CapEx of $5.6 billion is below the $5.9 billion spent in 2017
EOG Resources (ticker: EOG) announced fourth quarter results and reserves today, showing net earnings of $2.4 billion, or $4.22 per share. This result was significantly improved by the recent tax legislation, as EOG saw a non-cash reduction in income tax liabilities of $2.2 billion. After adjusting for this and other non-recurring items, EOG earned an adjusted $401 million in Q4 2017.
EOG produced an average of 662 MBOEPD this quarter, representing year-over-year growth. The company’s production growth was concentrated in the U.S., where crude oil output jumped 20% year-over-year.
ROCE will be double digits for the first time since 2014
EOG has wholly switched to targeting its “premium” locations, defined as locations with locations with at least a 30% after tax ROR at $40 oil, in its 2018 drilling program. The company estimates at least 90% of the wells completed in 2018 are expected to be premium. Up from 85% in 2017 and 50% in 2016. The company will spend approximately $5.6 billion this year, down from the $5.9 billion the company spent this year. Despite this decrease in spending, EOD plans to complete more wells in 2018. Current capital plans indicate EOG expects to complete about 690 net wells in 2018, compared to 536 in 2017.
EOG expects this expenditure will yield crude oil production growth of 18%. In addition, the company predicts it will be able to cover capital investment and dividend payments within the discretionary cash flow. 2018 also represents a return to double digit Return on Capital Employed (ROCE) for EOG, the first time the company has seen ROCE above 5% since 2014.
EOG now holds 2,527 MMBOE of proved reserves, up 18% from last year. Excluding additions due to price, the company replaced 201% of production at a F&D cost of $8.71 per BOE.
Rigs concentrated in Permian, completions highest in Eagle Ford
EOG will be very busy in 2018, running an average of 35 rigs across the company’s numerous basins. Activity will primarily be focused on the Delaware basin, where the company will average 19 rigs and seven completions spreads. These completions crews will be used to complete around 240 wells in the play this year, compared to 153 in 2018. EOG is also beginning to develop the First Bone Spring, which it announced as a “premium” play in November.
While rig activity will primarily be focused on the Permian, EOG will complete more wells in the Eagle Ford this year, with an estimated 260 wells coming online. The company will also begin developing the Eastern Anadarko Woodford oil window, which EOG believes is a premium play. The company will run two rigs and one completion spread in the basin, allowing it to complete 25 net wells this year.
In today’s conference call EOG Chairman and CEO Bill Thomas discussed EOG’s strategy, saying “EOG is driven by returns. Our goal is to earn return on capital employed that is not only the best among our peers in the E&P industry, but also competitive with the best companies outside our industry. Premium returns and capital discipline are how we reach that goal. Furthermore, by executing our premium capital allocation standard and practicing capital discipline, we believe we can sustain competitive ROCE throughout the commodity price cycle.
“EOG’s capital discipline governs our growth. Disciplined growth means not adding overpriced or poor performing services and equipment in order to grow. Disciplined growth means not growing so fast that we outrun the technical learning curve and leave significant reserve value in the ground. Disciplined growth means operating at a pace that allows EOG to sustainably lower costs and improve well productivity, instead of growing so fast that costs go up and well productivity goes down. EOG’s disciplined growth is driven and incentivized by returns and not growth for growth’s sake. Our strong growth is an expression of generating strong returns first.
“And finally, EOG’s disciplined growth maintains a strong balance sheet. We will not issue new equity or debt to fund capital expenditures or the dividend.”
Q&A from EOG conference call
Q: Just following-up on your comments around free cash flow here. So clearly you guys plan on putting out some pretty significant free cash flow if oil holds at $60 here. You talked about the $350 million debt pay-down, as well as the 10% dividend hike. But clearly there’s going to be proceeds beyond that. What else is EOG potentially planning on doing with the money? Could there be a ramp-up in even more exploration activity than you already talked about, or more acreage purchases? Just any color around that please.
William R. Thomas: Certainly, our priorities haven’t changed. Our first priority is to use free cash flow and reinvest in the high return drilling. And we think this is the best way to continue to improve the company, to increase ROCE, and the shareholder value. The one caveat on that is, we’re not going to ramp-up spending at the cost of returns. We want to maintain the efficiencies and the cost that we built into the system, and in fact, we want to continue to improve. So we want to go at a pace that our well productivity continues to improve. It’s improved this year over last year and our rates of return in our 2018 plan are improved this year over last year, and that’s because we continue to reduce costs and increase productivity. And so we want to continue to do that and continue to reinvest. That’s our first priority.
The second is, as Tim mentioned, we want to continue to firm up our balance sheet. Really, our goal is to have an impeccable balance sheet and we’re going to pay off the bond this year and as we go forward, we want to incrementally continue to reduce debt and firm up the balance sheet. This gives us so much flexibility. It’s served us so well during the last downturn. We didn’t have to issue equity or we didn’t cut the dividend. We want to be a consistent deliverer of shareholder value throughout the commodity cycles. And it does position us to take advantage of opportunities for maybe an acquisition. We continue to look at those, but also, as you mentioned, we are very organic, prolific, generating company and we have a lot of exploration and step-out testing going on this year. We collect a lot of core data, and our goal with all that is to find better and better inventory than we currently have. We think that is investments into the future of the company and those are very, very important to us getting better. So we want to be able to take advantage of that.
And then our third priority is our commitment to the dividend. We have a strong commitment to the dividend. We’ve increased it 17 times over the last year. As we’ve said, we increased it this quarter and our board is committed to continuing to increase our shareholder value certainly through better ROCEs in the future, and through our commitment to the dividend. So those are all the priorities we have and we’re going to stay focused on that and stay focused on getting better as we go forward.
Q: I wanted to start in the Eagle Ford. I think in your comments you mentioned the Eagle Ford is where you saw some of the best rates of return in the company during 2017, and I wondered why not shift more activity there relative to the Permian Basin. I think the increase in rig count is about one in the Eagle Ford, but more substantially in the Delaware. Can you just talk a little bit more about that capital allocation decision, and then how the rates of return, inflationary pressures, and ability to execute compare in the Eagle Ford relative to the Delaware?
Lloyd W. Helms, Jr.: In the Eagle Ford, we’re very pleased with the rate of return and the program. And this last year was a really good year for them, where they continue to learn and develop our learnings there quite a bit over the last year. The growth there in the Eagle Ford – the Eagle Ford is really a pretty stable platform for us to continue to slightly grow over the time as we develop that, but we’ve got some of these other areas that we’re also very interested in growing and applying our learnings to continue to benefit from the learnings that really kind of started in the Eagle Ford.
As a result of the activity in the Eagle Ford, we are improving our well cost and the well count is actually going up more so than rigs in the Eagle Ford versus that. The other thing that’s important to note on the Eagle Ford too, remember, is that 99% of our acreage there is HBP, so we have a lot of flexibility in how we manage our activity levels in the Eagle Ford.
