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spk06: Good day, everyone, and welcome to the EOG Resources First Quarter 2020 Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. Please note, this event is being recorded. At this time, for opening remarks and introductions, I would now like to turn the conference over to the Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.
spk04: Thanks, and good morning. Thanks for joining us. We hope everyone has seen the press release announcing first quarter 2020 earnings and operational results. This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings 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. Definitions as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com. Some of the reserve estimates on this conference call and in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday. Participating on the call this morning are Bill Thomas, Chairman and CEO, Billy Helms, Chief Operating Officer, Ken Baedeker, EVP Exploration and Production, Ezra Jacob, EVP Exploration and Production, Lance Turveen, Senior VP Marketing, and David Streit, VP Investor and Public Relations. Here's Bill Thomas.
spk10: Thanks, Tim, and good morning, everyone. I first want to acknowledge those responding to the COVID-19 pandemic, in particular the healthcare workers, first responders, and other dedicated professionals addressing this crisis on the front lines. Some of you are part of the EOG family, and we thank you for your dedicated and courageous service. EOG is a resilient company, and we believe the severity of this crisis will demonstrate just how resilient we are. The COVID-19 pandemic compounded what started as an oil price war, which drove oil prices to levels we have not seen in more than 20 years. While this shock to the market is unprecedented, and it's difficult to predict exactly how long it will take demand to recover and inventories to decline, like every other downturn, EOG will emerge a stronger global competitor uniquely positioned to capture the upside of the oil market recovery. There are two reasons we're confident in our resiliency. First is the EOG culture, and second is our premium drilling strategy. Times like these are when the EOG culture shines and becomes even more valuable because downturns supercharge our ability to improve. Our culture has responded quickly by aggressively reducing capital spending to a level that will allow EOG to generate free cash flow this year, assuming current commodity strip prices. We continue to be innovative and entrepreneurial by identifying creative ways to rapidly reduce operating expenses and develop new technical improvements that we can sustain into the oil price recovery. EOG is decentralized, driven by interdisciplinary teams that are empowered to make real-time data decisions. based on basin-specific market conditions. Most importantly, we are rate of return driven, and we will not invest a dollar unless it earns a good return, even in this price environment. The EOG culture is rising to the challenge and making a difference at every level and in every area of the company. Our super-talented EOG employees, armed with our advanced information technology analytics, are at the heart of this culture and I am incredibly grateful for the way they have responded to this unique downturn. I can't thank our employees enough. The second reason we're confident that EOG will weather this severe downturn is our premium drilling strategy. We believe it's the most strict investment hurdle rate in the industry. Premium requires that all investments earn a 30% direct after-tax rate of return using an oil price of $40 flat. We initiated our premium strategy in 2016 during the last downturn. Since then, we have continued to improve the quality of our drilling inventory with substantial and sustainable oil cost reductions. The improvement in our returns and cost structure has made EOG more resilient to low oil prices and positioned us to respond quickly to this unprecedented downturn and manage our business efficiently should the downturn be prolonged. As a result, we have a significant amount of premium inventory, more than 4,500 identified locations, in fact, that earn at least a 30% direct after-tax rate return with $30 oil, which is even lower than the 40 used to meet the premium hurdle. Armed with this high return inventory, EOG is well-positioned to continue to be a leader in returns. We ended this downturn in a position of operational and financial strength, and the reason for this is our consistent approach to the fundamentals of our business, return-focused capital allocation supported by a strong balance sheet. Rest assured that EOG priorities will remain the same throughout the duration of this crisis. First, only invest capital if it generates premium rates of return. Our disciplined approach to reinvestment does not change. We invest to make a return, even with low oil prices. We will not drill a well if it doesn't earn at least a 30% direct after-tax rate return. Second, utilize our operational flexibility to cut expenditures quickly. We exercise the operational flexibility allowed by our contracts with service providers to revise our development plan to be consistent with our outlook for oil prices over the next three quarters. Third, accelerate technical innovation across the company. Lower activity does not hamper our innovation. In fact, true to the EOG culture, each of our divisions have already started to implement multiple initiatives to further reduce our cost structure. improve well productivity, and advance our exploration program. Fourth, exit 2020 with momentum by increasing production into the price recovery. While we remain flexible and responsive to the pace of the price recovery, we have a large inventory of newly completed wells waiting to be put online. We plan to bring those to sales as prices begin to recover during the second half of 2020 and exit the year with momentum heading into 2021. Fifth, protect the financial strength of the company. Our goal each year is to spend within cash flow and maintain an impeccable balance sheet to support operations and protect our dividend through challenging times. Sixth, continue to strategically invest in the long-term value of our business. Through each of the prior downturns, EOG has emerged a stronger business because we continue to invest in the long-term value of the company. Whether it was leasing Exploration Acreage in the Eagleford to jumpstart our transition to oil or the Yates acquisition in 2016, challenging times for the industry often offer the best opportunities to invest. And finally, and most importantly, maintain our unique culture. Our culture is the key to our success, and we put a priority on protecting our unique ability to sustainably reduce costs, improve our inventory, and strategically adjust to market conditions. Our ultimate goal is not change, to be one of the best companies in the S&P 500. We believe the company will make tremendous progress towards its goal in 2020 by making EOG more cost-efficient by fostering innovation of sharpening our technical edge and progressing new exploration potential, we will emerge a stronger global competitor, uniquely positioned to capture the upside when all markets recover and continue creating long-term value for our shareholders. Next up is Tim to review our current financial position.
spk04: Thanks, Bill. A conservative approach to our capital structure has been a cornerstone of EOG's financial strategy throughout our history. This is born out of a recognition that oil and gas business has always been capital-intensive and cyclical. These cycles are as inevitable as they are unpredictable, and so a business must be built not just to withstand them, but to have the financial strength at the right times to be able to take advantage of them. EOG entered the downturn in very good shape. Cash at the end of the first quarter was $2.9 billion, which included roughly $760 million of collateral from hedge contracts. This compares to total debt of $5.2 billion for a net debt to total capital ratio of less than 10%. This is down from 13% at the end of last year and a recent peak of 34% in 2016. We reduced net debt by $4 billion in the last four years. Our liquidity position is further supported by a $2 billion unsecured revolving line of credit, which has no borrowings against it. Our long-term debt ratings which were recently reaffirmed by S&P and Moody's, stand four notches into investment grade. Furthermore, on April 14th, EOG issued 10 and 30-year bonds totaling $1.5 billion, enhancing our already strong liquidity position. Last month, we also repaid a maturing $500 million bond, and we plan to repay with cash on hand the $500 million bond maturing on June 1st. Given the outlook for oil prices for the remainder of the year, DOG has also added additional hedges for 2020. We now have hedged more than 95% of our second quarter oil production at an average price of $48 and more than 50% of our third quarter production at $47. This mirrors how we view the periods of greatest price risk and adds another dimension to our approach to maintaining a resilient business by securing that portion of our cash flow. We will begin to look at adding additional 2021 hedges later in the year if prices look attractive relative to our assessment of the market fundamentals. Maintaining and growing the dividend remains a top priority as it is the most tangible output of EOG's high-return premium business model. We have never cut the dividend, never issued equity to support the dividend, and have not relied on asset sales at fire sale prices to make it through a downturn. The Board yesterday declared a quarterly dividend of 37.5 cents per share or $1.50 per share annualized rate, which maintains the rate from the 30% increase declared last quarter. The dividend is designed to be sustainable through low price cycles without straining the balance sheet or sacrificing other priorities. We test these priorities against numerous down cycle scenarios so we can be confident these goals are achievable even under extremely stressed conditions. This resilience reflects EOG's strong returns, low-cost structure, and financial flexibility. EOG's financial strengths also gives our operations teams to be able to take necessary actions with a focus on long-term benefits to the company instead of making forced short-term decisions. Next up is Billy to review our operational performance.
spk08: Thanks, Tim. I want to highlight the major steps taken to adjust our operating plan by providing some detail, first, on our capital and operating cost reduction efforts, and second, the steps taken to reduce production during the low points in the oil price curve. Our swift response to the current environment is evident in our first quarter performance. We reduced capital by $265 million, or 14%, while essentially hitting the midpoint of the guidance for oil volumes. For the entire year, we reduced our capital plan to $3.5 billion, more than 45% lower than the original plan. Demonstrating the flexibility in our operational plan, we reduced our drilling rig fleets 78% from a peak of 36 rigs down to eight in the span of just six weeks. On the completion side, we reduced activity 69% from 16 frag fleets to just five. Our flexible contracting strategy combined with our established reputation as a consistent operator that values strategic vendor relationships have allowed us to make these adjustments without incurring significant cost. The goal is to generate high rates of return for the capital we choose to invest, along with free cash flow while maintaining our leverage to the up cycle as demand recovers. Our ability to reposition the company to achieve that goal in a few short weeks is a testament to EOG's strong culture and decentralized organization and, most of all, our fast-acting, innovative employees. I'm incredibly proud of them. We also reduced exploration and infrastructure capital without sacrificing projects with the highest long-term benefit to the company. Exploration capital has been focused on the prospects with the most promise to add future shareholder value. On the infrastructure side, The concentration of our activity in the Delaware Basin and Eagleford, where we have existing, well-developed assets in place, naturally reduces infrastructure needs. And we are also maintaining our commitment to reducing our environmental footprint by retaining investment in high-impact projects. On the operating cost side, we reduced lease operating expense by more than $300 million, or approximately 20% compared to the original plan. Our operations teams are highly engaged in cost reduction, and we are realizing savings from many areas, including fewer expense workovers, reduced maintenance and repairs, water disposal and compression expense, and contract labor. While reducing activity has driven significant initial cost reductions, we are maintaining a level of activity that allows us to accelerate technical innovation. The biggest opportunity from the downturn will be to identify step change efficiencies and operational improvements that lead to sustainable cost reductions. For example, our drilling and completion teams continue to establish new performance records in each area as illustrated on slides 39 and 43 of our investor presentation. Across all our operations, we believe we will be able to lower well cost another 8% this year. most of which will be sustainable as a result of the improved efficiencies. This is a testament to the continued drive and innovation to raise the performance bar and the spirit of continuous improvement that allows us to consistently reduce well cost in each of our plays. The cadence of our new capital plan is heavily front end loaded. Most of the $1.7 billion of first quarter capital was spent before the downturn began. As a result of rapidly reducing activity, we expect to spend about $650 million in the second quarter and decline sequentially in the third and fourth to total just $3.5 billion for the year, nearly half of our original plan. Our 2020 production profile reflects a rate of return decision. Even though 90% of our shut-in production is cash flow positive at $10 per barrel, And we have access to multiple markets. Rather than produce at potentially the lowest price point of the year, we elected to shut in existing and defer additional production by delaying the startup of new wells. We plan to continue to defer production through the first half of the year. This deferred inventory of new wells has been completed and is simply waiting to produce. This allows us to exert more control over the cash margins of every barrel we produce. and provides us the ability to quickly increase oil volumes into an improving oil price environment. We began deferring production during the first quarter, and even after delaying initial production from new wells and shutting in 8,000 barrels a day in March from existing wells, we achieved the midpoint of our guidance. First quarter and second quarter represent the peak and the trough, respectively, of our U-shaped production profile in 2020. Between deferred startups and new wells drilled and completed, we anticipate turning online approximately 300 additional wells in the second half of the year, for a total of 485 by the end of 2020. Volumes are currently forecasted to increase in the second half of 2020, with fourth quarter production averaging about 420,000 barrels of oil per day, establishing momentum going into next year. The capital required to maintain this level of production going forward would be approximately $3.4 billion per year. Our production profile corresponds to the current outlook for oil prices. However, we will remain flexible to make further adjustments to the operating plan as conditions change. If prices stay lower for longer, we can make additional reductions to our capital and operating costs and further defer bringing new wells online. To be clear, we would rather shut in production than sell into an uncertain low-price market. Ultimately, the decision to begin increasing production will be based on a more sustainable and constructive outlook for oil prices in the second half of the year. For the oil that we do choose to sell, we have secured favorable prices through various contracts providing exposure to Brent Gulf Coast WTI, and fixed prices. The marketing strategy provides flexibility to pivot each of our producing areas to multiple markets to capture the highest margin. In conclusion, I am proud of how decisively and thoughtfully our employees responded to this downturn. We exercised our flexibility to quickly cut capital and operating costs, and the decision to reduce volumes at the lowest point of the price curve supports our intent to accomplish two primary objectives. One, enhance the margins from each barrel that is produced, and two, maximize our rate of return for any investment. While EOG is not immune from the effects of low oil prices, we have the tools and the information to make real-time adjustments to maximize our profitability. We will remain disciplined, invest wisely, and constantly evaluate market conditions to generate the most shareholder value. Now here is Bill to wrap up.
spk09: Thanks, Billy. EOG is a resilient company, and while we aren't completely immune to the level of demand destruction caused by the pandemic,
spk06: Pardon me, this is the operator. It appears the main speaker line is not producing audio. Please stand by for one moment. Hello, speaker line, can you please proceed?
spk10: Yes, this is Bill.
spk06: Thank you, Bill. We missed the last part of your presentation, sir.
spk10: All right. In conclusion, EOG is a resilient company. And while we aren't completely immune to the level of demand destruction caused by the pandemic, we are prepared for it. Our financial structure is very conservative, and our capital allocation process is hyper-disciplined. This is an unprecedented downturn. U.S. oil production is in severe decline, and it could take years for domestic production to turn around. We believe that the historic and prolific oil production growth by U.S. shale may have been forever altered. And while the timing and level remains uncertain, we are confident demand will improve. Therefore, current prices are not sustainable. In the inevitable price recovery ahead, there is tremendous opportunity for UOG. With a strong balance sheet in hand, a culture that drives continuous improvement, and our commitment to generate strong returns with free cash flow, EOG will be ready to provide much-needed supply when prices show sustainable improvement. We don't believe there's a better company positioned to capture the upside as the oil market recovers. EOG will not only survive this downturn, but emerge as a stronger competitor in the global market. Thank you for joining us this morning. Our thoughts are with you as we navigate this pandemic together. We sincerely hope your family, friends, and colleagues are healthy and safe. Operator, that concludes our remarks, so please open up the lines for questions.
spk06: Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Questions are limited to one question and one follow-up question. We will take as many questions as time permits. Once again, please press star 1 on your touch-tone phone to ask a question. If you find your question has been answered, you may remove yourself by pressing star then 2. We'll pause for just a moment to give everyone an opportunity to signal for questions. And today's first question comes from Leo Mariani with KeyBank. Please go ahead.
spk00: Hey, guys. Just wanted to ask in terms of the budget this year. Obviously, you've cut it a couple times here, clearly prudent response to oil prices. I, too, agree that oil prices are unsustainable at these levels on a global basis. If we were to see just a rapid increase, say, in oil prices as we got later in the third quarter and fourth quarter, would you guys consider adding more capital back late this year to get you guys a little bit more ready for growth mode in 2021?
spk10: Yeah, Leo, this is Bill. And, you know, I think we're going to be very cautious before we add capital this year. And it's unlikely that we would add any more additional capital until, you know, we want to get into 2021 and see how demand continues to recover. And so we wouldn't – I don't think we're going to be adding any capital in the remaining of the year.
spk00: Okay, that's helpful. And, Bill, you certainly talked about, you know, emerging stronger from this pandemic. You kind of, you know, referenced potential M&A as an option. You know, what do you think sort of other than kind of continuing to lower the cost structure of what you guys are doing? You know, what are the other keys to kind of emerging stronger? And you think maybe there could be some likely M&A, you know, late this year if there are opportunities?
spk10: Yeah, I think we've been pretty clear over the years about M&A. We're not really interested at all in any certainly low return M&A or acquisitions. It's really difficult. It has been historically, as everybody knows, M&A markets. It's very difficult to make a good acquisition and generate a strong return at the same time. And everything we do, as you know, EOG, we're totally focused on returns. And so the dollar we spend, every deal we do, has to be competitive on a return basis. And it's very difficult to compete with our organic exploration effort. We're adding a lot of very low-cost acreage that we believe contains drilling inventory that will be better accretive to the quality that we have now. So it's very unlikely we'll do certainly a large M&A. We do do small bolt-on acquisitions to supplement our exploration efforts just to get low-cost acreage. But large M&As are really not, in our view, competitive. Other than the cost reductions that we're making, obviously we've spelled out a lot of those here. Billy has. We continue to be very innovative all over the company. We continue to see excellent technical work and a focus on innovation and new ideas, and those are just coming out in multiple areas of the company, completion technology, a lot of great geotechnical work going on in the company. And we haven't taken our eye off of our exploration effort. And I'm going to ask Ezra, Jacob, to maybe comment on that a little bit.
spk07: Thanks, Bill. As everyone knows, we entered the year with a pretty exciting exploration program. We're focused on capturing positions in basins where we capture the Tier 1 position, and we're working plays that we think will be improving the inventory quality with low decline and certainly low-cost plays. And we entered this year with a plan of testing and leasing in 10 different prospects. And we've obviously reduced our exploration budget this year, commensurate with reductions across other categories. But we're still planning to progress each of those prospects a little bit this year. We'll remain flexible as we do. But really the purpose, as Bill said, is that these all have the potential to add significant long-term value creation for the business and for our shareholders. And as Bill pointed out, what we've all seen here over the past, say, six or eight weeks since our employees have been working from home is really just an amazing effort from all of them on the development side and the exploration side to come up with and generate new ideas and and we just couldn't be more impressed or commend the employees for their efforts on that.
spk00: That's great color. Thanks.
spk06: Our next question today comes from Brian Singer with Goldman Sachs. Please go ahead.
spk13: Thank you. Good morning.
spk10: Good morning, Brian.
spk13: We appreciate the specificity on guidance for production for the remainder of the year and the quantification of the expected shut-ins. When we look at the production excluding the shut-ins, second quarter's oil production is implied down about 19 percent from the first quarter. Can you just talk to the drivers of that and whether to use that 19 percent as indicative of an annualized natural decline, whether there are other factors that are influencing that?
spk08: Ron, I'm going to ask Billy to comment on that. Yeah, good morning, Brian. The way I would look at that, I would still like to emphasize that our annual decline rate that we've provided in previous guidance of 32% is still accurate and true. The shape of that on a quarter-to-quarter basis depends a lot on the nature and the timing of when you bring on wells prior to that. So it can be a little bit – it can fluctuate quite a bit. It can be a little bit lumpy, as you might think of it. It's strictly depending on the timing of bringing on wells in the quarter or two prior to that. So naturally, it's a little steeper at the first part of the life of a well and then flattens out later in the life. So that's kind of what you're seeing in the second quarter. I wouldn't take the decline you're calculating there at 19% as an indication of a change in our quarterly or annual decline that we've given you in the past.
spk13: Great, thank you. And my follow-up is both an EOG and then a broader question with regards to maintenance capital and shale supply costs. How much of the $3.4 billion of maintenance capital do you think includes cost reductions you believe are secular versus cyclical? You talked about, I think, 8% cost reductions coming from here to Wellcost and wondered whether that was factored into the $3.4 billion cost. And then I guess does the lower maintenance capital you and other companies are highlighting reflect another large step down in the supply cost for EOG and shale generally, or is this just a function of the market and the low oil price environment that we're in?
spk08: I'm going to ask Billy to talk about the first part of the question. Yeah, Brian. So just to be clear, our $3.4 billion maintenance capital we talked about is to maintain – the 420,000 barrels a day we plan to exit the fourth quarter at. And to give you a little more color on how we calculate that, that does not anticipate the cost savings that we've talked about here today. Our capital programs are based on the kind of a backward-looking actual well cost that we've been able to attain to date and doesn't bake in anticipated cost savings on a go-forward basis. So in light of that, I think we always think about that as a potential upside to achieve better results. So our capital plan this year and our capital plan or the maintenance cost that we've quoted here, the $3.4 billion, doesn't make into the 8% cost savings that we're talking about in this call. In addition to that, I think it's important to know that the $3.4 billion, just to go back to that, it's maintained the 420,000 barrels a day that we're exiting the year in.
spk10: On the second part of that question, Brian, as we look at the whole industry, there certainly are companies that are doing a good job continuing to lower costs. But we believe there's a really small set of those. because it really takes scale. It's probably one of the biggest drivers to be able to continue to lower costs. A lot of the cost reductions are certainly in the infrastructure, in a very continuous drilling program and completion program, et cetera, et cetera. I think really, so I think a few companies, as I kind of commented in the opening remarks, We believe there will be less companies after this downturn than there were before. We think they'll be more disciplined. Certainly, there'll be less capital employed in the shale business. But we believe, you know, as we said, that EOG is going to emerge as a leader in most of our cost reduction. Nearly all of our cost reduction is driven internally through companies The technical innovation in the company and the efficiencies, there's a lot of data in our IR charts that shows the amount of stages per day, certainly the feet per day on drilling, et cetera, et cetera, as well as I want to note maybe there's a slide in the Powder River Basin on our recent completions in the Maori and the Naira where our completion technology is certainly making a huge difference in the well productivity. So most of the improvements in EOG are driven from our internal culture and our innovation and our just desire to always continue to get better. We have a very sustainable model and culture, and we do not see any end in sight in EOG getting better. Great. Thank you.
spk06: Our next question today comes from Charles Mead with Johnson Rice. Please go ahead.
spk05: Good morning, Bill, to you and your whole team there, and I appreciate the sentiments you expressed there at the end of your prepared remarks, and I just reflect that back to you and everyone there at EOG. One question I was a little bit surprised to see that you guys still are forecasting some shut-ins to go into 4Q, and I'm curious if you could kind of, characterize what sort of production that is that's still shut in in 4Q. I could see an argument for it being the last sort of legacy vertical wells to come back on, but I could also see an argument for it being high-rate wells that you want to deliver to the strongest markets. I wonder if you could add some color there.
spk08: Charles, we'll ask Billy to comment on that. Good morning, Charles. That's a good question. I'm glad you asked it. It's The 20,000 barrels a day that we referenced that would likely still be shut in in the fourth quarter is simply wells that have some form of expense that's required to make them back on production. For instance, you have a lot of reasons why production goes down. These are wells that might have to replace a gas lift valve and downhole or maybe a hole in the tubing or things that require some expense work over to bring back to production. And We just haven't made the decision yet to expend the capital or the expense dollars to bring those wells back to production until we see the margins improve to a point where we would do that. So for the sake of the plan, we just assume those wouldn't be brought back on until next year.
spk05: Got it. That's helpful. And then maybe perhaps related to that, it's interesting to me that – Bill, you mentioned in your prepared remarks that you guys have gone ahead and completed wells but are waiting to turn them to sales, and that's a little different from what I've heard from a number of other companies that are maybe just electing to build docks and not complete. And I'm wondering if that's just a function of you guys wanting to honor your commitments to frack crews or if that's actually expression of some other view about the best way to to leave your well or the response time that you want to have when you do see a price signal.
spk08: Yeah, Charles, this is Billy again. So the way I would think about that is two things. I guess we started as the downturn started to happen. We were in the process, of course, of completing several wells. As I mentioned in the prepared remarks, we dropped our fractal leak count quite considerably there. at the start of the year, but we still had wells that were in the process of being completed or just being completed, and we elected to not bring those on production at a time when prices were falling so steeply. And likewise, as we continue to cut our product count down, I think we're running about five today, then those wells, as they're finishing up the completions, we're not bringing those wells on either. So it's just built up, I'd say, an inventory of wells that are in that category that we're waiting on the right timing as to when we view the market fundamentals improving and being constructive going forward to bring those wells on production.
spk05: Thank you, Billy.
spk06: Our next question today comes from Paul Cheng with Scrooge Bank.
spk12: Thank you. Good morning, gentlemen. Two questions. One is either for Bill or Billy. I think one of the silver lining of the COVID-19 is that it triggered a lot of creativity and you guys certainly have done a lot of that, as you mentioned. So what have we learned from this whole episode and what is some of the best practice that may impact your future, how you run your operation?
spk10: Yeah, Paul, this is Bill. You know, every... I've been with the company over 40 years, and I've been through a number of these downturns. This is certainly the most unique one that we've ever experienced. What we've really seen inside the company is the tremendous value that our information systems and technology has allowed EOG to make a very granular evaluation of everything we do. Every well in the company, we know about it. We have all the data. And through our decentralized organization, we've been able to analyze down to a very granular level everything we're doing. And so we've learned how important it is to have a great information systems and technology and how effective our employees have been to perform even, you know, and most of them are working from their homes like everybody else in the world. So that's been a great experience for us on a learning curve, and we see areas in that we can continue to improve and get better in. I think on the technical side of it, We just do not see any end in the advancements coming from the company because, as you all know, EOG, all the ideas, all the creativity, all the improvements in the company are from really every person in the company. It's not from the top down. It's really from the bottom up. And everybody's engaged. and the communications have been really good. We're using Microsoft Teams to have big meetings, divisional meetings and department meetings and, you know, meetings between different groups in the company, and that's working out really well. And so it's been a learning experience, but I think... We're fortunate, you know, to have a lot of that in place, but we can see some areas in that process that we can continue to improve in.
spk12: Bill, is there a couple of examples you can cite that in the post-COVID world, I mean, at some point that we will come out from that, that you think it will fundamentally change because of the experience that you learned will be fundamentally changing how you manage your business? Any process or any that you can say?
spk10: I think the fundamentals of the company, return-driven, certainly committed to generating strong free cash flow, maintaining the balance sheet, a strong balance sheet, spending within our means, and then focused on returns. We are so focused on returns. Those things are not going to change. Those are the fundamentals that drive our business. I think the changes that you see in EOG are just the organic changes that are happening every day as we continue to just gather data and analyze it and apply it. And I think those are the things that make EOG who we are. So I don't see those things changing. We're focused on totally getting better literally every day. And we believe the opportunity in front of us, because we believe this unique downturn has been so severe, we believe our opportunities will be greater in the future than they've been in the past.
spk12: A final question for me, a short one. On the curtailment, can you tell us that maybe how the regional or basin speed and also that whether all the curtailment is essentially shut in or involving some of the well production?
spk10: Paul, I'll ask Billy to comment on that.
spk08: Yeah, Paul. So the way we go about analyzing our business to shut in wells is is at a very granular level. All of our areas are operated in the same manner. We have the tools, as Bill described, the information technology to gather the information, analyze it, and push that decision down to the lowest level in our organization to understand the profit margins on every well throughout the company. So with that information, we can make decisions on when and where best to shut in wells to maximize our cash flow at any given time. So the shut-ins occur on economics based on that way. We also analyze things from a market perspective in the same manner. We have the same information to understand the markets we can take the products to, how to maximize our our net backs for every product on a well level. And so we can do the same kind of analysis from a marketing perspective. And simply part of that decision is making a larger rate of return decision that helps us think about is it better to produce most of that volume into a more volatile and lower priced environment or based on a macro outlook for the product Is it best to wait a month or two or potentially longer to bring that production back on? And so I'd say most of the production falls into that realm. And it's made pretty much on every basin across the company in every area. So that's how we analyze it. It's a very granular look across the company. It takes a lot of effort. It goes back to the culture of the company, though, and we have so many engaged employees that are really committed to the company and making sure we all do the best thing we can to continue to make the company better. So couldn't be more proud of the people that we have to make it all work.
spk06: And our next question today comes from Neil Dingman with SunTrust. Please go ahead.
spk02: Morning, all. My first question is just around your return requirements. I'm wondering, you all took certainly some major steps this quarter in curtailing existing production, suspending D&C. I'm just wondering, Bill, are your margin requirements different when you look at bringing those curtailments back versus thinking about ramping up the D&C activity?
spk10: I think, you know, When we look at when we're going to bring wells shut in or new wells on, we're really just looking at the strip. And we obviously stay very engaged on a really daily, weekly basis on world events and the macro view of oil. And so when that becomes more positive and we get more firm, that's sustainable recovery. That's when we'll begin opening things up. We don't have an exact number on the margin. We're just looking for the trends. And certainly we're not, as Billy has talked about in what we've done, we're not interested in selling our oil at the lowest part of the market. When there's a steep contango in the prices, there's no use selling it now when we can get double in a few months. So that's really, that's all we're doing on that, in that area.
spk02: Very good. And then just, you know, one last question. You definitely hit this quite a bit, but just on activity, I was looking back in 16, it looked like I think you all had gotten down to, I think, nine or ten rigs during that time when we were around $26. And I'm just wondering, does some of that decision on sort of DNC activity and all and just I guess, activity and all come to how many of these premium locations you have, or is it simply, Bill, what you had just mentioned, just, you know, not wanting to produce, you know, into sort of this environment, I guess. I was just sort of comparing today versus 2016 maybe, and maybe you could just tell us a little color on how you're looking differently at these two periods at this point.
spk10: Well, certainly we're not limited by inventory. We have a tremendous inventory. Like we said, we've got 4,500 locations already identified that will do a 30% rate of return at $30. And I'm sure that will grow over time. So that's not the issue at all. Really, you know, our investment pace every year is set on a very conservative price deck in our view of the macro. And, you know, the limitations on that are we want to generate free cash flow. We want to spend within our means and generate free cash flow and maintain an impeccable balance sheet and also, obviously, generate very, very high rates of return. So those are the things that guide us. And so in this particular instance, you know, we're just looking for a better view of the future and what the recovery is going to look like. not only in the price but in, you know, what's U.S. shale going to look like and where is our spot in there. We think we'll continue to be the leader in returns and continue to be the company to continue to add very, very significant value.
spk06: Thank you. Our next question today comes from Janine Way with Barclays. Please go ahead.
spk01: Hi, good morning, everyone. Hi, Jane. Hi, good morning. Thanks for taking my call. My first question is probably a follow-up to Charles' and Neil's question. It seems to us that EOG is just taking a more aggressive approach on production shut-ins than others. I know it all depends on your Mac review and whatever, you know, contracts or lease stuff you have or any related shutdown or startup costs, but Do you have an estimate on the MPV uplift for the year for doing the shut-ins and the well deferrals versus maybe the business as usual case with no shut-ins and no deferrals?
spk10: Janine, I don't know. We don't have a number. You know, we can certainly calculate that, but it's more just common sense. We just don't like giving our oil away. Okay. We want to make money. We're focused on returns, and we believe just waiting a few months or a quarter that we could get twice as much of our oil than we are today. And so it's really just a common-sense approach and a return focus and our view on a market that's improving.
spk01: Okay. Okay. And then my second question is, I know we're in the middle of an oil rally here, but we're still only at, I don't know, call it 25 TI. If we see a pullback in oil prices, to what extent are you willing to lean on the balance sheet to support long-term value? I know you're not trying to maximize dollars today or tomorrow, but in terms of the long-term, if we see that pullback, is there a point where it becomes just too detrimental to long-term value to keep cutting capex? And if so, kind of what is that level?
spk10: Thank you. Yeah, Janine, we certainly have a lot of flexibility to continue to cut capital. I'm going to ask Billy to comment a bit on that.
spk08: Yeah, Janine, so we cut back to the level we did to basically be able to do the things Bill talked about, make sure we generate a rate of return and generate free cash flow while we see the commodity price outlook today. If that changes and we feel like that we need to cut more, certainly we have that flexibility to do so and would continue to push that lever down throughout the end of the year, depending on the outlook. So we could still try to manage within cash flow, even if prices stay lower for longer.
spk06: And our next question today comes from Arun Jayaram with J.P. Morgan. Please go ahead.
spk03: Yeah, good morning. Bill, we've seen, you know, a lot of different approaches to shut-ins with, you know, EOG, Conoco, Exxon, and Chevron announcing significant shut-ins. I was wondering how clear is the decision to shut in versus not? And I also just want to see if you could address one of the questions that came in last night was just the execution risk in shutting down, you know, hundreds, maybe thousands of wells, and then restarting those consistent with what you've guided to in the deck.
spk10: Yeah, Roon, I'm going to ask Billy to comment. I'm on the execution part.
spk08: Yeah, Roon, thanks for the question. Yeah, I think as we talked before, one of the unique things that we built the company around is our ability to gather data and analyze it very quickly and and have that information basically in the hands of every employee in the company, including at the field level. So the actual execution of being able to shut in and bring back the wells on is fairly painless. It's a very simple exercise by communicating that data down to the people out there in the field to be able to make those actions happen. So that effort is very easy to do. As far as any risk of shut-ins, You know, there's really not any risk in our part. I think the cost of shedding in the wells is very minimal, if not zero. The cost of bringing the wells back on is kind of the same thing. And we could actually have all the wells back on production in just a matter of days because you have to remember we are a decentralized organization. We have these assets across the country, and we have people managing those assets here. that are very capable and committed to making sure that we do the best things we can as quick as we can safely. So the effort is very easy to attain with the culture of the company that we have and the operations we have set up. And I would just – this is Bill.
spk10: Go ahead. Just one more comment on that. I think, you know, we have multiple – you know, years and years of experience of shutting in wells for different lengths of time. And we've got a chart in the IR deck, you know, that shows, you know, on these shale wells there's absolutely no damage when you shut them in and bring them back on for, you know, whether it's two weeks or two months. We feel very confident about that. So we just view shutting in as just low-cost storage. That's the lowest-cost storage that we can come up with. And, you know, And it's a great way to manage your business, especially in a price environment like we're in.
spk03: Yeah, that's a clever way to think about it. Just a quick follow-up. You guys cited a $3.4 billion sustaining capital for the 4Q exit rate at 420. How fully loaded, Billy, is that 3.4? I know you talked a little bit about the ability to even maybe – push that down based on incremental cost savings, but how fully loaded is that capex number?
spk08: It's in keeping with how we would run our business. The way I would think about it, it is maybe a little more high graded than it was in the $4.1 billion capital plan that we announced some time ago that people might remember. In that previous maintenance capital plan, it was pretty much designed to keep each division operating flat This one is truly we're going to go to the wells that have the highest return at today's prices, and so it is a little bit more high-graded than you might think of. It's still spread across multiple basins, though, so I wouldn't jump to the conclusion that it's just one area. It's still spread across multiple areas, and it includes infrastructure and facility costs and ESG spending and those kind of things that we typically would include in a normal budget, just maybe at a little bit lesser scale.
spk06: And our next question today comes from Doug Leggett with Bank of America. Please go ahead.
spk11: Thank you. Good morning, everyone. I hope everyone's doing well out there. Bill, you made a number of comments. If I could read them back to you. U.S. shale is forever altered. This is a unique downturn and there's been a price war. So my question is, can you share with us what that means for your goal forward strategy. And you kind of know what I'm getting at here is the U.S. is doing 50% and Saudi removed the lowest cost barrels off the market. So it sounds like there's a little bit of a pivot here. And I'm just wondering if I'm reading that right, if you can walk us through how you see the right mix of reinvestment, growth, cash flow. And I've got to follow up with.
spk10: Yeah, Doug, I think, you know, Looking into the future, as we said, we believe there's going to be a structural change in U.S. shale. There's going to be less players. I think certainly the industry is becoming more disciplined and it will be even hyper disciplined coming out of this downturn. So we believe there's going to be significant less capital invested in growth in the U.S. So and certainly there will be substantially less growth. We have a hard time seeing that the U.S. production will be able to certainly in the next several years get back up to the levels we've been just a few months ago. So in that lies tremendous opportunities for the companies that survive and It's an enormous opportunity for EOG. If you look back on our last three years, we've generated an industry-leading return on capital ploy of 14%. We've generated $5.6 billion of free cash flow, and we've returned $3.3 billion back in shareholder-friendly ways with substantial dividend growth and debt reduction. And over that last three-year period, we've increased our proven reserves by 55%. and we've accomplished this all with an average WTI oil price of $58. So fundamentally, we're not going to change. As we've been talking about, we're return-driven and believe in a strong balance sheet, and we believe we're improving at a rate much faster than we have in the past and that we're going to emerge a much better company in the next recovery. So we're going to continue to stick with our fundamentals, evaluate the market conditions, and continue to create value.
spk11: I appreciate the answer. My follow-up is going to be a related question because I'd just like to press you a little bit on this. Because the $58 oil price bill was subsidized by Saudi, and the U.S. growth rate, in my opinion, is no longer going to be tolerated, and obviously you've been a large part of that growth. So everything, there's no issue around the operational capability of the company. You are clearly the leader, if not one of the leaders in the industry. The issue is whether the business model continues to reinvest 90% of its cashflow and grow, in the words of the Texas Railroad Commission, at a wasteful level in excess of reasonable demand. So the question is really not about your capability. It's about the behavior coming out the other side of this. Going from 36 rigs to six, Do we see you go back to that level of growth, or do we see you right-size your organization to pivot more to free cash flow? That's really what I'm getting at, because that $58 you referred to was with Saudi taking the lowest-cost files off the market.
spk10: Well, let me make one correction there right off the bat. We've invested about 80% of our cash flow, which is about a really good level. We've been very committed – to generating substantial amount of free cash flow. We paid off all that debt, increased our dividend, ended the year last year with $2 billion of cash on the balance sheet. So we haven't been spending all our cash. We've been very disciplined in generating tremendous value with that. As we go ahead and we look to the future, again, we think it's going to be different. So we'll certainly... We'll be continuing to evaluate that and continue to stick with our fundamentals and see what's the best way for EOG to continue to generate significant value.
spk06: Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Bill Thomas for any final remarks.
spk10: Thank you. In closing, I just want to say We've never been so proud of the employees of EOG. The way you have responded to this historic COVID-19 crisis has been outstanding and heroic. During every downturn in my over 40 years with EOG, the company responds with record-breaking improvements. Sooner or later, this crisis will be over and oil will recover. We believe EOG will emerge with the ability to be a stronger and a higher return company. than ever before. Thanks for listening and thanks for your support.
spk06: Thank you sir. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.
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