“The EOG Machine is Firing on All Cylinders”: Chairman and CEO Bill Thomas
EOG Resources, Inc. (NYSE: EOG) reported second quarter 2018 results and beats its oil, natural gas, and NGL production targets.
Highlights
- Net income of $696.7 million, or $1.20 per share a 2,916% increase YOY
- Total crude oil production of 384,600 BOPD, up 15% YOY (Company Record)
- Total production was up 16%
- Maintains 2018 exploration and development CapEx of $5.4-$5.8 billion
EOG greatly benefitted from increased commodity prices, which increased production volumes and overall per-unit cost reductions. Total per-unit operating expenses declined during the Q2 YOY with a 16% reduction in depreciation, depletion and amortization rates and an 18% decrease in transportation rates as the largest contributors to the overall per-unit cost reduction.
Stockholders received an increased cash dividend of 19%. Effective with the dividend payable October 31, 2018, to holders of record as of October 17, 2018, the board declared a quarterly dividend of $0.22 per share on the common stock.
EOG’s total debt outstanding is $6.4 billion for a debt-to-total capitalization ratio of 27%. Considering cash on the balance sheet at the end of the second quarter, EOG’s net debt was $5.4 billion for a net debt-to-total capitalization ratio of 24%.
Powder River Basin expansion
EOG significantly expanded the estimated resource potential of its 400,000 net acre position in the pressure cell of the Powder River Basin in Wyoming. The Mowry and Niobrara shales along with the Turner sand have combined estimated net resource potential of 2.1 billion barrels of oil equivalent (BBOE). The company has identified over 1,600 net premium drilling locations, representing more than 30 years of drilling inventory at the current pace.
Q & A
Included below are excerpts from EOG’s Q2 earnings call.
Q: Bill, I’m not sure who you want to direct this one to. But some time ago, I seem to recall you mentioning the Powder River had some of the best wells in the portfolio. Now that you have shown us what this can do by way of the additional inventory, how would you characterize how activity might evolve there relative to the other plays or indeed additive to the other plays in 2019?
EVP, Exploration and Production of EOG Resources, David W. Trice: Yeah, Doug, this is David Trice. As far as the Mowry and the Niobrara go, we’ll be increasing activity in 2019 on those plays. The volume impact of those will be more likely weighted to late 2019 and on into 2020 as we build out our infrastructure there.
Q: I was hoping to dive a little bit more into the Powder River here. Just noticing that you haven’t had a ton of wells in the Niobrara and Mowry, but you guys are certainly coming out with a pretty robust inventory. I was hoping you can maybe just give us a little bit more color if there are a lot of industry wells that are giving you confidence. And then also I’m just trying to get a sense of how the new Powder River plays rank in comparison to some of your other premium plays.
EVP, Exploration and Production of EOG Resources, David W. Trice : Leo, this is David Trice. So we’ve known for quite some time that the Mowry and the Niobrara have a lot of resource potential under our acreage. We began drilling on those actually in 2008 and 2009 as far as in the testing phase. So over the years, we’ve collected a lot of data. We’ve drilled nine Niobrara wells and nine Mowry wells since that time. We have five proprietary cores in the Mowry and two proprietary cores in the Niobrara in addition to all the publicly available data.
So what this has allowed us to do is build over 1,700 full petro-physical models across the Powder River Basin. And what that really does is allows us to define the very best targets, also the resource in place, and helps with our completions as well, which is really critical to the success of the plays.
And then as you noted, there has been industry activity in the basin. There have been over 200 Niobrara wells drilled in the Powder River Basin and about 30 Mowry wells. So we can take all that data with all the petro-physical data and core data, and we can build some very sophisticated reservoir models that we can really apply across a lot of our different plays and help us to understand both these plays. So all of that data that’s been collected over the years has really helped.
And then one of the biggest factors in converting this to premium is the fact that our cost structure has dramatically come down over the last several years. We’ve been able to focus our drilling the last few years on the Turner, which is a higher permeability sandstone that’s premium. And so as we’ve done that, we’ve gotten a lot better at executing in the Powder River Basin, and we’ve been able to bring down a lot of our drilling and completions, facility, and LOE costs over time.
So as we mentioned on some of the calls and even on this call, we set a lot of records over several years in the Powder. We routinely drill these Turner wells. These are 2-mile wells, in six to seven days, and our zipper frac operations allow us to complete up to 10 stages a day. So all of that really, really helps, and it really helps deliver a really low finding cost. As you think about the low finding cost, that ends up flowing through to your corporate-level return, so that’s going to drive a higher ROCE over time. So really we do have quite a bit of data, and we’ve got a lot of experience in the basin.
Q: Okay, that’s helpful. I just wanted to shift gears a little bit over to the Delaware Basin. I just wanted to get you guys to talk a little bit high level about what your exposure is to some of the weaker differentials there, and if you guys are able to maybe get a bunch of those barrels over to the Gulf Coast. And I guess if there is some exposure to the diffs, would you plan to reallocate capital going forward?
SVP, Marketing of EOG Resources, D. Lance Terveen: Leo, hey. This is Lance. Hey, thanks for the question. I think you can really see the value of our transportation is really flowing through. When you look at our gas differentials, you can absolutely see for Q1 and Q2 relatively very little exposure related to Waha on gas.
And then for the oil differentials, I think what you’re seeing there too, we’ve talked about 25% is subject to the Mid-Cush. But when you look at our transportation that we have, and then when you look at that with our natural hedges that we have operationally and the large focus that we have in the Rockies, big Gulf Coast exposure, it’s really distilled, it’s really diluted down. So when you really look at the Mid-Cush exposure even for the rest of this year, it’s less than 10%. Then you add in our Mid-Cush hedges, we’re very well insulated in terms of the differential related to the Permian.
But maybe just to talk about the transportation, we’ve done an exceptional job there. We’ve got our Conan terminal. That’s up and running at full speed. We’re going to have five market connections there long term. We’re moving barrels to Cushing today. We’ve got capacity down to Corpus today.
We don’t talk a lot about it, but when you think about a lot of the new pipeline expansions that are going to be starting up, starting in late 2019 and then 2020, EOG was a big reason why a lot of those got anchored. When you think about the Sunrise expansion that’s going to be starting very quickly going into Cushing, that’s EOG. When you think about Gray Oak Pipeline starting up, we’re going to have a position behind that with our terminal.
So we think not only 2018 for the rest of this year and then also into 2019 and beyond, especially looking into late 2019 moving into 2020, we’re effectively going to have very minimal if any Mid-Cush exposure. And that’s the value of having a lot of optionality, because what we’ve seen in other basins, as you see the infrastructure get built out and somewhat overbuilt, you don’t want to have too much exposure into one market. Because as we see things going into 2020, the overbuild situation, you could actually see a lot of strength actually in the Midland local market. So long term we’re going to have the flexibility to sell into all those markets.
The Oil and Gas Conference®
EOG Resources is presenting at EnerCom’s The Oil & Gas Conference® at the Denver Downtown Westin Hotel, Denver, Colo. Aug. 19-22, 2018. EnerCom expects to have more than 80 presenting oil and gas companies and more than 2000 financial professionals attending this year’s conference.
To learn more about the conference and presenter schedule please visit the conference website here.
