yes, we do benefit from higher interest rates with having that cash on the balance sheet.
Mm-hmm. Mm-hmm. And now that makes sense. And then, based on some of the examples that you talked about, it just gives you more flexibility to do things that are opportunistic, like the pipe, I think, that you were talking about. Talking about exploration, exploration has always been in EOG's DNA, and I think part of it is culture of the company. What makes EOG, like, really good at exploration and your commitment in exploration?
Mm-hmm.
Are there things organizationally that's really set up that encourages these, new development and new plays? Would love to hear more about that.
Yeah, you know, culturally is what it is, and it's not just on the exploration side, it's on operations as well. It's continually innovating, continuing to try to get better, and that's just a piece that culturally has impacted us. We do have an advantage. I think it's very advantageous being decentralized in multiple basins. And so when I say that, it's not that we just have multiple basins and they're all run out of a central headquarters in Houston. We have actual standalone offices, a full complement, if you will, of an oil company. Houston is dominantly just kind of back office. And what that allows you to do is to move fast. It allows you to stay focused on your exploration area.
It really, again, the key to a decentralized organization is letting those closest to the operation feel encouraged and empowered to go ahead and innovate, try new ideas, and experiment. What we try to do at the corporate level in Houston is we try to share learnings across basins. A lot of transfer of technology, so we don't always reinvent the wheel. So basically, you can think about a specialized single-basin company that has the benefit of data from across multiple basins and the support of a roughly $75 billion company with, as you said, industry's strongest balance sheet, to be able to move quickly, experiment, innovate, and kind of drive the business forward from the front end.
At the end of the day, it's not that complicated of a business if you stay focused on the fundamentals, which is ultimately just producing more oil and gas for less money, and that's it.
So we're 15 years into a development, an unconventional development now. The teams continue to look at new plays and options. Do you really see any big plays or new areas that can compete for capital with the relative to your current portfolio? Like, even with the exploration efforts and room to improve your operations.
Mm-hmm.
Like, how much room is there, like, to create that upside through finding new plays and finding new areas?
You know, I think everyone knows that the basins have been identified, right? They were identified by the U.S. Geological Survey, you know, decades ago. But it's what's within those basins, how do you look at them, how do you approach them? Do you do it with a fresh set of eyes? Do you do it with new technology? Just some of our recent ones that we've really uncovered, Dorado. It's an Austin Chalk play. Pretty darn close to Giddings Field. The Utica, it's been drilled and developed on the gas side for a number of years. In fact, the oil play was first tested, you know, back in 2010, 2011, and 2012. We didn't have the technology there. It took some key points, for us, data points from different basins to really unlock it there.
So whenever we think about exploration, and yes, we have a number of exploration opportunities ongoing in the company, I wouldn't say it's some sort of massive undiscovered basin, but what I would say is applying a new look, a new perspective, new technology to some existing areas. You know, we have a... It sounds funny, and it kind of is, but it's not meant to be, but the best place to look for an oil and gas discovery?
Where you already found it.
Where you're producing oil and gas. That's exactly it, and so we kind of keep that in mind as we're going. We don't try to reinvent the wheel. We just try to turn the wagon wheel into something that should, you know, fit on a Ferrari.
Got it. So, let's talk about the Dorado gas play. Something really interesting that you found the play and you're putting capital in it, but you're also-
Mm-hmm
... building a pipeline. Clearly, it's a sign of seeing the opportunity there. And then the fact that we can actually build a pipeline, actually build a pipeline, so that, that speaks volumes too. So how big is the opportunity there, and what gas price, you know, do you need to really get back into that play?
Yeah, so we based our investment in that play on a $2.50 investment. It's part of our premium price tag, and we do that for the life of the asset. And to drill wells there, we really focus on making them premium, which means we're looking at a 30% direct after-tax rate of return at that $2.50 natural gas price. So this year, we did defer some wells later in the year, and some of them actually slid into 2024, basically out of respect for where the inventory levels were at. You know, we entered the year pretty far above the five-year average, but our forecasted models internally show that we'd probably be exiting the year closer to the five-year average. So far, that seems to be working out correctly. And so it seems like that was definitely the right idea to do.
Dorado, you know, it's an Austin Chalk play. We've got some Eagle Ford there as well. We think we've captured basically about 20 Tcf. And what we found is, with the pipeline, it's again, one of these countercyclical opportunities where we can use our balance sheet, our expertise technically, our knowledge of the area and the marketing agreements, to go ahead and capture additional value for the shareholder. So we're installing a pipeline basically from the play, to a demand center there, near Agua Dulce, Texas, which connects it basically to the emerging, you know, LNG markets along the Gulf Coast, some of the petrochemical areas. And it essentially gives us control from the wellhead all the way to deep into the demand center.
When you think about 20 Tcf and what taking that transportation on for ourselves means, A, it is countercyclical, because right now, with higher-cost steel and pricing, you know, you would be signing up for a long-term contract. But on the transportation side, it essentially is gonna deliver to us about a $0.20-$0.30 per Mcf savings. So imagine doing that on, you know, a 20 Tcf type of project. When we run our margins, when we run our investment on a $2.50 natural gas price, $0.20-$0.30 per Mcf is, is substantial. But the thing about being EOG goes back to one of our value proposition is we're committed to being the low-cost operator. That's not only on the front-end investment, but we think of full cycle returns. We think about return on capital employed.
We think expanding cash flow and earnings margins that go into that, owning the kind of space of the company, is a big piece of that. And this ability to construct the pipeline ourselves and capture that value for the shareholders, it's a big piece of it, and we couldn't be more thrilled than to have that project.
Now that you're getting into that demand center and getting that access to the Gulf Coast and global gas market, we seem to see more direct operator signing supply contracts to get pricing advantage internationally. Is that something that, like, is that something we'll look into as well? Is that another set of opportunity?
You know, I like the LNG exposure that we've gotten right now. We've negotiated, we've partnered with a Tier 1 operator out there, and we deliver them gas. We've got a flexible contract that we'll be expanding in the future. So right now we're experiencing the upside potential right now to about 300 million a day, and that'll be expanding to 740 million a day. Part of which will be exposed to a linked international pricing. And we couldn't be more happy with that. We don't have an equity position, we don't have risk on the water, we don't need to find buyers overseas. We just basically sell right there dockside and get the upside exposure to the linked pricing.
That is a fantastic job for us because what it allows us to do is continue to focus on our core competencies, which is again, basically developing oil and gas for cheaper cost.
Got it. Now we'll want to wrap up with one of the five points is the environmental ESG targets. EOG has a net-zero one and two emission target. Walk me through what you are doing to get there. I'm a full believer that companies should be in control of should reduce the emissions that they're in control of.
Mm-hmm.
I think you’re doing a lot of interesting things there to reduce your own operating emissions, so would love to hear more.
Yeah, as I said, you know, as I started off, is we're happy to hit our near-term targets, our 2025 set targets on GHG emissions intensity and the methane emissions percentage. For us, you know, reducing flaring, capturing gas, that's not a new thing. We've always valued that. We've always looked at that as value, as value lost when you go to a flare now. If it happens under emergency circumstances, that's one thing, but just to be able to do it because you're waiting on pipe, you're waiting on input structure, that's never been an excuse for us because again, that's part of the value that our shareholders deserve to capture. Now, that's one reason that we've always done our own in-basin gathering.
Typically, we set up our fields, so we deliver that gas to a centralized sales point where we have multiple markets that come in and take the gas. That way, if there is a downstream interruption, we don't just throw up our hands and say, "Well, there's nothing we can do about it." We can actually divert the gas into a different sales market if we need to. Ultimately, our net-zero ambition, which is for Scope 1 and 2 by 2040, it is a three-pronged approach of reduce, capture, and offset. Reduction we're doing in the field every day. Recently, I guess, we rolled out iSense, Continuous Methane Monitoring System. It allows us to identify around our facility, basically fugitive emissions leak methane leaks. It triggers an alarm in our control room.
Our control room can then send people out to repair it. It's, in many ways, a little bit better than third-party procedures. It's a very same type of setup. The difference, though, is that in our control room, the data that comes in also measures other things on our facility: pressures, tank levels, slugging effect, how the well's producing. What that allows us to do is not only understand that there's a leak out there and repair it, but it allows us to understand the root cause, what is actually going on there. We've actually already integrated some of that data into some new facilities designs. That would ultimately be the right answer. We've experimented with other things such as lean fuel, other operating procedures. We've swapped out equipment as well on the reduction side.
On the capture side, we're actually piloting a carbon capture and storage project. We're currently injecting. We've been injecting off and on throughout the year, learning about that. Primarily right now, we've used off-the-shelf technology, but we're actually doing some experimentation out there of our own to try and drive towards some proprietary technology. Unbeknownst to a lot of people, you know, we think carbon capture actually aligns very well with what we some of our core competencies. That's subsurface characterization, it's obviously drilling of wells, mechanical operation of wells, but then we've also developed a very strong facilities in-house, and we think that we've got a really core competency there.
What we think we can bring to the table on carbon capture and storage is not necessarily trying to capture, you know, all the emissions from the island here and store it offshore somewhere with a massive endeavor like that. We think, just like the way we do oil and gas, there's an area out there to be much more fit for purpose, be much more dynamic. I think that's what it's really gonna take for much of the industry to be able to achieve net-zero ambition. That's kind of where we're driving on our carbon capture and storage. And lastly, there is an offset component of it. We do recognize that there are gonna be fugitive emissions out there that are very small, minor, very dispersed, and it's not gonna be economically ever probably make sense to try and capture some of those things.
There is gonna be a minor component of just offsetting those. Right now, we're not engaging heavily in offsets. We're not engaging actually at all in offsets because we're not really sure where that market's going or how it's developed, but it is something that we're monitoring on. So that's really our strategy, ultimately, for the net-zero ambition.
Right. That's all three of these things are very interesting. The continuous monitoring is a very, very active space in the startup space, and, for you to do that in-house is very impressive, and, would love to compare notes on that. But unfortunately, we're running out of time, but takeaway is produce oil and gas at the lowest cost possible, safely, environmentally, and sustainably. So with that, I think we'll end. Thank you so much.
Thank you, Betty.
for being here.
Appreciate it. Thanks, everybody!