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spk10: Good day, everyone, and welcome to EOG Resources Third Quarter 2021 Earnings Results 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 Chief Financial Officer of EOG Resources, Mr. Tim Triggers. Please go ahead, sir.
spk13: Good morning, and thanks for joining us. 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 in EOG's SEC filings. This conference call also contains certain non-GAAP financial measures. Definitions and reconciliation schedules for these non-GAAP measures can be found on EOG's website. Participating on the call this morning are Ezra Jacob, Chief Executive Officer, Billy Helms, President and Chief Operating Officer, Ken Baedeker, EVP Exploration and Production, Jeff Leitzel, EVP Exploration and Production, Lance Turveen, Senior VP Marketing, and David Streit, VP Investor and Public Relations. Here's Ezra Jacob.
spk16: Thank you, Tim. Good morning, everyone. EOG is delivering on our free cash flow priorities. Yesterday, we announced an 82% increase to our regular dividend to an annual rate of $3 per share, a $2 per share special dividend, and an update to our share buyback authorization to $5 billion. These cash return announcements reflect EOG's consistent, outstanding performance and are the direct result of our disciplined approach to high return investment. During the third quarter, we set new quarterly earnings and cash flow records, adjusted net income of $1.3 billion, or $2.16 per share, and free cash flow of $1.4 billion. The strength of our current and future earnings and cash flow that supports both dividend announcements can be traced back to 2016. Amid a potentially prolonged low commodity price environment, we made a permanent upgrade to our investment criteria. Our premium hurdle rate was established not only to protect the company's profitability in 2016, but all future commodity cycles. The discipline to only invest in new wells that earn a minimum 30% direct after-tax rate of return, assuming a $40 oil price for the life of the well, continues to improve our capital efficiency, profitability, and cash flow. Our employees immediately embraced the challenge of this new investment hurdle, and by the second half of 2016, EOG was reinvesting capital and paying the dividend within cash flow. We have generated free cash flow every year since. From 2017 to 2019, we generated enough free cash flow to significantly reduce net debt by $2.2 billion, while also increasing the dividend rate 72%. We also expanded our inventory of premium wells by more than three times. While adding inventory that meets the minimum premium threshold increases quantity, our goal through technical innovation and organic exploration is to add higher quality inventory. Our employees, empowered by EOG's unique culture, applied innovation and efficiencies to raise the return of much of the existing inventory, while adding higher rate of return wells through exploration. The premium standard established in 2016 and the momentum that followed provided a step change in operational and, by extension, financial performance, which set the stage for the second upgrade to our reinvestment hurdle rate, double premium. Double premium, which is a minimum return hurdle of 60% direct after-tax rate of return at $40 oil, was initiated during the depth of last year's unprecedented down cycle. That capital discipline enabled EOG to deliver extraordinary results in a $39 oil price environment last year. Using such stringent hurdle rates prepared the company not only for 2020, but for our stellar results this year. There is no clearer indication of the impact premium and now double premium has had on our confidence in EOG's future profitability than the 82% increase to our regular dividend announced yesterday. Combined with the 10% increase made in February of this year, we have doubled our annual dividend rate from $1.50 per share to $3 per share. After weathering two downturns during which we did not cut nor suspend the dividend, the new annual rate of $3 per share reflects the significant improvement in EOG's capital efficiency since the transition to premium drilling. Going forward, we are confident that Double Premium will continue to improve the financial performance just like Premium did five years ago. We are also confident in our ability to continue adding to our Double Premium inventory without any need for expensive M&A by improving our existing assets and adding new plays from our deep pipeline of organic exploration prospects. Developing high-return, low-cost reserves that meet our stringent Double Premium hurdle rate expands our future free cash flow potential and supports EOG's commitment to sustainably growing our regular dividend. EOG's focus on returns, discipline growth, strong free cash flow generation, and sustainability remain constant. Just as our free cash flow priorities are consistent, so remains our broader strategy and culture. EOG's competitive advantage is our people, and today's announcements are a reflection of our culture of innovation and execution. Looking towards 2022, Oil market supply and demand fundamentals are improving, but remain dynamic. While it's unlikely the market will be fully balanced by the end of 2021, we will continue to monitor macro fundamentals as we plan for next year. We are committed to maintaining production until the oil market needs additional barrels. Under any scenario, we remain focused on driving sustainable efficiency improvements. We are well positioned to offset inflationary price pressures to help keep our well costs flat next year. To summarize this quarter's earning release in three points, first, our fundamental strategy of investing in high return projects consistently executed year after year is delivering outstanding financial results. Second, we are still getting better. As we continue to expand our opportunity set to add double premium inventory through sustainable well cost reductions and organic exploration, EOG is set up to improve performance even further. And third, we are well positioned to execute our high return reinvestment program in 2022 to deliver another year of outstanding returns. Here's Tim to review our capital allocation strategy and our free cash flow priorities. Thanks, Ezra.
spk13: As we have been progressing premium the last five years, our capital allocation decisions have been guided by a set of longstanding consistent priorities. First is high return disciplined reinvestment. Our returns on capital investment have never been higher. However, market fundamentals remain the number one determinant of when to grow. Second is the regular dividend, which we believe is the best way to return cash to shareholders. We have paid a dividend for 22 years without suspending or cutting it. At the new level of $3 per year, we can comfortably fund both the dividend and maintenance capex at $40 WTI. The combination of our low-cost structure, high returns, and strong financial position will sustain this higher regular dividend. This resilient financial position is backstopped by our third priority, a pristine balance sheet with almost zero net debt. We remain firmly committed to a strong balance sheet. It's not conservatism. It's a competitive advantage. Fourth, we regularly review other cash return options, specifically special dividends and share buybacks. Yesterday, we declared a special dividend for the second time in 2021 and updated our share buyback authorization. Share buybacks have always been part of our playbook and will remain an opportunistic cash return alternative. We are cognizant of the challenges of successfully executing a share buyback in a cyclical industry. We know and expect there will be periods in the future when the stock will be impacted by macro factors such as the commodity cycle, geopolitical events, and other unforeseen events like the COVID pandemic in 2020. The updated $5 billion authorization provides the flexibility to act and take advantage when the right opportunity presents itself. We believe our strategy for the use of other cash return options is well designed to deliver value through the cycle. Finally, we are not in the market for expensive M&A. It is simply a low return proposition. we can create much more value through organic reinvestment and our shareholders can do better with their excess cash our premium strategy generates back in their hands. Since our shift to premium in 2016, EOG has generated nearly $10 billion of free cash flow. With that cash flow, EOG has reduced debt $1.5 billion, increased the cash balance by $3.6 billion, and will have returned more than $5 billion to shareholders by the end of 2021. This is a significant amount of shareholder value driven by premium. Today, EOG is positioned to translate that value creation into even more cash returns to shareholders. In the third quarter, we generated a record $1.4 billion of free cash flow, bringing our year-to-date free cash flow to $3.5 billion, which is equal to the total return of capital paid and committed this year to our regular dividend, two special dividends, and debt repayment. you can expect us to continue returning cash going forward. There may be times when we strategically increase or decrease the cash balance, but over time, the cash will go back to our shareholders. Here's Billy.
spk17: Thanks, Tim. As a result of the consistency of our operating performance, we delivered another quarter of outstanding results. I couldn't be more proud of the engagement of our employees and their culture of continuous improvement. Their execution of our 2021 plan has been near perfect. For the third quarter in a row, we produced more oil for less capital. That is, we exceeded our production targets while spending less than our forecast for capital expenditures. Well productivity, driven by our double premium hurdle rate, continues to outperform while our drilling and completion teams push the envelope on new sustainable cost savings and expand those efficiencies throughout our active operating areas. Examples include insourcing and redesigning drilling equipment, adopting innovative techniques to reduce non-productive time, expanding super zipper completion operations, and reducing sand and water sourcing costs. Our ability to continue to lower costs and deliver reliable execution quarter after quarter is tied to a common set of operating practices that together form a sustainable competitive advantage for EOG. First, we are a multi-play company with activity spread across four different basins in the U.S. As conditions change, we have the flexibility to shift capital between plays to optimize returns. Second, we are organized under a decentralized structure. Decisions are made by discrete focused teams closer to the operation rather than dictated by headquarters. Our culture is non-bureaucratic and entrepreneurial. We empower our frontline employees to make decisions, freeing them to drive innovation and efficiency improvements. Third, we have established strategic vendor relationships with our preferred service providers. We are not typically the biggest beneficiary of price reductions during downturns, We also tend to not be on the leading edge of price increases during inflationary periods. Fourth, we have taken ownership of the value-added parts of the drilling, completions, and production supply chain by applying our operational expertise and proprietary technology to improve efficiency and lower cost. Examples include sand, water, chemicals, drilling fluids, completion design, drilling motors, the marketing of our products, and much more. As a result, our operating teams have complete ownership of driving improvements in every step. And finally, we apply world-class information technology to every part of our operation. Our data gathering and analysis capabilities continue to improve, which we leverage to better manage day-to-day field operations for more efficient use of resources, as well as discovering new innovations. As a result of these strategic advantages, We are confident in achieving our target of 7% well cost savings this year. This is an incredible accomplishment given this state of inflation. And as we move into next year, we're on track to lock in 50% of our total well cost by the end of this year. We have locked in 90 plus percent of our drilling rigs at rates that are flat to lower than 2020 and 2021. We've also secured more than 50% of our completion crews at favorable rates. While it is still early, the savings from these initiatives and other improvement efforts will continue to be realized next year, helping us offset the risk of additional inflation. And thus, we remain confident that we will be able to keep well-cost at least flat in 2022. Now, here's Ken.
spk14: Thanks, Billy. Last month, we published our 2020 Sustainability Report. As detailed in this report, we are focused on reducing emissions in the field. Our flaring intensity rate decreased 43% in 2020 compared to 2019, which drove an overall 9% reduction in greenhouse gas intensity. We continue to make progress toward our goal of zero routine flaring across all our operations by 2025, with our more immediate goal of 99.8% wellhead gas capture this year. We also made significant progress on methane last year, reducing our methane emissions percentage by one-third to less than one-tenth of one percent of our natural gas production. Since 2017, we've reduced our methane emission intensity percentage by 80 percent. Our sustainability report profiles the technology and innovation that contributed to these improvements and illustrates why we are optimistic about future performance on our path to net zero by 2040. Examples of how we are addressing emissions in the field include closed-loop gas capture, which helps us continue to reduce flaring. We're leveraging information technology and our extensive data analysis capabilities from both mobile platforms and our central control rooms to better manage day-to-day operations. In addition, we're piloting technology in the field such as sensors and control devices that complement our already robust leak detection program. These are just a few examples of the initiatives we have underway. Like all efforts at EOG, our sustainability strides are bottom-up driven. Creative ideas to improve our ESG performance come from employees working in our operating areas every day. We have a long list of solutions we expect to pilot and profile in the future. Our record of significantly reducing our GHG intensity over the last several years speaks for itself and we are committed to continuing to improve our emissions performance. Now here's Ezra to wrap things up.
spk16: Thank you, Ken. Our record-breaking operational and financial results throughout this year and the cash return announcements we made yesterday deserve to grab some headlines. However, the real story behind our performance is consistency of strategy supported by our unique culture. At the start of the call, I said there is no clearer indication of the impact premium and now double premium has had on our confidence in EOG's future profitability than the annual $3 per share regular dividend. And while establishing the premium standard back in 2016 shifted us into a different gear, culminating in the magnitude of our cash return this year, our fundamental strategy executed year after year by employees united by a unique culture dates back to the founding of the company. That's ultimately what gives me confidence that EOG's best days are ahead. We are a return-focused, organic exploration company that leverages technology and innovation to always get better. Decentralized, non-bureaucratic, every employee is a business person first focused on creating value in the field at the asset level. Our financial strategy has always been and remains conservative, not just to offset the inherent risks in a cyclical business, but to take advantage of them. We are committed to the regular dividend and believe it is the best way to create consistent and dependable long-term value for shareholders. We have a proven track record that our strategy works, and going forward, investors can expect more of the same, consistent execution year after year. Thanks for listening. We'll now go to Q&A.
spk10: Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone 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, press star 1 on your touch-tone telephone to ask a question. If you find your question has been answered, you may remove yourself by pressing the star two key. We'll pause for just a moment to give everyone an opportunity to signal for questions. Our first question will come from Paul Chang with Scotiabank. Please go ahead. Thank you.
spk05: Good morning. Two question please, Ersan. You have the authorization for the buyback, but quite frankly, I don't recall EOG ever done any buyback for the past 20 years. So can you talk about what is the conditional criteria for you to actually act on it? And in theory, that if you're going to buy it when the market is suffering the downturn, does that mean that you should have a really strong balance sheet going into it? into the downturn, maybe at a net cash position in order for you to be able to afford it. Like last year, at the top of the pandemic, your share price was really attractive, but I'm not sure that you have to balance it or that the will to do the buyback at that point. So that's the first question. The second question is on the hedging. you have been quite aggressive putting in a lot of natural gas hedges. Curious that, I mean, with your low break-even requirement and a very strong balance sheet, why put on the hedges so aggressively? And to some degree, even though you have the physical barrel or MCF set to support it, but is that the fundamental basis that you become a speculation on the direction of the commodity prices? when you're doing it that way. Thank you.
spk16: Yes, this is Ezra Paul. Thanks for the question. Let me start by just outlining a little bit on the buyback, and then I'll hand it to Tim Driggers for a little more detail on it. You know, you're right. Our buyback authorization, we've had one previously, and we haven't exercised that in quite some time. What we've done right now is we've refreshed it to a size that's a little more commensurate with the scale of our company today. And we plan to exercise the buybacks in more of an opportunistic way rather than something programmatic is how we expect to be able to use it. And I'm going to ask Tim to provide you a little more details on exercising it.
spk13: Sure. Turn my microphone on. Sorry. First of all, we will evaluate buybacks like any other investment decision. How does it create long-term shareholder value? So that'll be the first thing we'll have to look at every time we make this decision. Specifically, to answer your question about could we have started during the pandemic but didn't have the financial wherewithal to do that, you're exactly right. At that point in time, oil was negative. The price of oil was negative. We had two bonds coming to totaling a billion dollars. So had we been in the shape we're in today, that would have been a perfect time to buy shares. But we weren't in that same position we are today. That's why continuing to work on the balance sheet and positioning ourselves for the future has been so important to EOG. We should not ever have that situation again. We have positioned the company to be able to opportunistically take advantage of these situations.
spk16: Paul, on the second question regarding our hedges, specifically gas, but really in general, our hedging strategy hasn't changed at all. As you know, we invest on a very, very stringent hurdle rate, our premium and now double premium rate. That's based on a $40 oil price, but it's also based on a $2.50 natural gas price for the life of the well. And so when we can opportunistically look to lock in some hedges north of $3, we feel very good about the returns that we're generating going forward on the gas price. You know, in general, we like to have a bit of hedges put on, whether oil or gas, to just give us a little bit of line of sight into our budgeting process as we enter into a new year. And so, really, that's the commentary on both the gas and the oil hedges.
spk10: The next question will come from Arun Jayaram. Please go ahead.
spk15: Yeah, good morning. Ezra, the 2021 cash return to equity holders has tallied just under 30% of CFO. If you add in debt, it's around 36% of your CFO. You know, I know there's no formal framework in place, but how should investors be thinking about cash returns on a go-forward basis? And could this 30% be viewed as some sort of benchmark?
spk16: Yes, this is Ezra. No, I would not take that as any type of benchmark. I think we've been very clear for the last couple of years in talking about our framework for cash return, really just our free cash flow priorities. The emphasis, the priority really is on a sustainable, growing regular dividend. We think that's the hallmark. You know, it's forward-looking. That's the hallmark of a very strong company. It hopefully sends a signal to everybody of our confidence in the growing capital efficiency of our company. Obviously, we've talked about some low-cost property bolt-on acquisitions. We've highlighted those on the last call and in the slide deck. today. We obviously covet a very strong, not just strong, but really a pristine balance sheet. And then to the last part of really the other part of your question is our other cash return options for excess free cash flow, which are the special dividends. And then as Tim was just mentioning, some of these share repurchases. And, you know, as we've said, we're very committed to returning excess free cash flow. We have stayed away from a specific formula because We like to be able to, you know, we try not to run the company on a quarter-to-quarter basis. We try to take a longer view of things. We realize that there are times when potentially the cash on hand may need to move up or down. But regardless of it over the long term, I think we've demonstrated, especially this year, that we're very committed to returning that excess free cash flow.
spk15: Great. And my follow-up. With the dividend increase to $3 on an annualized basis, Ezra, that will represent just over $1.75 billion in annual outlays to equity holders for the dividend. How should investors be thinking about future growth? Does this temper how we should think about longer-term production growth given the higher mix of dividend payments?
spk16: Yes, Arun, the step up this year in the regular dividend is really a reflection of what we've been doing for the last five years in reinvesting this in the premium wells. We've been seeing it slowly but surely show up in our financial performance. as we've lowered the cost basis of the company. And the confidence going forward really is what we're seeing with our change in focus over the past 18 months to these double premium wills. We feel that it's providing another step change in operational performance that should filter through to a step change in financial performance as we've witnessed with that change to premium. And then our inventory, of course, is spread across multiple basins. We have 5,800 of these double premium locations and over 11,000 of the premium locations. And we're adding to that every day. Our employees are working. you know, through either identifying low-cost bolt-on acquisition opportunities, sustainable well cost reductions, as we've highlighted this quarter, stronger well productivity, and then, of course, our low-cost entry into organic exploration opportunities to further expand both the quantity and the quality of that inventory. So I think as we continue moving forward and Sticking to our game plan of investing in double premium, it has the potential to continue to expand the free cash flow potential of EOG and thereby continue to provide an opportunity for us to remain committed to sustainably growing our dividend.
spk10: Our next question will come from Janine Way with Barclays. Please go ahead.
spk00: Hi. Good morning, everyone. Thanks for taking our questions. Our first question is on the special dividend. In terms of the timing and the process for that, when you looked at the potential to announce one, what did you see this time around that perhaps you didn't see last quarter when you decided to forego a special dividend?
spk13: Hi, Janine. This is Tim. So as has already been stated, we are committed to our free cash flow priorities, and that has not changed. So we look at all the factors every quarter to determine when's the right time to do either special dividend or now the share buybacks or increase the regular dividend. So when we looked at our cash balance of September 30, it was sitting at $4.3 billion. That leaves us well positioned to pay off our bond in 2023 and provide this $2 special dividend. So it's a combination of all those factors. And we felt this was a meaningful amount of cash to return at this time.
spk00: Okay, great. And then my second question may be following up on Arun's question on the base dividend. The large increase in the base, it seems like it's a catch-up to close the gap between what the business can support, given the premium and double premium wells, like you just said, and what was actually getting paid out. So I guess in terms of the timing also on the base, we're just curious how much of a factor the potential that you now see in your exploration plays factored into the decision to increase the base.
spk16: Yes, Janine, this is Ezra again. You know, it's not just the exploration plays. It's really just our confidence in being able to expand the overall inventory, the quality of the inventory into that double premium. And some of it comes from the announcements that you saw on this quarterly, on the quarter results, you know, the stronger well productivity supporting better than guidance volumes, the better than guidance capex driven by sustainable well cost reductions. So when I think about that, you know, I think about our existing inventory increasing in performance and quality and then I think about converting some of our premium wells into double premium status and then of course we have identified small bolt-on acquisitions where we can continue to grow and expand that that that inventory level for us and then as you highlighted we've got the organic exploration mix we're drilling 15 wells this year that we've talked about that are not in the publicly disclosed plays. Those plays are at various states of either, you know, initial drilling, collecting of data, or kind of evaluating, as we've talked about on other calls, repeatability, production performance of those plays. We're very excited and confident in our ability to continue to expand and, as I said, increase the quality of our double premium inventory. Ultimately, that's what gives us the confidence to be able to see that we can continue to lower the cost base of the company, increase the capital efficiency of EOG, and continue to support a sustainably growing base dividend, which is our commitment.
spk10: Our next question will come from Scott Gruber with Citigroup. Please go ahead.
spk09: Yes, good morning. So in your deck, you mentioned a carbon capture pilot project, which is interesting. Ezra, can you speak to your early ambitions in carbon capture? Are you looking strictly at EOR? Are you investigating pure storage? And what level of resources have you committed internally to the initiative?
spk16: Yes, Scott, I appreciate the question. I'm going to ask Ken Bedecker to address it.
spk14: Yeah, Scott, you know, we're continuing to make good progress on that initial carbon capture project that we've talked about. We've finalized many of the below-ground geologic studies, and we're currently working on the engineering and regulatory portions of the project. As we work our way through these steps, we'll get more clarity on timing, but right now we hope to initiate CO2 injection in late 2022. In terms of capital that we're allocating towards it, it's roughly 2% to 3% of our budget is going to be allocated towards all of our ESG projects is what we see.
spk09: And as you investigate the opportunity, how are you thinking about participating in the value chain? Would you be interested in entering transports? Obviously, it's an exciting opportunity, but It gets more capital intensive as you broaden participation. How are you thinking about the broader opportunity and participating across the value chain?
spk14: Scott, we're really not going to change the business that we're in. We're looking at carbon capture right now to significantly reduce our scope one and scope two emissions at this point. That business is a much lower return business than what we see with our well development that we have. We'll keep an eye on that, but our real goal for carbon capture is just reducing our scope one and scope two emissions, which we've made significant progress on in the last several years.
spk10: Our next question will come from Leo Mariani with KeyBank. Please go ahead.
spk11: Hey, guys. Just looking at the guidance here for fourth quarter, we can certainly see some pretty significant growth in U.S. gas. Obviously, you know, looking at gas prices right now, we're at, you know, multi-year highs at this point in time. Should we see that as a bit of a signal that EOG is perhaps, you know, flexing up a little bit on the natural gas side to try to capture what are probably some fantastic returns at the current prices here?
spk17: Yeah, Leo, this is Billy Helms. So on the CapEx side, certainly part of our program, as we laid out earlier this year, was just advanced some of our Dorado prospect in South Texas. As you know, it's a very competitive gas play with the rest of the plays in the U.S. And we've been very pleased with the results there, but we remain disciplined to only complete the 15 wells we targeted and laid out at the start of this year. And it's really a little bit early to be talking about what we're going to look like next year, but obviously with the results we're seeing, we're very pleased with the results being meeting or exceeding the type curves we have laid out, that certainly gives us an option to look at increasing activity there. So it's a little bit early yet to be saying what we're going to do next year, but we're very pleased with what we've seen.
spk11: Okay, that's helpful. And I guess, you know, obviously in y'all's prepared comments, you certainly spoke about the fact that it would probably be challenging to kind of meet all the necessary conditions at year end, you know, 21. that you all have laid out to put any type of, you know, real oil growth, you know, back in the market at this point in time. But, you know, I guess we've certainly heard some rumblings lately that, you know, perhaps we might already be at kind of pre-pandemic demand levels here as we work our way into November. I think OPEC Plus has a plan to reduce its spare capacity pretty dramatically by mid-22. Just wanted to get a sense if you think, you know, perhaps in the you know, mid to second half part of 22, there's a good shot at kind of hitting the conditions that EOG laid out to potentially put a little growth back in the market.
spk16: Yes, Leo, this is Ezra. You know, as Billy said, typically we don't provide guidance, you know, for the following year on this call. But in general, our focus on 2022, the potential for that, and us, as you highlighted, the things that we're looking at, we're focused on remaining disciplined, and that hasn't changed. As we look into 2022, there are the three items that you've referenced. that should signal a bit of a balanced market. That first is demand, which is probably surprised to the upside a bit with just how quickly we've approached pre-COVID levels. The second is going to be the inventory numbers, which for us, we'd like to see at or below the five-year average, which, you know, they're currently there right now. But that brings up kind of that third item that you spoke to, which is the spare capacity. And we'd like to see that spare capacity back to low levels in you know, more in line with historic trends. So as we sit here today, you know, 2022 is looking like a year of transition. Spare capacity is going to come back online at this scheduled rate that should translate into rising inventory levels. And if things move forward, you know, we could be looking at a balanced market sometime in the first half of 22. For us, for EOG, in a scenario like that, we could probably return to maybe our pre-COVID levels of oil production and around that 465,000 barrel a day mark, that would represent no more than 5% growth next year. But again, that's as we're sitting here today. We'll be officially firming up that 2022 plan and watching how the market develops over the next couple of months. But as we're witnessing, bringing spare capacity back online has hit some snags. So we're watching to see if You know, is that more routine startup challenges or is that more structural in nature due to underinvestment? And those two factors are going to be just as important as seeing how the continued demand recovery from COVID really develops with any potential future lockdowns, so on and so forth. So ultimately, we continue to remain to be disciplined going forward.
spk10: Our next question will come from Charles Mead with Johnson Rice. Please go ahead.
spk04: Good morning to you and the whole EOG team there. You actually anticipated a large part of my question with your answer to the last one, but maybe just to dial in on it a little more closely. How far out do you think your view holds or your ability to look at the balance or unbalance in the world market? And then once you did see a call to increase your oil activity, how long would it be before we actually saw it in the public markets in your quarterly financials?
spk16: Yes, Charles. Thanks for the question. I'll answer the first part of it and then ask Billy to provide a little bit more color also. You know, how far out we can see the balance or the imbalance, to be perfectly honest, we're watching a lot of the same things that all of you are, those three things that we highlighted. Demand has recovered pretty aggressively, I would say. I think it's surprised everybody. And then the inventory numbers in concert with the spare capacity coming back online. And the spare capacity, again, if you simply look at the schedules that have been laid out and everybody sticks to the schedules and the supply actually comes back online, that would contemplate sometime in the front half of the year. But as I highlighted and everyone's been seeing, there are some, you know, challenges or hurdles to getting all that spare capacity back online. As far as the color on what we would be looking at, perhaps Billy can speak to it.
spk17: Yeah, Charles, for as far as how long it would take before we'd see any response, especially showing up in our financials, you know, if you just simply look at when we see the signal and the time we deploy rigs and get the wells completed and on production takes usually three to four months. So you'd start seeing it no earlier than that, but probably sometime a quarter or two after. So to have a meaningful difference in financial performance.
spk04: Got it. So if I'm understanding you correctly, it would be two quarters. Maybe you start to see it nearly three quarters before there was a real delta. That's correct. Great. And then just one quick follow-up for Tim, and I think you partly addressed this in an earlier comment. In the past, I recall you guys have talked about a target of $2 billion of cash on the balance sheet. With this new $5 billion target, share authorization in a slightly different posture about wanting to have some dry powder. Does that mean that your target for $2 billion in cash, and I recognize you're not always going to be at the target, but does that mean that the target has gone north of that? If so, has it gone to three or four? What's your thinking?
spk13: No, we haven't changed our target. We will continue to monitor that through the cycle and see. There's all sorts of factors we have to take into consideration for the cash balance. As you know, working capital changes, for example, as prices swing up and down. So that's a big consideration. But no, it has not changed. The authorization has not changed our philosophy on the cash balance.
spk10: Our next question will come from Neil Dingman with Truist Securities. Please go ahead.
spk07: Morning, all. I don't want to belabor this just on the growth and reinvestment, but, Ezra, I just want to make sure I'm clear on this. You guys have been quite clear about returns. I just want to make sure that I'm certain around the priority about the moderate and reinvestment rate in order to drive the cash returns. Is that what I'm hearing, overgrowth?
spk16: Yes, Neil. When we think about moving forward, we've done a lot on reinvesting and building this company to take a bit of a step away from the commodity price cycles by focusing in on the premium whales and now double premium strategy. The growth for us has always been an output of our ability to reinvest at high rates of return. Through 2017 to 2019, during a period of rapid growth for the industry, in fact, we were reinvesting only at a rate of about 78% and still generating free cash flow every year and putting that towards an aggressively growing base dividend. So the strategy for us hasn't really changed. I think we've talked about potentially watching the macro environment a little bit more to help formulate our plans year to year. And that's where it falls in line with what we've been discussing over the last couple of questions. We still remain very committed to that. We don't want to push barrels into a market that's oversupplied or doesn't need the barrels. And so we'll be looking for the right time to see if the market needs our barrels before contemplating any return to growth.
spk07: Very good. Very clear. And then just follow up on what I asked earlier about you. It looks like you all had been adding a little bit of gas hedges. Is that in relation to, does that mean that you've been increasing the focus on the Dorado play given what natural gas prices are doing? So I guess I'm just wondering, are the two correlated or are you adding to that activity in the Dorado?
spk17: Yeah, Neil, this is Billy Helms. So as far as the volume of gas hedges and what we've been doing there, it really is not focused strictly on Dorado. It simply, you know, goes back to our premium strategy that Ezra just laid out. You know, it's based on a $40 oil and a $2.50 gas price. We saw the opportunity to lock in gas prices above $3, so it gave us encouragement of locking in returns over the next several years at those prices. We have gas production quite a bit, as you know, in Dorado, but also quite a bit in other places as well. So it just helps ensure locking in returns over a multi-year period.
spk10: Our next question will come from Scott Hanold with RBC. Please go ahead.
spk03: Yeah, thanks. I'm going to try Ezra. I know you'll probably give me the answer that you'll talk about the budget next year, but if I could talk about it more big picture, if You know, we all think of just a base maintenance spending levels into 2022. You know, has the capital changed too much from what you all did this year? Like, what would be the, you know, puts and takes from that? Because it seems like your wall costs you're going to hold pretty steadily. So is sort of your maintenance cap-ex case this year, you know, somewhat similar to what it would be next year, all being equal? Or are there anything else to consider?
spk16: Yeah, Scott, this is Ezra, and we'll talk about next year's budget next year. I say that a little bit facetiously for you, but quite frankly, I think we haven't updated our maintenance capital number yet. We'll provide that number commensurate with our plans laid out next year. But I think what you can see is that our team continues to make great progress in sustainable well cost reductions. through their efficiency gains and applying innovation and technology. And I think Billy highlighted pretty well that we feel very confident that we achieved our first initial goal, I should say, of 5% well cost reduction, and we're in line to reduce our cost 7% this year. And we feel that a lot of those costs are what's going to insulate us against some of the inflationary pressures out there.
spk03: Was there anything unusual you'd say this year or that we should think about next year in terms of exploration, play, or ESG spending? Is there any reason for us to think about that any differently?
spk16: No, Scott. Really, over the last few years, a lot of our percentage dedicated towards exploration and ESG have been pretty consistent.
spk10: Our next question will come from Doug Leggett with Bank of America. Please go ahead.
spk02: Thanks. Good morning, everybody. Ezra, I think your share price reaction today, I think you can see the market's response to the greater cash returns. I'm wondering why is it reluctant seemingly still from EOG to provide a framework around the proportion of cash returns It seems to be a persistent barrier, perhaps, to recognition of sustainable free cash flow, which at the end of the day is what defines value. I'm just wondering why there's reluctance not to commit to or at least lay out some kind of framework as to how you think about the go-forward cash returns as opposed to one-off special dividends.
spk16: Yes, Doug. You know, it's a question that we've been answering, and we feel that we have provided a framework for our free cash flow priorities. It's, as you mentioned, the sustainable growing base dividend to strengthen the balance sheet, these low-cost property acquisitions, and then more on point with your question, the other cash return options, which are special dividends and opportunistic share repurchases. And in a lot of ways, when we look back, I think we've shown our commitment to that, not only this year with committing to $2.7 billion return in dividends over a year to date, free cash flow generation of about $3.5 billion. But I think we added a slide into the deck that shows longer term what we've been able to do in providing just over $5 billion of free cash flow return since 2016 on about $10.9 billion of free cash flow generated. And so I think we've laid out a framework. I think our two announcements this year on special dividends totaling $3 per share on the specials really demonstrates our commitment to it. And as far as having The ability for our investors to see through and capitalize on that number, I think we've demonstrated our commitment to the point where the investors can capitalize on some of our excess free cash flow. To us, we still remain committed to delivering on those free cash flow priorities. we do want to continue to make decisions based on what we think will create the most significant long-term shareholder value. And that means sometimes not necessarily running the business on a quarter-by-quarter basis, but really taking a longer-term approach. And so locking ourselves into a formula that might have to change as conditions change is really at the heart of our reluctance to do that.
spk02: Yeah, I understand that. I guess it's know it's a moving piece maybe my follow-up is related then i want to talk specifically about the buyback and there's been a lot of reference to the 1619 period and you know the history it was a subsidized environment you doubled production saudi was taking oil off the market and we all see how that ended so we know what the response to the industry has been but i want to get specifically to your view of mid-cycle and how you think then about the relative priorities around mid-cycle. What is your definition of mid-cycle, and how should we think about growth versus growth per share, given the buyback announcement?
spk16: Well, Doug, I don't think I'm comfortable getting into mid-cycle metrics on here, but what I would tell you is we continue to think of this buyback as opportunistic. We think, again, with our authorization in place, we want to use it in a way that We feel confident we're going to be generating long-term shareholder value. More often than not, for us, that's going to tend towards special dividends, and we're going to reserve our buyback authorizations to be used really just in times of dislocations, and you use it opportunistically rather than a more programmatic method.
spk10: Our next question will come from Bob Brackett with Bernstein Research. Please go ahead.
spk18: Good morning. It looks like you turned a couple pads on in Dorado in the third quarter. Any color or commentary there, hitting expectations, exceeding?
spk14: Yeah, Bob, this is Ken. As Billy said earlier, we have turned on several wells in the last few months, and the color is all of them are at or above our type curve and what our plans were going into the end of the year. We do have one drilling rig active in the play right now and we're really moving rapidly up the learning curve. Again, just to reiterate, this play has really double premium returns and it's competitive for capital with our oil plays.
spk18: Great, thanks for that.
spk10: Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
spk08: Good morning, team. Ezra, every new CEO has an opportunity to put their own thumbprint on the business and recognize that you're a part of the prior leadership team as well. But just talk about your early observations as the new leader of the organization, any subtle changes that you're making, and talking about your messages to your internal and external stakeholders that you want the market to be aware of.
spk16: Yes, Neil. Appreciate the question and the opportunity. I think the biggest thing for our investors, our employees, everyone who's listening to the call, is that EOG's got a proven track record. Our strategy works. The shift to premium strategy has put us on a different trajectory, and the shift to double premium is going to do that as well. The culture of EOG, the people at EOG, has always been our competitive advantage, and that'll continue to be that way. Honestly, Neil, the most important thing we can do as a leadership team is put our employees in a position to succeed where they can really contribute to the best of their abilities. And that's what we try to do every day. And that's going to translate into not only our operational performance, that which you see the results of this quarter, but to our financial performance as well.
spk08: Thanks, Ezra. The follow-up is I appreciated the slide that shows the breakdown of the well costs and how you guys are ahead of your competition in terms of managing and mitigating some of these inflationary pressures. As you step back and think about the U.S. oil industry broadly, do you think this is ultimately going to be a challenge, these inflationary pressures, to restart the shale machine? And which of these bottlenecks do you worry about the most in terms of being a constraint on the ability for the industry to grow again?
spk17: Yeah, Neil, this is Billy Helms. Certainly, as industry is seeing, we're seeing quite a bit of inflationary pressure, mainly in three areas, I would say. Steel prices, so tubulars, labor, which certainly affects all industries, and then fuel. Those are probably the three inflationary pressures that are throughout our industry and really throughout all industries. The one thing that I think is going to be, or maybe two things, two top priorities would be probably steel. I think availability of tubulars is something that I think most companies are struggling with or dealing with, I guess. And then the other one would be labor and just getting enough people to manage the activity levels. You know, just to maybe give you a little bit color then on where EOG sits, you know, each year we try to get ahead of the curve and lock in a certain amount of our services to secure activity, but in this case also protect us from inflation. You know, so for instance, in 2021, we protected about a 65% of our wealth costs going into the year. And as a result of that, plus the improving efficiencies, we were able to reduce our average wealth costs by about 7%, as Ezra stated earlier. So during the year, though, we also took advantage and renegotiated many of our services at lower rates and locked them in through the end of next year. So going into 2022, we expect to have about 50% of our well costs secured and with over 90% of our drilling rigs secured at lower rates and also 50% of our frack fleets secured. So we expect to see inflation certainly in items of such as steel, labor, and fuel, just like everybody else. But by doing that, we've given ourselves visibility into areas of also improving efficiencies that we expect to offset much of this inflation. So we're still confident we can keep well cost at least flat going into next year.
spk10: Our next question will come from Michael Scala with Stiefel. Please go ahead.
spk06: Yeah, hi, good morning. It's not a high-level question. Ezra, on your long-term outlook, as you think about the energy transition, how are you thinking about oil versus natural gas? Is there any preference there? And are any of the exploration plays focused on gas, or are they all on oil?
spk16: Yeah, thank you, Michael. You know, long-term, we believe that hydrocarbons are going to be a significant part of the the energy solution long term. Obviously, we need to do, as an industry, a better job with our emissions profile. But when you think about oil and natural gas, they both go to different markets dominantly. Your natural gas essentially is more on your power side and potentially in direct competition with things such as coal and your renewables. And then your oil transportation, your oil obviously is a little more focused on transportation. In general, when I think longer term, I think the energy transition is going to be significantly slower than oftentimes you hear about, and we're very bullish on the prospects for both. As far as the exploration plays go, as we've said in the past, dominantly the exploration plays are all oil-focused.
spk06: Okay, thanks for that. And Ken, you had said on your CO2 pilot, or excuse me, your CCS pilot, I think you said you plan to inject in late 22. That seems to suggest you would not need a class six permit. So I'm wondering, is it fair to say you're re-injecting CO2 into an EOR project? And when you say it's not really economically competitive with your upstream business, are you planning on capturing 45 tax credits with any of your projects?
spk14: Yeah, Michael, this is Ken. To answer your question on the tax credit side, we are planning on capturing those 45Q tax credits. Our goal in terms of what class of permit that we would secure, we believe that we will initially secure a Class 2 permit that can be converted. We'll go through all of the regulatory requirements to be able to convert it to a Class VI later in its life. But that's what the plan is for our CCS project at this point.
spk10: Our next question will come from Paul Sankey with Sankey Research. Please go ahead.
spk01: Hi, guys. Just very quickly, can you talk about your LNG or downstream natural gas strategy? Thanks.
spk12: Oh, hey, good morning. This is Lance. Hey. Yeah, thanks for your question, and good morning. Yeah, we're, you know, the team is definitely executing. You know, you've seen several of our slides, you know, that we've put back, talking a lot about our, you know, our transportation position is so incredibly valuable. You know, we can move, you know, gas from, you know, all our different basins, you know, from the Permian Basin, from the Eagleford. We talked a lot about Dorado earlier. And then with that, it gets access as you look along the Gulf Coast and you look at the LNG demand, you know, especially that's growing over time. Obviously, you know, we've got a position there that we started, you know, and just really speaks to being a first mover, especially when you think about LNG. You know, we went through a whole BD effort, kind of 17 and 18. We got the contract finalized in 2020. And, you know, in 2021, obviously, you know, we're definitely seeing, you know, the value of that contract. So being a first mover is absolutely important. And yeah, we're going to continue to look at new opportunities from an LNG standpoint and very well positioned. Again, it gets back to our transport, our export capacities, and just having that ability to transact. We can definitely be very nimble as we even think about new opportunities.
spk01: Got it. And then a follow-up on the buyback. I'm not clear. Are you saying that it's a shelf ability to buy back shares when you want, or are you actually going to you know, try and get through this amount in, let's say, the next 12 months.
spk13: Paul, this is Tim. We do not have a timeline on when we plan to buy back the $5 billion. When the opportunity presents itself, we will be in the market.
spk10: This concludes our question and answer session. I would like to turn the conference back over to Mr. Jacob for any closing remarks.
spk16: Yeah, we just want to thank each of you for participating in our call this morning and thank our shareholders for their support. As I highlighted at the start of the call, EOG's competitive advantage is our employees, and they deserve all the credit for delivering another outstanding quarter. So thank you and enjoy the weekend.
spk10: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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