EOG Resources Inc (EOG) 2021 Q1 法說會逐字稿

Good day, everyone, and welcome to EOG Resources' First 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 Driggers. Please go ahead.

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing first quarter 2021 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 or 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; Ezra Yacob, President; Ken Boedeker, EVP, Exploration and Production; Lance Terveen, Senior VP Marketing; and David Streit, VP, Investor and Public Relations. Here's Bill Thomas.

Thanks, Tim, and good morning, everyone. EOG is delivering on our free cash flow priorities and our strategy to maximize long-term shareholder value. Yesterday, we declared a $1 per share special dividend to demonstrate our commitment to returning cash to shareholders. Combined with the regular dividend, we expect to return $1.5 billion to our shareholders through dividends in 2021.

Double-premium well productivity and cost reductions are substantially improving our returns and increasing our ability to generate significant free cash flow. In order to maximize long-term shareholder value, we will remain flexible as we carry out our free cash flow priorities in the future.

By doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they've ever been. This quarter, we generated a quarterly record $1.1 billion of free cash flow and earned $1.62 per share of adjusted net income, the second-highest quarterly earnings in company history. In addition, our balance sheet is in superior shape with a peer-leading low net debt-to-cap ratio.

Next, Ezra will review our capital allocation strategy in more detail. Billy will go over our operational performance. And Tim will cover our financial performance before I make a few closing remarks. Now here's Ezra.

Thanks, Bill. Yesterday's dividend announcement is just the latest in a long line of achievements that demonstrate the value of EOG's fundamental strategy of returns-driven capital allocation, including the impact of permanently raising our investment return hurdle rate for the second time in 5 years.

In 2016, during the last downturn, we established our premium investment strategy, which requires a 30% direct after-tax rate of return of $40 oil and $2.50 natural gas. The premium investment strategy drove a step change in our capital efficiency and resulting financial performance. It is the reason we entered 2020 in a position of operational and financial strength, which enabled us to generate positive adjusted net income and free cash flow in a year of unprecedented oil volatility and prices that averaged just $39. This year, we increased the return hurdle once again, doubling it to 60% at $40 oil and $2.50 natural gas.

Sustainable improvements in our inventory of drilling locations and continued progress in exploration have paved the transition to double-premium. The data driving our confidence to make this move is illustrated on Slide 6 of our investor presentation, which details the return profile of every drilling location. Half our current inventory earns at least 2x the premium return hurdle rate we established back in 2016. 5,700 double-premium locations is more than 10 years' worth of inventory at our current pace of drilling and is more than we had when we made the transition to premium 5 years ago.

Just like we did with our premium inventory, we are confident we can replace our double-premium locations faster than we drill them through line of sight into additional cost reductions that will increase the returns of existing inventory and through exploration. A number of innovations, which Billy will discuss in a moment, are being piloted across our operating areas and will sustainably drive down both well costs and operating costs as we implement them throughout the company. Our exploration program is focused exclusively on prospects that will improve on that 60% median return. In fact, our anticipated return on the current slate of new exploration plays is more than 80%.

To see the impact of our premium returns-focused capital allocation strategy, a closer look at our corporate financial performance is required. As we replace our production base by drilling locations with higher well level returns, the price required to earn 10% return on capital employed continues to fall. Prior to establishing premium, EOG required oil prices upwards of $80 to earn a 10% ROCE. As the premium strategy matured, the oil price needed to earn 10% ROCE came down and averaged just $58 the last 4 years.

This trend is illustrated on Slide 9 of our investor presentation. For 2021, that price is just $50, and we're not stopping there. We expect it will continue to fall as our well level returns improve. The impact of reinvesting at higher returns is also showing up in our free cash flow performance. We've more than doubled the dividend over the last 4 years and improved our balance sheet, reducing net debt by nearly $3 billion. As a result, net debt to total capital at the end of last year was just 11%.

But our future financial performance potential is the real prize. Our first quarter results are a preview of what we are aiming for. Over the coming years, we expect reinvesting in our current inventory of high-return wells will continue to lower the corporate decline rate and compound the value of our low-cost operating structure. The result leads to higher margins and generates even more free cash flow, providing us tremendous opportunity to create long-term shareholder value. We believe when we look back in a few years, it will be viewed as the catalyst for another step change improvement in EOG's financial performance.

Our fundamental strategy of returns-driven capital allocation remains consistent. And consistency is key. Prioritizing reinvestment in high-return projects is the driver behind the steady improvements we've made year-after-year. As a result, we are now in a position to follow through on our commitment to return additional free cash flow to shareholders. Looking ahead, you can expect our priorities to remain consistent: investing in high returns, generating significant free cash flow to support a sustainable and growing dividend while maintaining a strong balance sheet, followed by opportunistic return of additional free cash flow to investors and bolt-on acquisitions.

Now here's Billy.

Thanks, Ezra. The first quarter of the year was about execution. We exceeded our oil target, producing more than the high end of our guidance range because wells that were offline due to the winter storm Uri recovered a bit faster than expected. As a result, our first quarter daily production declined just 3% compared to the fourth quarter last year.

Our capital for the quarter came in under our forecasted target by 6% mainly due to improvements in well cost across the company. The savings realized during the first quarter are in addition to the tremendous 15% reduction last year. EOG is on track to reduce well cost another 5% this year despite some potential inflationary pressure as industry activity resumes. Similar to previous quarters, these results are driven through innovation and efficiency gains in each phase of our operation.

A closer look at our operations will help explain why we are confident we can once again lower well cost. Our drilling teams are consistently achieving targeted depths faster with lower cost. The constant focus on daily performance and reliability of the tools and technical procedures is creating this continual drive towards lower cost. Some of the benefits this year stemmed from larger groups of wells per pad simply requiring less rig move costs per well and increasing efficiencies, like offline cementing.

The larger well pads also complement our completion operations through the increased ability to utilize a technique we call super zipper. We began our initial experiments with this technique back in 2019. And it has since advanced to consistently deliver the expected well results at lower cost. We have also learned that super zipper is particularly well suited to optimize the efficiencies of our 5 electric frac fleets.

However, conventional spreads gain efficiencies as well. This practice involves using a single spread of pressure pumping equipment to complete 4 more wells on a single pad. We split the equipment's capacity in half, simultaneously pumping on 2 wells while conducting wireline operations on the remaining wells. We piloted and perfected a super zipper logistics in our Eagle Ford play. And the collaboration between operating areas has accelerated its adoption throughout the company. And in cases where a minimum of 4 wells cannot be physically be located on a single pad, the engineering teams are working to develop new techniques, where we can still utilize this improved completion practice.

Completion costs are also benefiting from reduced sand and water costs through our integrated self-sourcing efforts. The savings we realized by installing water reuse pipelines and facilities saves about 7% of well costs compared to third-party sourcing and disposal. Longer term, we expect water reuse and disposal infrastructure will continue to lower lease operating expense in each area as well.

Lease operating expense has also benefited from lessons learned through the pandemic this last year. The number of wells one lease operator can maintain has increased by as much as 80% by optimizing the use of innovative software designed and built by EOG. The software prioritized lease operator activity throughout the day using our mobile and real-time software infrastructure. Our experience last year inspired a number of new ideas to further high-grade our lease operators' work activity throughout the day, which we believe may continue to expand productivity in day-to-day field operations.

Slide 35 of our investor presentation illustrates the consistent progress we have made year-after-year on productivity, all powered by innovative ideas generated bottom-up by employees. Each of our active operating areas functions as an individual incubator to test out new ideas, many of which have -- are a homegrown innovation from EOG employees and rolled out company-wide if successful.

That's one of the primary reasons our well cost improvements every year are never one silver bullet but a list of small- to medium-sized individual improvements across all elements of total well cost that result in sustainable cost reduction. As a result of the innovation spreading throughout the company to reduce capital and operating cost, I have strong confidence that the cost structure and capital efficiency of the company will continue to improve.

Here's Tim to review our financial position.

Thanks, Billy. Yesterday's special dividend announcement marks another milestone in the growth of EOG's profitability and cash flow. We achieved this milestone through the disciplined execution of consistent, long-term, return-focused strategy for capital allocation, supported by a strong balance sheet. Over time, this strategy has produced increasing amounts of free cash flow. The top priorities for the allocation of that free cash flow remains sustainable dividend growth and debt reduction.

The shift to premium in 2016 drove a significant improvement in returns, profit margins and costs, enabling the significant increase in the dividend over the last 4 years. Since 2017, the dividend has grown from $0.67 per share to $1.65 per share, now an annual commitment of almost $1 billion. Going forward, our goal is to continue growing the regular dividend. We have never cut or suspended the dividend and we remain committed to its sustainability.

With the shift to double-premium, we're now focused on making another step change improvement. And the results of those efforts will guide future common dividend increases and the potential for special dividends. Since the shift to premium, we have also retired bond maturities totaling about $2 billion with plans to retire another $1.25 billion in 2023 when the bond matures. Net debt to total capitalization was 8% at the end of the first quarter.

A strong balance sheet with low debt has been at the heart of EOG's strategy throughout our existence. It's not just conservatism, it's about creating a strategic advantage. Our superior balance sheet enables us to acquire high-return assets at bottom-of-cycle prices, whether exploration acreage like the Eagle Ford or for the new plays we're working on today, bolt-on acquisitions or companies like the Yates acquisition 5 years ago.

A strong balance sheet also gives us the financial strength to be a partner of choice in our operations, whether it is with marketing or export agreements, service providers or even other companies in other countries unlocking new plays. Strong balance sheet extends to ensuring ample liquidity, which we have also secured with no near-term debt maturities, $3.4 billion of cash on hand and a $2 billion unsecured line of credit.

Now EOG is positioned to address other free cash flow priorities by returning additional cash to shareholders. The $1 per share special dividend follows through on these consistent long-tailed priorities. At $600 million, the special dividend is a meaningful amount while also aligning with our other priorities. After paying the special dividend, we will have $2.8 billion of cash on hand, a full $800 million above our minimum cash target. This is a healthy down payment on the $1.25 billion bond maturing in 2 years.

Going forward, our free cash flow priorities remain unchanged. We will continue to monitor the cash position of the company, oil and gas prices and of course, our own financial performance. As excess cash becomes available in the future, we will evaluate further special dividends or at the right time, opportunistic share repurchases or low-cost bolt-on property acquisitions. I think it goes without saying you should expect us to avoid expensive corporate M&A. You can count on EOG to continue following our consistent strategy to maximize long-term shareholder value.

Now here is Bill to wrap up.

Thanks, Tim. In conclusion, I would like to note the following important takeaways. First, true to the EOG culture, our employees have fully embraced doubling our investment hurdle rate. As we drill more double-premium wells, we expect our performance will continue to improve. Our decline rate will flatten, our break-even oil price will decline, our margins will expand and the potential for free cash flow will increase substantially.

Second, while our new double-premium hurdle rate alone will drive significant improvement, it represents just one source. We never quit coming up with new ways to increase productivity and lower cost. Innovative new ideas and improved technology are developing throughout the company at a rapid pace and will continue to result in even higher returns in the future.

And finally, our special dividend this quarter, we are demonstrating our commitment to generating significant free cash flow and using that free cash to improve total shareholder returns. We are more excited than ever about the future of EOG and our ability to deliver and maximize long-term shareholder value.

Thanks for listening. And now we'll go to Q&A.

(Operator Instructions) And the first question comes from Scott Gruber of Citigroup.

So the most common question we've received, I know you touched on it a bit in the prepared remarks, was just the framework that you guys use to determine that the $1 special dividend was the right amount, now is the right time. Can you just elaborate on that a little bit more around the framework and the timing? Obviously, folks are trying to get a sense of whether the special dividend can repeat in the future.

Yes, Scott. Certainly, we're demonstrating our commitment to our shareholders by returning a significant amount of cash back to them. And the $1 per share, I think, is a very significant number and large enough to be very meaningful. And I'm going to ask Tim to kind of go through some of the numbers to give you a little bit of the background on the reason that we picked this number.

Thanks, Bill. So going back to our priorities over time, it's consistent within our priorities. If you look back, our regular dividend has increased 146% since 2017. That's one of our highest priorities. We reduced debt by $2.1 billion. So that set us up to be in a position to now return more cash to the shareholders. When we looked at our cash position, we were sitting with $3.4 billion of cash. So returning $600 million at this point in time, as Bill pointed out, is a significant amount and it follows through on our long-held plan to return cash to the shareholders. So it's simply following through on what we've been committed to for a long time.

Yes. And I want to add, Scott, going forward, our free cash flow priorities and framework haven't changed. And so you have to put the special dividend in context with our total framework. And just a reminder, we've already said this, but our first priority is a sustainable dividend growth. We believe the regular dividend is the absolute best way to give cash back to shareholders. And we certainly are working on that and have worked, we've got a great history of doing that. And then the next one is debt reduction, and we've got a little work left to do with that, as Tim noted in his opening remarks.

Our next options are the special dividend. And certainly in favorable times, like we have right now, those are the things that we are doing. And then we'll also -- we want to keep in mind the potential for opportunistic share repurchases in downturns, counter-cyclic opportunities and share repurchases. And then after that, we also want to be able to consider high-return bolt-on acquisitions. And these are acquisitions that go in our best operating areas, obviously where we've got a lot of synergy and a lot of ability to move quickly and drill wells.

And some of them could be in our new exploration plays, where we can capture a very high-potential acreage at very low cost. And so we'll just continue to evaluate all these options and work with this framework. And we'll evaluate the best use of cash on a quarter-to-quarter basis. We're in a dynamic business environment all the time. So it's important to have the flexibility to use the cash in a way that creates the most shareholder value.

Got it. And then my follow-up relates to the growth strategy in '22 and beyond. If the oil markets have healed next year -- and you guys have been very explicit around the factors you're looking at and you laid out the 8% to 10% growth case on your last call, but there seems to be some discussion around -- now around the potential for a middle ground, if you will, maybe some -- a growth case below that 8% to 10%.

So just wanted to hear your latest thoughts around 2022. If the oil markets have healed and it's time to grow again, what is the right growth cadence? What factors are you looking at to determine that rate of growth if the markets have healed? Is there a middle ground, somewhere between 0 and 8% to 10%? Or is it just if it's time to grow, we're going to grow at 8% to 10%?

Yes. Thanks, Scott, for that question. We want to make sure we're really clear on that, and I think we have. We're not going to grow until demand has recovered to pre-COVID levels, which is -- it's on the way to do that. I think everybody can see that. And we want to make sure that, obviously, world inventories, U.S. inventories are below the 5-year average. And then we're looking for spare capacity to be certainly a lot lower than it is right now. And that just means not a lot of oil shut-in to match supply and demand.

And every year, the market factors that year -- going into that year will determine our plans. And so we want to be flexible. And we want to be able to and we will modify our growth plans to fit those market conditions. If we need to grow at a lower rate or no growth at all, like we're doing this year, whatever that right growth plan is, whatever fits the market conditions, that's what we want to do. Above all everything else, we are committed to staying very disciplined and not forcing oil into a market that's not ready.

The next question comes from Arun Jayaram of JPMorgan.

Yes. I guess, my first question is kind of to dovetail on the special dividend talk. Bill, this year, you've guided to $3.4 billion in free cash flow, $1.5 billion for dividends, another $750 million for debt you've already paid down. So that leaves a little bit more than $1.1 billion of free cash flow. And I know you're above your minimal cash target. So I guess, the question is how are you gauging the market for bolt-ons versus potentially if the oil price holds up here in terms of looking at more cash return this year?

Yes. Thanks, Arun. We take the -- we evaluate where we are every quarter. I can't give you any specific on anything. But we evaluate where we are every quarter. And we're constantly looking at bolt-on potential and evaluating that. So we want to make sure we leave room to fully consider that, something that would make a very significant difference in the future of the company, upgrade our high-quality premium, double-premium inventory, we want to do that. So we're very fortunate, we've got a lot of cash. And we've got a lot of, hopefully, we believe, a lot of cash coming.

So that's a lot of great opportunities for us to consider additional special dividends, bolt-on acquisitions, et cetera. And we keeping in mind -- as Tim talked about, we want to keep in mind, our debt reduction targets in a year. And then -- excuse me, in 2023 and also be able to continue to think about growing our regular dividend. So we'll just keep all those in the proper framework. And you just need to know that we're committed to doing the right thing at the right time for the shareholders to maximize total shareholder value.

Great. Then my follow-up, Bill, you cited this as being the company's best free cash flow quarter in history. But I wanted to see if you could provide a little bit more detail on how the unique pricing conditions for natural gas, given winter storm Uri, some of your leverage to JKM, how that contributed to the free cash flow. How would you call that out? I know there was some incremental cost. But what was the puts and take on the gas price this quarter?

Yes, I'm going to ask Tim to give some details on that. But just to -- before I turn it over to Tim, everybody needs to know that the special dividend has nothing to do with the storm and the natural gas process. So Tim, do you want to give some detail?

Sure. When you boil everything down, the effects of Uri was about $40 million to cash flow and net income in the quarter. Obviously, there are big components in there, but that's the bottom line. It was very immaterial to our cash flow or net income.

The next question comes from Scott Hanold of RBC Capital Markets.

First and foremost, I want to -- I appreciate your very direct commentary on your desire not to go on into what the plan is. So hopefully, that does clear the air a bit. What I'm wondering is, strategically, if we do stay in sort of the current environment, whether it's '22 or even beyond, you all do build a lot of free cash flow. I mean, we're talking, what, something around $3 billion even after your base dividend annually. Do you all see if there is a benefit into setting up a more predictable return to cash -- cash return to shareholders like some of your other peers did? Do you think there's a benefit to that predictability? Or would you rather see that more opportunistic?

Yes, Scott. We're always in a very dynamic business environment. So it's important we believe to have the flexibility to use the cash in a way that creates the most shareholder value. One of the reasons we don't -- the biggest reason we don't want to get into a strict formula because we don't want to be put in a position to where we're growing oil, say, at 5%, when the market clearly does not need more oil. So we want to be in a position to where we can do the right thing at the right time and to maximize the use of the cash and our plan to maximize shareholder value.

Got it. And my next question, maybe this one is for Ezra. You all talked about shifting to double-premium that's generated significant increases to EURs. I think Page 8 shows just a massive uptick. Do you all have any color on how much of that is organic versus mix shift? I would assume the shift to relatively more Permian has -- relative to, say, Eagle Ford has biased that upward. But do you have a sense on how much is mix shift versus organic?

Yes, Scott, thanks for the question. This is Ezra. Yes, definitely, in the Permian, we have a higher percentage of those, 5,700 double-premium locations are located in the Permian. But part of that is simply just because we have so many targets captured there in the Delaware Basin. What I would say is we have a fairly wide variety and fairly distributed variety of double-premium wells across our entire portfolio, including the Eagle Ford, the recently announced Austin Chalk Dorado play and the Powder River Basin as well.

The next question comes from Doug Leggate of Bank of America.

I apologize, I was just taking you off my headset. Bill or Ezra, I wonder if I could press on Scott's point. I'm afraid I'm not quite where Scott is in thinking this draws a line under the growth story. So my question is real simple. You currently have one of the lowest free cash flow yields in the sector, arguably a reflection of your share price. But my point is that everyone has got the capacity to spend more money. What happens to your 10% return at $50 oil if the whole industry follows your lead and goes back to a 10% growth rate?

Yes, Doug. I want to make it really clear, we're not stuck on 10% growth rate or 8% growth rate. We are totally focused on making sure we do the right thing at the right time. So we -- the oil price does not guide how much we're going to grow, it's the market fundamentals. And so we're really focused on that. We've laid out, I think, a strong set of fundamentals that we're focused on. And we will adjust our plan each year, which means our growth plan each year, to those market fundamentals. And maybe certainly, next year that we don't grow at all or we may grow at 4%, 5%, we'll just have to see what the market fundamentals show.

That is actually a great answer, Bill. It's not set in stone and it's kind of what I was really trying to get to. My follow-up is, Ezra, very quickly, 10 years of inventory double-premium at the current pace. If you do choose to go back to growth, one assumes that 10 years shrinks some. So can you talk about the sustainability and how that plays into, again, how you think about that activity level? And I'll leave it there.

Yes, Doug, that's a good question. Similarly, as we've done over the past few years, we're consistently focused on getting better year-after-year. And so by driving down well cost through sustainable well cost reductions, some of which Billy spoke to in the opening remarks, but also through applying technology and innovations to increase the well productivity gains, we're able to convert some of our existing inventory every year into that double-premium metric.

In addition to that, we have 2 other avenues. The first, which Bill has touched on, is bolt-on acreage acquisition opportunities in areas of preexisting development, but then also our exploration effort. And as I talked about in the opening comments, our exploration effort is really focused on, again, making another step change to our current inventory. It's focused on adding low-decline, high-impact plays that really increase the overall return profile of the company.

And again, regardless of any growth rate, when you're reinvesting in higher-return opportunities and adding lower-cost reserves to your company, you're really driving down the cost base of the company year-after-year. And that's essentially what translates into our corporate financials and allows us to lower that price required for a double-digit ROCE every year.

The next question comes from Neal Dingmann of Truist Securities.

Guys, my first question is around how you look at your reinvestment rate. I'm just wondering, number one, could you talk about at sort of current strip how you see the reinvestment? And again, let's assume another $5 or so higher, what would that do to that?

Neal, thanks for the question. We're going to ask Billy to comment on that.

Yes. Thanks, Neal. I think for the reinvestment rate, we're always looking at, as Bill mentioned earlier, what's the market look like and what's the need for oil. And we're not certainly not going to grow into a market that doesn't need the oil, as he pointed out, just trying to make sure to reemphasize that point. And then going forward, each year, we'll do the same thing we always do, we kind of see where the market is and what the prices are and what our opportunities are to develop our assets. And we balance that against the cash needs of the company. So it's not really a straight formula, it's more about where the market is at that current time.

I'm glad to hear that. I wish more others would say the same. And then just a follow-up. Could you talk about -- I would call this question more on sort of your regional allocation process. I know, Bill, you talked about sort of the new hurdles, the premium locations. But I'm just wondering, how does that factor in when you've got some exciting but not quite as developed areas like in the PRB, but I think have high potential, but if you're just strictly looking at maybe what they produce immediately, might not compete? So I'm just wondering, how do you factor in some of those high-potential wells with this plan?

Yes. Neal, this is Billy again. Let me take a stab at that. So as we look at all of our assets, that's the beauty of having a decentralized culture, where we are focused on multiple plays across our portfolio. You have plays that are in different phases of their life cycle as you might think about it. As you just said, like the Eagle Ford is a more mature play, it's had a growth for about 10 years, it's further down the maturity window than, say, the Delaware Basin. And then the Powder River Basin is certainly in early maturing or early growth phase play.

So each one of those, we certainly go in with the idea of delineating the play first, putting in the infrastructure to drive down our cost over time and maximize returns. So each one of those have a different life cycle that commands a different amount of investment. And overall though, the company is able to maintain a very steady pace of activity and future value creation through that -- the way we operate the company.

The next question is from Leo Mariani of KeyBanc.

Spending here, certainly noticing that just based on your guidance, your CapEx is picking up here in the second quarter. Just wondering what was sort of driving that. I wasn't sure kind of what was kind of causing that.

Yes, Leo, this is Billy. So the guidance on the CapEx, it's up a little bit in the second quarter relative to the first quarter. It's simply the timing of when wells are available to be completed. So we'll have a little bit more completion activity in the second quarter than we did in the first quarter, that simply is. I think, in general, we'll have about 50% -- 52% of our CapEx spend in the first half, the remaining to be spent more ratably through the rest of the year. And the volumes will be really pretty much keeping with that 440,000 barrels a day per quarter average the rest of the year. So it's -- we'll be maintaining 440,000 barrels a day each quarter going forward.

Okay. That's helpful for sure. And just wanted to ask on the exploration plays. If I'm not wrong, I think you guys are certainly devoting more capital there, particularly to the drill bit, in 2021 here. I just wanted to confirm, are you guys kind of drilling out multiple plays at this point? I think you did a little bit of that in the last couple of years as well. And as a result, maybe just can you kind of speak to high level what your confidence is in being able to maybe prove some of these up in the next year?

Yes. Leo, this is Ezra, appreciate the question. Yes, on our exploration plays, you're right, we're -- we've allocated about $300 million to the exploration effort this year. Over the last few years, we've done a little bit of drilling, it was dominantly kind of leasing, putting some of the acreage together. And then of course, there was a pullback here in 2020 due to the reduction in capital allocation associated with a downturn in prices and COVID.

But this year, we are back to drilling multiple prospects. We're at a point where the prospects have started to move at different phases, I would say. We're drilling exploration wells across some of the prospects. Across others, we're into more of what I'd call appraisal wells. And we're feeling very confident with where we're at, the results that we're seeing. And we hope to be able to provide some results on that soon.

The next question comes from Jeanine Wai of Barclays.

Maybe a question for Ezra, following up on the exploration. You're in Oman now, and I believe we saw last month that you paid a nominal amount for an interest in the Beehive oil prospects, offshore Australia. So can you talk about what attracted you to Australia? And do you still have interest in other international plays?

Yes, Jeanine, that's a great question. This is Ezra. Yes, the opportunity there in Australia, as you mentioned, it's on the Northwest Shelf, obviously everyone knows, a very prolific hydrocarbon region. It's a shallow water opportunity that we've stepped into there, as you mentioned, for a very low upfront cost. It's exposing us to a prospect that we think has the opportunity, the potential to be impactful to our company. It -- we're forecasting it has the potential to really compete with our domestic returns. And what we've -- the opportunity that we have here in Australia is really an outgrowth of our experience in Trinidad, where for nearly 20 years, we've been operating in the shallow waters offshore of Trinidad.

And really, this is a geologic province, a type of play where industry has really moved away from. And so we found ourselves as kind of a niche operator. And we've developed not only operational procedures but also some geologic techniques, where we think we can come into some of these shallow water prospects and make very, very good returns. The attractive thing about Australia again is not only does it fit into our experience level from operations and a technical perspective, but it has many offtake and oilfield service availability there. And of course, the low cost to entry to an exciting amount of upside in the prospect.

Interesting. We'll be looking forward to that. My second question, and I apologize in advance for beating the horse again on this, but on the special dividend, the perception in the market is simply that cash returns aren't consistent or formulaic. You can't capitalize them on valuations. You don't get credit for it, et cetera. With that in mind, you mentioned that you evaluate the health of the business every quarter, probably more frequently than that.

And specifically, when it comes to the special dividend, can you just clarify, is it really a matter of just holding $2 billion of minimum operating cash plus $800 million to $1.25 billion for the 2023 maturity and then everything else kind of gets paid out in due time and it kind of needs to be meaningful? I know you also mentioned a couple of times that having optionality for high-return full time is also one of the priorities. So if you have any kind of commentary on what a comfortable placeholder for that would be, that would be really helpful.

Yes, Jeanine, Tim has given, I think, some answers for some of those on there. Yes, we want to keep ample cash on the balance sheet to run the business. And that's around $2 billion. And then we have set aside -- are looking at plans for reducing the $1.25 billion bond in 2023. So that's all fits in and that's part of our evaluation of how we use the cash and when we use the cash. But really, the special dividend just fits into the framework that we've already laid out in our commitment to giving back cash to shareholders.

So we will look at our cash position, look at bolt-on potential opportunities. They can truly be any size from a very small -- we've done them in the past, $20 million, $30 million deal. But they could certainly be bigger than that, too. So we'll take all that and work it into our framework and evaluate where the company is and the outlook for the business. And our goal is to continue to return cash to shareholders through that framework.

The next question comes from Charles Meade of Johnson Rice.

I really just have one question, and it goes back to the -- some of your prepared comments, Bill, in more specifically share repurchases. Yes, I recognize that, that hasn't been your MO in the past and they kind of have a bad reputation maybe. Because usually, share repurchases wind up being pro-cyclical. And the way you talked about it, you said, for you, you would look at it in an opportunistic way, is the word I remember you said, in a downturn.

And I guess my question is it's easy to see a downturn in retrospect, right? 6 months ago, you guys had a 3 handle on your stock. But it's hard to recognize when you're in it. So is there any guideposts that you can share about how you would recognize when you're in one of those downturns and it's time to be opportunistic? Or is it just one of those things you know it when you see it?

Yes, Charles. I think it goes right along with the supply/demand and market fundamentals analysis that we do. We can -- we've gotten more sophisticated. We've got a very sophisticated model now developed through our information technology. And we're gaining a lot of confidence in it on being able to kind of be on top of the oil market and where it's headed. And certainly, the oil price, that's the biggest indicator. But we -- I think we'll be able to determine when is the right time, when is the opportunistic countercyclic time to maybe consider share buybacks. And of course now, we have a lot of cash on the balance sheet, and we want to continue to watch that and keep that where we'll have an opportunity when we do have a downturn to have cash to do that if that happens.

The next question comes from Neil Mehta of Goldman Sachs.

Congrats on a good quarter here. First question is, Bill, any updates on permitting on federal lands and how that process has been to apply for new permits? And in general, in your conversations with Washington, does it seem like some of the risks around the federal lands exposure in the Delaware has diminished?

Yes. Neil, this is Billy Helms. So on the permit -- the federal permits, certainly, we were very active in obtaining permits prior to the administration change just to protect our activity levels. Since that moratorium has been lifted, we are receiving a steady stream of permits. The permit stream is coming very well. We're receiving permits in all of our areas, too. So I think the working relationships we've been able to maintain with the regulators and working through the process with them has benefited us real well. So we're not really seeing any restrictions there. And I think the Biden administration clearly has said that activity -- he wants to maintain activity on valid leases. So we're very comforted by the fact that we'll be able to continue them.

That's great, guys. And the follow-up is just on the macro. You guys talked a little bit about the tools that you have to evaluate direction of oil price and the way things are trending. I'd be curious if you could unpack what you're seeing real time and how you're thinking about the commodity price moving from here for both for oil and for natural gas.

Yes. Neil, on oil, as we already talked about, the fundamentals are definitely improving. It's been a little bouncy on the COVID recovery and oil demand. But we're seeing very steady improvements. I think we're up to maybe 95 million barrel a day demand right now, we think. Maybe by the end of the year, that will get to pre-COVID levels of somewhere around 100 million barrels a day. We'll just have to watch it and see. The inventories are dropping. And we think there will be fairly consistent draws on inventory from here on out, especially during the summer pickup activity. And so that's all looking really good.

And then the spare capacity is going fine. It's been extended and drawn out a little bit further than what it started out to be at the beginning of the year. But we believe, again as demand picks up, that, that spare capacity will be put back online. We don't want to give you the data when everything is okay. We'll just have to watch and see it. But certainly, everything is going in the right direction. And I think the market, as oil prices have responded to that, I think it's what we're saying and seeing is not different than what the consensus view is.

On natural gas, we're mildly bullish. Inventories are low and supply is less. And demand is higher this year than supply. So we're going to be entering the summer and particularly the fall of the year with pretty low inventories. So depending -- obviously, it always depends on the weather on gas. And so we'll just have to see how all that turns out. But we're optimistic on gas also.

The next question comes from Michael Scialla of Stifel.

You've highlighted for quite a long time your ESG sustainability ambitions. Just want to see where you stand on the government putting the price on carbon or carbon tax. And do you see any economic opportunities in the energy transition for EOG?

Yes, Michael, I'm going to ask Ken Boedeker to talk on that. Just before he starts, the carbon tax or issues like that, we're going to leave those up to the legislatures and not come out with our opinions on that. We'll work with whatever transpires on that. So Ken, you want to talk about other opportunities?

Yes. We really have no interest in a lower-return business that this might lead to. But we've really made excellent progress in reducing our emissions over the last 4 years. And you can see that with our intensity rates coming down as indicated in the attached slides that we've got on the presentation there. We're focused on reducing our own emissions with projects that have competitive returns before we consider a second phase of applying technology, such as carbon capture to reduce our emissions. And we do believe that we can use 1% to 2% of our capital budget every year to make a substantial progress towards our goals of no routine flaring by 2025 that's been endorsed by the World Bank and our ambition of scope 1 and 2 net 0 by 2040.

Okay. And Bill, you mentioned some of the things you're doing to lower well costs, the larger pads and the super zippers. Some of your competitors have talked about 3-mile laterals in the Permian. I think you guys have done some 2-mile-plus laterals in the Eagle Ford. But do you see a trend toward 3-mile laterals, particularly in the Permian? Or if not, what are the issues that would prevent that?

Yes. Thanks, Michael. So on the 3-mile laterals, you're right, we've done several, I'd say, between 2.5- and 3-mile laterals in multiple plays where it makes sense. And we do them probably more predominantly in the Eagle Ford. And then we've had some in the Bakken and also in the DJ, so -- but there are unique circumstances that allow that to happen for us. And they're more driven by geology in that particular area but also the access issues on the surface.

I think just as a general rule, I'm not sure that it always makes sense to go through to a 3-mile lateral. I think you have to take into account the efficiencies of being able to complete that last mile of lateral economically compared to a 2-mile lateral, those kind of things. And a lot of it does depend on the geology. And as you know, we spend a lot of detailed time working through the geology and how to best approach every single well location we have. So there are some limitations on where you can do that effectively. And so it's not a broad brush approach.

The next question comes from Vincent Lovaglio of Mizuho.

I wanted to ask on the double-premium locations, and you might have touched on it last quarter, but if there's anything unique to the geology across these plays that lends itself to higher productivity but also the lower declines described in Slide 8. And if so, how that might affect your pursuit of new opportunities that are double-premium, why you guys are differentiated in that pursuit and also in the development of those opportunities.

Yes, Vin, this is Ezra Yacob. That's a great question. And yes, what we're highlighting there in the slide deck, it really comes down to what you touched on with the unique geology. These are -- the double-premium plays are usually in areas where we've really refined our target down to get -- in our existing portfolio down to get rock quality that is higher, better permeability. And really, the big step change is, as we look forward into the exploration prospects, as we've talked about before, we're looking for new plays that historically haven't really been drilled routinely with horizontals.

We're looking for a higher quality of rock, so we can apply the horizontal drilling and completions technology to. And really, it's the higher permeability, higher porosity that lends itself to the shallower declines. And we think that this is not only going to be a step change for our performance as a company going forward. But really, potentially those are going to be the new reservoirs the industry eventually is looking at to apply horizontal drilling to in the future.

Perfect. And maybe second, any additional color that you can maybe give on conventional EOR, just where it stands in the Eagle Ford right now, thoughts on applicability across other plays and then maybe how that could improve your environmental footprint going forward?

Yes, this is Ken. As far as EOR goes in the Eagle Ford right now, we've high-graded our EOR process. And we have some of our units that are in blowdown and other units that we're continuing to inject into. EOR is much more challenged in a higher gas price environment with our double-premium returns. So we are evaluating it for other areas based on that across the company.

The next question comes from Nitin Kumar of Wells Fargo.

First of all, congratulations. The market is definitely receiving the special dividend very well. My question is perhaps a little different from some of the other ones that have been asked. Over time, I was looking at Slide 9, you've migrated to this double-premium strategy. With the macro environment as favorable as it is, what happens to the single-premium or the lower half of your core inventory here? Ezra mentioned the exploration base can have returns as high as 80%. So just wondering, is there an opportunity to, with the E&D market opening, to monetize some of those? Or how should we think about that part of your inventory?

That's an excellent question, and we appreciate it, and appreciate your compliments. Yes, we are always evaluating property sales. And I'm going to ask Ken Boedeker kind of to comment on that in general for the company.

Sure. Thanks, Bill. We're always high-grading our portfolio and divesting of those properties with minimal double-premium potential remaining. And we've actually sold about $7 billion in assets over the last 10 years. And we will continue to high-grade our assets as we see the market giving them fair value.

And certainly, in the last few years, it hasn't been a seller's market, but it is -- it will turn as people get short of inventory. And we think that, that -- the premium, the single-premium assets that we have, even those are probably some of the best inventory in the industry. So those certainly have a lot of value.

Okay. And they don't -- with $60 oil and cost where they are today, they don't compete for capital within your program?

Yes, that's correct. The 30% rate of return at $40 doesn't compete in our program right now. It needs to be a 60% rate of return at $40 flat. It's definitely a huge shift in our returns. And that's what we've been talking about for the last several quarters. And our script and our slides detail a lot of really good information. But certainly, the shift to double-premium is, we believe, by far the highest reinvestment standard in the industry. And it is a clear separator for EOG. And it will drive exceptional performance for the company going forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Thomas for any closing remarks.

In closing, our excellent first quarter results are a testament to EOG's ability to generate significant shareholder value. We're proud of all of EOG employees and their outstanding contributions to continuously improve the company. Our excitement about EOG's ability to improve returns and increase value has never been greater. So thanks for listening, and thanks for your support.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.