EOG Resources Inc. unveiled an upgraded strategy for its drilling inventory on Feb. 26, saying it plans to chase wells that deliver at least a 60% economic rate of return — double the threshold for wells in the past.
Premium drilling, a strategy that EOG introduced early in 2016, had aimed at only drilling wells that yielded at least a 30% after-tax return rate at $40 per barrel of oil and $2.50/Mcf natural gas. But over the years, the company kept pushing the envelope on cost-cutting and improved well drilling and completion efficiencies, all of which can improve return rates for wells and push them into the “premium” class.
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Now, after five years of continual cost-cutting and besting its own standards with premium drilling, EOG will mostly target what it has termed “double premium drilling” — wells that deliver a 60% return rate at the same $40/b oil and $2.50/Mcf gas prices, the company’s Chairman and CEO Bill Thomas said during a fourth-quarter earnings call.
“Using such a stringent hurdle rate shields the company from cyclic oil and gas prices,” Thomas said, adding that double premium locations account for the top half of EOG’s 11,500 premium drilling locations.
Drilling longer laterals — horizontal well sections — as well as precisely targeting drill bit placement within shale zones and placing wells at just the right spacing intervals are other refinements that can increase return rates, EOG geologists have said.
“Shifting to double premium will make another step change in our future performance by delivering higher returns, lower decline rates and more free cash flow potential,” Thomas said. “We have more than 10 years of double premium inventory and are optimistic we will replace double premium locations faster than we drill them.”
The time from first production to payback declines to nine months from 11 months at $50/b West Texas Intermediate for double premium wells, the CEO said.
Moreover, the company in 2021 is targeting a 5% well cost reduction, as it has for the last couple of years. Last year its actual well cost reduction was 15%.
“[In the fourth quarter], much of the industry continued to recast the investment case for the upstream and attempted to address multiple and sometimes divergent asks from investors,” Evercore ISI analyst Stephen Richardson said. “What stands out in this update from EOG is how little the outlook has changed here.”
EOG’s 2021 capital budget is set at $3.7 billion to $4.1 billion. That sum includes maintenance capex to keep production flat with fourth-quarter 2020 levels, and also allots $500 million for international plays, emissions reduction projects and exploration where the focus will be on double premium drilling, Thomas said.
“There’s no reason to consider [production] growth until the market rebalances,” the CEO said.
By contrast, capital spending in 2020 totaled $3.5 billion, excluding acquisitions. Thomas and his team said they believe the market is likely to be rebalanced by the end of 2021. Consequently, they have set what they believe is an optimal annual production growth target of 8%-10% for 2022-2023.
That is a higher rate than the 5% where most large exploration and production companies currently have capped their growth. But Thomas said that precise range is best for EOG’s internal metrics, including optimal free cash flow, low-cost property additions, dividend growth, share repurchases and other cash return options.
“If we go slower, some of those are not optimal, they’re worse,” Thomas said. “If we grow faster than that, same thing.”
In the fourth quarter, EOG produced an average 444,800 barrels per day of oil, down 5% from the same quarter in 2019, and total crude oil/condensate, NGLs and natural gas of 801,500 barrels of oil equivalent per day, down about 6% from the same year-ago period.
Recent severe winter storms in the U.S., particularly in Texas and Oklahoma, will result in a 4% production hit in first-quarter 2021, or about 32,000 boe/d, EOG’s COO Billy Helms said.
For EOG, the impact was mostly for a week in mid-February in the Delaware Basin of West Texas and the Eagle Ford Shale in South Texas, Helms said, adding all production has since been restored.
Of 500 net completed wells planned for 2021, most will be sited in the Delaware Basin, the Eagle Ford Shale in South Texas and the emerging Powder River Basin in Wyoming.
On the climate change front, EOG this year has charted goals to achieve zero routine flaring by 2025 and aims to reach net-zero Scope 1 and Scope 2 greenhouse gas emissions by 2040.
Scope 1 emissions are direct like vehicles and processing facilities, while Scope 2 are indirect, like the result of purchased electricity or steam for use.
Source: Starr Spencer is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.