EOG Resources has responded to the recent downdraft in oil prices in a similar manner to Pioneer Natural Resources, slashing its rig count and focusing drilling activity on its most productive acreage.
With oil prices at $55 per barrel, management estimates that the company earns an after-tax return of at least 35 percent on its core holdings in the Bakken Shale, Permian Basin and Eagle Ford Shale. A 10 percent to 30 percent decline in service costs this year will juice these returns even higher.
The company also continues to push the envelope on drilling efficiency. For example, EOG Resources estimates its average well cost in the Eagle Ford Shale at $5.7 million, down from $7.2 million in 2012. Drilling times have also declined dramatically, from an average of more than two weeks in 2012 to as little as 4.3 days; this trend translates into more wells with fewer rigs.
EOG Resources has also found that its base decline rate—the pace at which output from its existing wells diminishes each year—has become less of a headwind, despite the steep drops in output that occur in the first two years of a shale well’s life.
Management addressed these improvements during the company’s first-quarter earnings call:
Every year that goes by, our well base gets more mature and we’ve got older wells, a bigger percentage of older wells all the time and so that’s slowing the process. Number 2, our completion technology is really beginning to starting to flatten out our decline rates on a per well basis. Specifically, the high-density fracs we talked about in the last quarter that we’re applying to the Eagle Ford are not only increasing the initial rates, but they’re also decreasing the decline rates here. So, we’re very encouraged about that. And then number three, as we go forward, we are targeting plays that have better rocks with better permeability and better ability to flow oil and those rocks such as these sandstone plays and the Delaware Basins and in Wyoming have lower decline rates also. So the mix of our decline rate in the company is slowing over time due to a number of different reasons.
The transition to high-intensity hydraulic fracturing, which involves more silica sand and tighter spacing between fracturing stages, boosts initial production rates and shows signs of moderating the decline rate. Given the growing popularity of these techniques among a wide range of companies, US oil output could prove more resilient than some expect.
EOG Resources is also one of the most financially sound exploration and production companies that focuses on US shale plays, having lowered its net debt-to-capitalization ratio to 18 percent from 23 percent a year ago. The firm also has more than $2 billion in cash on its balance sheet and, even at lower oil prices, should be able to generate enough cash flow to fund its $5 billion capital budget.
This financial strength positions EOG Resources to pursue selective asset acquisitions, while its track record of operational excellence could lead to opportunities to farm into a distressed producer’s acreage.
To maximize its profit potential, EOG Resources has amassed a significant backlog of drilled wells awaiting completion. Reporters from Bloomberg have described this inventory as a “fracklog”
Management asserts that aggressively growing oil production doesn’t make sense in the current pricing environment; even a modest increase in oil prices can bolster after-tax returns significantly. Delaying well completions also puts more pressure on the service firms that perform these activities and their suppliers, helping to improve economics.
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Elliott and Roger on Sep. 26, 2017
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