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EOG Resources, Inc. (NYSE:EOG) Q1 2024 Earnings Call Transcript

EOG Resources, Inc. (NYSE:EOG) Q1 2024 Earnings Call Transcript May 3, 2024

EOG Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the EOG First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Investor Relations Vice President of EOG Resources, Mr. Pearce Hammond. Please go ahead, sir.

Pearce Hammond: Good morning, and thank you for joining us for the EOG Resources’ First Quarter 2024 Earnings Conference Call. An updated investor presentation has been posted to the Investor Relations section of our website and we will reference certain slides during today’s discussion. A replay of this call will be available on our website beginning later today. As a reminder, this conference call includes forward-looking statements. Factors that could cause our actual results to differ materially from those in our forward-looking statements have been outlined in the earnings release and EOG’s SEC filings. This conference call may also contain certain historical and forward-looking non-GAAP measures. Definitions and reconciliation schedules for these non-GAAP measures and related discussion can be found on the Investor Relations section of EOG’s website.

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In addition, some of the reserve estimates on this conference call may include estimated potential reserves as well as estimated resource potential not necessarily calculated in accordance with the SEC’s reserve reporting guidelines. Participating on the call this morning are Ezra Yacob, Chairman and CEO; Billy Helms, President; Jeffrey Leitzell, Chief Operating Officer; Ann Janssen, Chief Financial Officer; Keith Trasko, Senior Vice President, Exploration and Production; and Lance Terveen, Senior Vice President, Marketing. Here’s Ezra.

Ezra Y. Yacob: Thanks, Pearce. Good morning, everyone, and thank you for joining us. EOG is off to a great start in 2024, both delivering value directly to our shareholders and investing in future value creation. Primary drivers of that value are EOG’s commitment to capital discipline, operational excellence and leading sustainability efforts all underpinned by our unique culture. Strong first quarter execution from every operating team across our multi-basin portfolio has positioned the company to deliver exceptional returns. Production and total per unit cash operating costs beat targets driving strong financial performance during the quarter. We earned $1.6 billion of adjusted net income and generated $1.2 billion of free cash flow.

We paid out more than 100% of that free cash flow through our peer leading regular dividend and $750 million of share repurchases. EOG’s operational execution continues to translate into strong returns and cash flow generation. Our robust cash return to shareholders continues to demonstrate our confidence in the outlook and value of our business. Quarter-after-quarter, we have delivered outstanding operational performance on our core assets while also driving forward progress in our emerging plays. We’ve built one of the deepest, highest return and most diverse multi-basin portfolios of inventory in the industry. The most recent addition to our portfolio is the Utica Combo play, a textbook example of our differentiated approach. Capturing highly productive rock through our organic exploration and leasing efforts is the primary way of expanding our premium inventory with a low cost of entry to drive healthy full-cycle returns.

Adding reserves that lower funding and development costs drive down DD&A and lowers the overall cost basis of the company. The result is continuous improvement to EOG’s company-wide capital efficiency. Our track record of successful exploration, strong operational execution and applied technology has positioned the company to create shareholder value through industry cycles. The oil macro environment remains dynamic but is overall constructive and we anticipate that certain drivers will limit oil prices to a relatively narrow band this year. In the first quarter, global demand performed as expected and is on trend to increase throughout the year led by a strong U.S. economy. And while U.S. production surprised to the upside in 2023, several developments have altered the U.S. supply outlook this year.

Rig counts have remained flat over the past eight, nine months and oil drilled but uncompleted or DUC inventory has been drawn down. Current activity levels combined with M&A in the public and private sectors should lead to more moderated U.S. growth this year. Globally, spare capacity has kept inventory levels around the five year average to start the year, and we forecast these barrels returning to the market throughout the second half of the year and aligned with growing demand. Overall, the result is a strong operating environment for a low cost and returns focused producer such as EOG. And while we expect the natural gas market to remain soft through the end of this quarter much like last year, we expect it to strengthen through the second half of the year and are managing our Dorado program to align with demand.

Longer term, we expect an additional 10 Bcf to 12 Bcf a day of demand for LNG feed gas and another 10 Bcf to 12 Bcf per day of demand from several areas, including overall electrification, exports to Mexico, coal power plant retirements and other industrial demand growth. So, the outlook for North American natural gas by the end of this decade is bullish both for the industry and in particular for our Dorado dry gas play which has advantaged access to the Gulf Coast and pipeline infrastructure. We look forward to participating in the emerging LNG demand through our diverse sales agreements to grow from 140,000 MMBtu per day today to 900,000 MMBtu per day over the next three years. Through EOG’s differentiated approach to organic exploration, the utilization of technology to improve operational efficiencies, vertical integration of certain parts of the supply chain and our diverse marketing strategy, EOG remains focused on being among the highest return, lowest cost and lowest emissions producers offering sustainable value creation through the cycles.

Ann is up next to provide an update on our forecast and three year scenario. Here’s Ann.

Ann Janssen: Thanks, Ezra. Given the recent strength in commodity prices, we have updated our 2024 forecast to reflect $80 oil and $2.50 natural gas for the remainder of the year and now expect to generate $5.6 billion of free cash flow for the full-year. Considering both share repurchases executed during the first quarter and our annualized regular dividend, we have already committed to return about $2.9 billion this year, which represents more than 50% of that free cash flow, so we are well on our way to return a minimum of 70%. And while cash return exceeded free cash flow during the first quarter, we continue to view our return commitment on an annual basis. During the first quarter, we repurchased 6.4 million shares for $750 million averaging about $118 per share.

Since we began using our buyback authorization at the start of last year, we have bought back more than 15 million shares or nearly 3% of shares outstanding for an average price of about $115 per share. To-date, that totals about $1.7 billion worth of shares. We will continue to monitor the market for opportunities to step-in and repurchase shares throughout the year. Last quarter, we provided a three year scenario to illustrate EOG’s expanded capacity to generate free cash flow and earn a strong double-digit return on capital employed to create future shareholder value. This quarter, we provided an additional price scenario to illustrate our expanded free cash flow potential over the next three years by assuming similar commodity prices as the past three years.

From 2021 through 2023, oil averaged $80 and natural gas averaged $4.25. Over that three year time frame, we generated $18 billion of free cash flow. Applying those same commodity prices to our forecast for the next three years, we would expect to generate $21 billion of free cash flow, that’s 17% more cumulative free cash flow than the prior three years at the same price deck. Robust cash return to shareholders, supported by substantial free cash flow stems from EOG’s strong operational execution. By focusing on well performance, sustainable cost reductions and maximizing full-cycle returns through organic exploration and disciplined growth, EOG has driven a step change in our financial performance and capacity to create significant value for our shareholders.

Now, here’s Jeff to review operating results.

An oil rig in action in a vast desert, drilling for natural gas.
An oil rig in action in a vast desert, drilling for natural gas.

Jeffrey R. Leitzell: Thanks, Ann. I’d like to first thank all the employees for a great start to the year with safe and efficient operational execution. Our first quarter volumes in total per unit cash operating costs beat targets while capital was in-line. For the year, our capital forecast remains $6.2 billion and delivers 3% oil volume growth and 6% total production growth. We continue to expect that capital this year will be slightly more weighted in the first half, driven by the timing of our investments in the two infrastructure projects that we provided details on last quarter. These projects include the Janus Gas Processing Plant in the Delaware Basin and the Verde pipeline that will serve our South Texas Dorado play both highlighted on Slide 10 of our investor presentation.

By the end of the second quarter, we expect to be on pace to have spent about 56% of our $6.2 billion capital plan. While our oil production and capital plan for the full-year remains unchanged, we are actively managing activity in our Dorado asset, which is reflected in our second quarter natural gas production guidance published yesterday. As discussed last quarter, we moderated activity in Dorado this year in response to a weaker natural gas market and are now leveraging additional flexibility to delay well completions and manage volumes through the summer. However, we will continue to pursue a balanced development approach for this asset, which includes operating a full rig program throughout the year. This will help maintain operational momentum, capture corresponding efficiencies and continue to advance and improve the play, while we continue to monitor the natural gas market.

We remain constructive on the long-term gas outlook for the U.S. supported by LNG, power generation demand and the growing petrochemical complex on the Gulf Coast. We are especially pleased with Dorado’s place in the market as one of the lowest cost supplies of natural gas in the U.S. with an advantaged location and emissions profile. With regards to service cost market, bids for standard spot services have been trending lower, which is consistent with our expectations of seeing some deflation this year. For high-spec rigs and frac fleets, we are still observing stable pricing. However, their availability is improving, especially in markets with less activity. As a reminder, we have secured 50% to 60% of our service cost in 2024, primarily with our high-spec, high-demand services to ensure consistent performance throughout our program.

By securing these resources, we’re able to focus on sustainable efficiency improvements to progress each one of our plays at a measured pace. EOG’s operating performance and capital efficiency continues to improve as our cross functional teams work to drive efficiency gains throughout our multi-basin portfolio. A significant driver of efficiencies this year is longer laterals, which we expect will increase by 10% on average companywide. The charge is being led in our foundational plays, the Delaware Basin and the Eagle Ford. Our operating teams in both plays have achieved consistent execution and success drilling and completing longer laterals leading to increased efficiencies, lower per foot well cost and improved well economics. In the Delaware Basin, we drilled four three-mile laterals in 2023 and have plans to drill more than 50 in 2024.

In the Eagle Ford, our 2024 plan includes increasing the average lateral length by about 20% to continue to unlock new potential across our 535,000 net acre footprint. Moving to the Powder River Basin, our technical teams continue to make good strides with our balanced development approach between the Mowry and the Niobrara formations. In the Niobrara, we have recently transitioned into package development by applying the learnings we captured while drilling the deeper mile reformation first. In our first three Niobrara development packages this year, we’ve been able to increase our drilling footage per day by 25% compared to 2023 averages, while maintaining over 95% in zone targeting. This can be attributed to our refined geologic models and a better understanding of the stratigraphic variation across the play.

With these continued efficiency gains across our diverse portfolio plays along with stable service costs, our expectations for full-year well cost decrease is a low-single-digit percentage. After a strong first quarter, EOG is well-positioned to execute on its full-year plan. Our technical teams continue to drive innovation with a focus on improved recovery, lowering costs and being a leader in sustainability. Now, here’s Keith to provide more color on the Utica.

Keith Trasko: Thanks, Jeff. We’re very happy with the results of our first three packages of development wells in the Utica Combo play. We now have over six months of production data from the first two, the Timberwolf and Xavier, which continue to outperform our expectations. Daily production rates per well have averaged more than 1,000 barrels of oil, 600 barrels of NGLs and 4 million cubic feet of gas over the first six months. On average, these seven wells have produced more than 200,000 barrels of oil per well since being brought online in the second half of 2023. We recently brought on our third package, the White Rhino. This is our first development package in the southern portion of our acreage. The four White Rhino wells drilled at 1,000 foot spacing have been meeting our expectations during their first few weeks of production.

Initial production also indicates a slightly higher liquids mix than our Timberwolf and Xavier wells drilled in the north and central parts of the play. While our Northern and Central acreage benefits from a thicker Utica, the Southern area has better geomechanical properties. The Southern area also benefits from significant economic uplift associated with the mineral rights we secured across 135,000 net acres. The White Rhino wells add to our growing collection of data points, which includes 18 legacy wells, four delineation wells, and now three development packages, which adds another 11 wells. While we expect to see performance vary across our 435,000 net acre position, oil results over the past two years in multiple areas confirm high liquids premium productivity through the 140 mile north-south trend of the Utica’s volatile oil window.

On a per foot basis, the cumulative production in the Utica Combo play compares favorably with some of the best areas of the Permian Basin with respect to both oil and total equivalents. Our large contiguous acreage position in the Utica lends itself to developing a long life repeatable low cost play competitive with the premier unconventional plays across North America. Our operating team continues to leverage consistent activity to increase efficiencies and drive down well costs. We recently drilled a 3.7 mile lateral on our Sable [pad] (ph) in the south, which is an EOG wide record lateral length. This well is scheduled to come online later this year and we’re excited to continue to driving similar efficiencies as we increase our activity across this asset.

For 2024, we are on target to drill and complete 20 net wells in the Utica across our northern, central and southern acreage, which supports a full rig program and enables significant well cost reductions. Now here’s, Ezra to wrap up.

Ezra Y. Yacob: Thanks, Keith. I would like to note the following important takeaways. First, our differentiated business model focused on exploration and innovation has built one of the deepest, highest return and most diverse multi-basin portfolios of inventory in the industry. The Utica, our most recent exploration success will be competitive with the premier unconventional plays across North America. Second, consistent execution in our core Delaware Basin and Eagle Ford assets delivers outstanding operational performance quarter-after-quarter while investment in our emerging plays contributes to EOG’s financial performance today and lays the groundwork for years of future high-return investment. Third, our robust cash return to shareholders continues to demonstrate our confidence in the outlook and value of our business.

Finally, one of EOG’s best champions of utilizing innovation to constantly improve the company is our friend and colleague, Billy Helms. Billy recently announced that he will retire at the end of this month. In Billy’s 40-year career with EOG, he demonstrated a distinctive ability to encourage new ideas from our employees across multiple disciplines, innovative ideas to utilize infield technology, information technology, and new processes to drill better wells for lower cost more safely and with lower emissions. He then helped shepherd the very best of those ideas through to execution across the company. Even though well earned, the retirement of a friend and colleague is bittersweet. Best wishes to you, Billy. Thank you for your service to EOG.

Operator: Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] And, our first question today comes from Steve Richardson with Evercore ISI.

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