EOG Resources Inc (EOG) 2019 Q4 法說會逐字稿

Good day, everyone, and welcome to EOG Resources Fourth Quarter 2019 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 the Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.

Thank you, and good morning. Thanks for joining us. We hope everyone has seen the press release announcing fourth quarter and full year 2019 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 may include estimated potential reserves and estimated resource potential, not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday.

Participating on the call this morning are Bill Thomas, Chairman and CEO; Billy Helms, Chief Operating Officer; Ken Boedeker, EVP, Exploration and Production; Ezra Yacob, EVP, Exploration and Production; Lance Terveen, Senior VP, Marketing; and David Streit, VP, Investor and Public Relations.

For the call this morning, we want to cover 3 topics. First, Bill Thomas will review the characteristics of EOG that have contributed to our long-term sustainable success. Second, I will discuss our financial strategy. And third, Billy Helms will review the outstanding 2019 operating performance and the 2020 plan. Here's Bill Thomas.

Thanks, Tim, and good morning, everyone. In times of uncertainty, EOG's sustainable business model is well suited to navigate a volatile environment. In fact, we are more confident in EOG's future today than we've ever been in the history of the company. With our strong balance sheet and flexibility, EOG is better positioned now, both financially and operationally to weather the storms than it's ever been in the past. Our operational performance last year was the best in the company history, and we believe EOG's performance in 2020 will be even better than 2019. With an industry-leading return on capital employed of 12% in 2019, we beat our plan in every respect. Capital spending was below plan, volumes were over plan and per unit operating expenses declined more than forecast. We grew oil production at a lower cost per barrel than ever before and delivered on our goal of double-digit returns and double-digit growth in a modest oil price environment. The company also generated nearly $1.9 billion of free cash flow, defined as our discretionary cash flow lest our total cash capital expenditures. That cash flow funded the retirement of $900 million of debt and the payment of $588 million in dividends. We accomplished all this with oil prices averaging $57 a barrel. Today, due to our confidence in the future performance of the company, we are increasing the dividend again for the third year in a row by another 30%. With this increase, our dividend has more than doubled since 2017 and represents an annual return of cash to shareholders of more than $800 million in 2020.

Our confidence in this company's future is based on 2 unique characteristics of EOG. The first is our culture, and the second is our premium investment standard. These 2 qualities drive our company and give EOG a unique and sustainable competitive advantage. EOG's culture is the foundation of our long-term success. First and foremost, we are return focused, which drives disciplined capital allocation. Our decentralized organization supports an entrepreneurial mindset to drive bottom-up value creation. We embrace technology and innovation to make better wells for lower costs. Counterintuitively, our capital efficiency improves year after year because we don't consider this a manufacturing process. We pride ourselves on being a responsible operator; good to employees, our communities, our partners and our vendors. We embrace technology and innovation in every aspect of the company, including reducing our environmental footprint. EOG's culture is our #1 competitive advantage and has driven our strong historical success, and we are confident it will continue to drive success in the future.

The second unique characteristic of EOG is our premium investment standard, which is rooted in our return-focused culture. The premium well strategy dictates that a well isn't a well unless it earns at least 30% return at an oil price of $40, requiring a hurdle rate of 30% for direct capital ensures that once full cost is applied we earn a healthy double-digit all-in return. We believe our premium standard is one of the most strict investment hurdle rates in the industry and positions EOG to be one of the lowest cost producers in the global energy market. Our premium inventory is growing faster than we drill it, and the quality of the wells we are adding to the inventory is improving. To instill -- to illustrate this point, after 3 years of adding premium inventory, our median premium well today actually yields a direct a-tax rate of return of over 55% at $40 flat oil prices. With a $50 oil price, the median return sourced to more than 80%. The combination of our ability to replace and improve our inventory while continuously lowering cost at the same time is why we are so excited and confident about EOG's future.

Premium drilling delivers exceptional capital efficiency that has allowed EOG in a modest oil price environment to grow oil volumes at strong double-digit rates and generate significant free cash flow at the same time. A financial profile that is competitive with the best companies in the S&P 500.

For 2020, our goal is to continue to create significant shareholder value through disciplined investment in high-return premium wells while ensuring the capital program and dividend payments can be funded at a conservative oil price. In response to lower oil prices, we reduced capital allocation to premium drilling and oil production growth versus 2019. However, we did not slow down investments in projects that we believe will improve the future of the company. These include drilling and testing a number of new large plays to improve our inventory, building infrastructure to lower operational costs and investing in projects that will lower future GHG emissions. It's important to note that our 2020 all-in capital efficiency, including infrastructure and exploration, is better than 2019, consistent with our commitment to getting better every year. At an oil price of less than $50, our disciplined capital plan of $6.5 billion supports growth in crude oil production of 12%, sets the company up for better returns in the future and comfortably funds the dividend.

Finally, we want to review our environmental, social and governance performance. We made significant progress last year in both our ESG disclosure, and more importantly, our ESG performance. EOG is one of the lowest flaring intensity rates in the industry as recently reported by the Texas Railroad Commission. We're very excited about the level of innovation and degree of focus in the company to drive further environmental improvements. We continue to expand our water reuse technology throughout the company. We've been a leader in the use of electric frac fleets and continue to electrify our operations, replacing diesel generation where feasible. We are piloting the use of alternative energy sources, such as solar to power compressors and reduce GHG emissions. And last, but certainly not least, all these projects are expected to earn a return. We are optimistic that most, if not all, of these efforts and many others will help lower our GHG emissions intensity. To sum up, we hope you can see why we're so confident about EOG's future. Our unique culture and premium investment strategy are competitive advantages that will drive our long-term operational, financial and environmental performance and together underpin our long-term sustainable success.

Next up is Tim to review our 2019 financial performance and long-term financial outlook.

Thanks, Bill. EOG had outstanding financial performance in 2019, demonstrating the resiliency of our business. Our 2019 return on capital employed was 12% with oil averaging $57 per barrel for the year and with meaningfully lower NGL and natural gas prices compared to 2018. EOG generated discretionary cash flow for the full year of $8.1 billion and invested $6.2 billion in exploration and development expenditures, resulting in full year free cash flow of $1.9 billion. Proceeds from asset sales in 2019 contributed an additional $140 million. We paid $588 million in dividends and retired $900 million in debt. Cash on the balance sheet at year-end was $2 billion and total debt was $5.2 billion for a net debt to total cap ratio of 13%, down from 19% at the end of 2018.

The power of our premium well strategy can be seen in our financial performance for the last 3 years. We established the premium hurdle rate in 2016, and the strategic shift began paying off the very next year. Beginning in 2017, we have averaged 14% return on capital employed, a return measure that can be directly calculated from our financial statements using GAAP earnings, generated nearly $4.6 billion of free cash flow while growing U.S. oil production by 64%. Paid out $1.4 billion in dividends or 30% of free cash flow and retired nearly $1.9 billion in debt, cutting our debt-to-cap ratio by more than half from 28% to 13%.

Our focus at EOG is creating long-term shareholder value. The clearest way to realize this goal is to grow the business value of our company over time while at the same time protecting that value through commodity price cycles. How do we do this? We compound attractive corporate level returns through disciplined growth while ensuring the company remains profitable in lower commodity price environments. We analyzed a model the company under numerous scenarios and the outcome from each of them is clear. By reinvesting and growing, EOG generates higher ROCE, higher cash flow and higher free cash flow in the future and ultimately higher business value. The most tangible output of this strategy is the payment of a regular dividend. The payment of a growing sustainable dividend is the best way of returning cash to shareholders and is an integral part of our successful business model, high return reinvestment. EOG's dividend growth has grown at a compound annual rate of 22% over the last 20 years. I'm pleased to say we've never cut the dividend and never issued equity to support it. In the past 3 years, the adoption of our premium strategy has dramatically increased the capacity to pay a sustainable dividend in a volatile commodity environment, and EOG has responded with healthy increases.

We analyzed the amount of the dividend under many scenarios. There is no simple formula. So one way you can think about it is consider the financial profile of the company under various oil price environments. This is illustrated on Slide 9 of the investor presentation.

In 2020, maintenance CapEx of $4.1 billion plus the dividend can be funded at an oil price of $40 per barrel. Maintenance CapEx is the amount of capital required to fund drilling as well as infrastructure requirements to keep oil production flat relative to 2019 across all premium oil plays. Our premium strategy has dramatically lowered the cost structure, improved the capital efficiency of the company and increased the capacity to pay a sustainable dividend. We are proud of the performance that allowed us to reward shareholders with sustainable dividends of more than 30% in the last 3 years.

Looking ahead, the Board of Directors will ultimately evaluate the amount of the dividend each year based on business conditions at the time and expectations for the future. Our goal remains the same, pay a growing sustainable dividend that represents a tangible return to shareholders and long-term value creation.

Next up is Billy to review our operational performance.

Thanks, Tim. Let me first start by saying that I'm extremely proud of the efforts and achievements of our talented employees for their tremendous execution in 2019. EOG delivered more oil for less capital in all 4 quarters of 2019. For the full year, we increased U.S. oil production 15%, producing 5,000 barrels of oil per day more than we initially estimated at the start of 2019 with CapEx that was near the low end of the guidance. We achieved this with 4 fewer rigs and 2 fewer of completion spreads than originally planned. Driven by efficiency improvements across our operations, total well cost declined 7% in 2019. Internally generated improvements came from every area of our operations, sparked by innovation from EOG's creative, decentralized organization.

In our drilling operations, a good example is our premium drilling motor program. The program implemented in the Permian led to a 50% reduction in motor failures in 2019, generating a cost savings of $20,000 per well. We are now implementing this program in the Rockies and Mid-Continent areas, joining the Eagle Ford which has had a similar program for some time.

Our drilling teams are also delivering performance improvements more consistently, which reduces downtime. As a result, our drilling times improved 17% across our 36 rig program. Our completion teams also delivered outstanding improvements in 2019 due to the employment of electric frac fleets and the use of a diverter material. As a result, overall well performance increased and completion costs were down 15%. Our drilling and completion advancements last year were the primary reason we delivered higher production with lower capital cost expenditures.

CapEx savings driven by well cost improvements in 2019 allowed us to invest more money in the infrastructure projects and acreage acquisitions than the original plan. Investments in infrastructure like water handling systems had very high rates of return and paid back quickly, often within months. And acquiring low-cost acreage in our new exploration prospects will enable the company to sustain the growth well into the future.

Operating expenses also improved significantly in 2019, especially per unit LOE cost, which declined by 6% for the full year and a whopping 13% in the fourth quarter 2019 versus the fourth quarter 2018. Savings from infrastructure investments supported these improvements. Use of diversion material in our completion designs was another driver of operating expense improvement. Diverter mitigates the risk of sand and water incursion into offset wells, reducing workover expense.

We had some great accomplishments in 2019 in our environmental and safety performance as well. Most importantly, we reduced the recordable incident rate by nearly 30%. We decreased our use of freshwater. For the total company, 75% of the water sourced from reuse was non-fresh water sources. 75% of the water sourced from reuse or non-freshwater sources decreased freshwater consumption by more than 25% versus the previous year. In the Permian, 98% of the water was from reuse or non-freshwater sources, reducing the freshwater consumed by more than 60%.

We achieved a wellhead gas capture rate of over 98% across the company, including the Permian Basin, performance, we think, places EOG amongst industry leaders.

Now just to comment on our reserves. Our 2019 capital program yielded more than 250% reserve replacement at a low finding cost of just $8.21 per BOE, excluding revisions due to commodity price changes. That finding cost is 12% lower than 2018. As a result, our proved reserves increased by 401 million barrels of oil equivalent or 14% year-over-year to 3.3 billion barrels of oil equivalent.

Our premium -- our permanent shift to premium drilling focused on efficiencies driven by innovation and our unique culture of how our capital efficiency continues to improve, and how we've lowered our corporate finding cost to less than $8.50 per barrel of oil equivalent.

The marketing team also did a phenomenal job last year to position EOG to capture the highest prices for our products, bypassing pinch points while avoiding the counts of long-term expensive commitments that narrow profit margins and constrained operational flexibility. In 2019, EOG sold its first cargoes of crude oil into the export market. And we will build on that success in 2020 as our long-term export capacity for crude oil and natural gas continues to expand.

In 2020, we will be able to successfully transport nearly all of our crude oil, natural gas and NGLs out of the basins where they are produced to capture the highest prices in the domestic markets while also accessing export markets for all these products for the first time.

Looking ahead into our 2020 capital plan. Due to the commodity uncertainty and -- due to the current uncertainty in commodity prices, we reduced capital allocated to oil growth. However, we have allocated capital to fund investments that will continue to improve the company, such as drilling to test and bring forward new play drilling potential that will improve the quality of our inventory, infrastructure to lower cost and environmental projects to lower GHG emissions and increase water recycling. The plan allows us to accomplish several key objectives. One, our capital efficiency improved over last year. Our goal is to continue to get better every year, and our premium strategy continues to transform the financial and operational efficiency of the company. In fact, our capital efficiency is strong enough to carry the additional capital allocated to exploration and infrastructure, which will continue to improve future drilling returns, lower cash operating cost and lower the breakeven price needed to generate 10% ROCE. Number two, the plan is balanced at $50 oil, meaning we can fund capital expenditures and pay the dividend with discretionary cash flow. To be clear, we have a tremendous amount of flexibility to adjust our activity levels as we see how the commodity landscape plays out. Should we see oil prices continue to trend lower over the sustained period of time, we would reduce our activity and capital budget in order to generate free cash flow. At higher prices, we would not increase activity, and our 2020 plan generates significant free cash flow. Number three, we are allocating capital to test several key new exploration projects. Our 2020 program includes multiple exploration wells and at least 6 new plays, along with an additional leasing of low-cost acreage. We are confident that our exploration efforts will add future high-return growth potential to our already deep inventory. And number four, we anticipate continued improvements in our operational efficiencies. We lowered well cost 7% last year and have set an initial goal to lower our well cost another 4%. We also expect to reduce LOE by another 2%. Our operating teams are highly focused on capturing additional efficiency gains in each area of our operation, and we anticipate that there will be some additional savings from service pricing as well. It's important to note that we have not included these potential savings in our 2020 plan.

Finally, we are starting 2020 off just like we did in 2019, with CapEx slightly weighted to the first half of the year. We had excellent results in 2019, and we are confident that we will continue to -- continue that performance into 2020. We allocated capital to Trinidad, infrastructure and environmental projects early in the year to allow the most benefit to this year's economics. We will continue to monitor the commodity markets and make adjustments to ensure we meet our objectives of generating free cash flow and solid returns. We have a great deal of flexibility to adjust as needed.

Because of our decentralized organizational structure, multi-play portfolio and deeply ingrained culture that fosters innovation, continuous improvement and growth, I'm highly confident EOG can sustain our success well into the future.

Now here is Bill to wrap up.

Thanks, Billy. In closing, I will leave you with these thoughts. First, our 2020 plan is set to perform even stronger than 2019. With improved capital efficiency, we are set to deliver strong, high-return growth and investments that will strengthen the future of the company. We are particularly excited about cost reduction and drilling a significant number of wells on several new large exploration plays that we believe will continue to improve our inventory. We see no end to improving the company in 2020. Second, EOG's unique return-focused and innovative culture has proven for decades to deliver significant shareholder value. Our culture continues to improve and will continue to drive our future success. Third, our strict premium investment hurdle is the most stringent in the industry and a significant and unique competitive advantage that allows EOG to be one of the lowest cost operators in the global energy market. And finally, EOG is positioned better than ever to be the leader in ROCE and deliver double-digit growth with significant free cash flow through the commodity cycles. We are more confident and excited about our future now than we've ever been before.

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

(Operator Instructions) And the first question comes from Doug Leggate with Bank of America.

Bill, may I say, thank you for the disclosure on sustaining capital, we've been asking for it. It makes life a little more transparent and a lot easier for us to figure out how we think about valuation. So I appreciate on that Slide 9 of your deck. My question is on the inventory. I guess, it's Slides 12 and 13, again terrific disclosure. But can you just help us understand how -- what the process is, excuse me -- what the process is to translate -- I think you called it conversion potential of some 5,000 locations. And what that visibility looks like longer-term because the only knock on the stock now that we constantly hear is, well, as you continue to grow and increase the pace, that inventory life is going to shrink. So applying some kind of annuity valuation becomes problematic unless you've got that visibility. So what is the process and what is the depth, I guess, is the question.

Yes, Doug, thank you. Yes, our inventory, when I think about EOG's inventory life, it's probably last on my list of things to worry about as -- because the company has just historically and continues to be a prolific generator of inventory. And since we started premium in 2016, we've just steadily increased the inventory up and currently it's 10,500. And we have an additional 5,000 locations that really are just on the verge of converting into premium. And I'm going to ask Ezra to give a little bit more color on -- about how we do this and then maybe talk about some of our additional inventory through our exploration.

Yes, Doug, this is Ezra. Thanks for the question. As Bill pointed out, we have identified 10,500 premium locations right now, which at our current pace of drilling represents about 13 years of drilling. And then those 5,000 locations that you both pointed out with a conversion potential would add another 6 years at the current pace. So going back to the conversion potential, I think, as Billy noted in the opening remarks, this past year we were able to reduce well cost across the company by approximately 7%. And that's really the one -- the #1 driver of converting those well locations. And that's something we've done over the past 4 years, is be able to lower well cost every year through not just reduce contract pricing, predominantly through our increased operational efficiency and applying innovative technologies and capturing different parts of the value chain. So that's the first way that we look to expand the inventory, the premium inventory. The second thing we do, which is a bit more challenging, of course, is through our exploration effort. And that's an organic exploration effort where we're currently trying to add not only additional premium locations but really improve the quality of the locations. So as you mentioned on Slide 12, we've shown what the medium rate of return of our current premium well inventory is there at a 58% rate of return on that premium price deck of $40 flat oil, $2.50 natural gas. What we're trying to do is really increase that, and we're currently -- for the past 12 to 18 months, we've been leasing in -- across 10 different prospects. And as Billy mentioned in the opening remarks, we look to be testing about 6 of those this year. And we're very excited about the progress of those exploration prospects and the potential that they could add to the inventory.

My -- maybe a part B to that real quick. The maintenance capital number. What's the decline rate that goes with that?

I'll ask Billy to comment on that.

It's -- yes, the decline on the base production is 32%, Doug.

So, a follow-up then is just a real quick one. Billy, it's also for you, I guess, because you talked about, you wouldn't increase spending in a higher oil price environment. Well, I guess, the question that kind of follows from that is, are we seeing then a reset in your sort of base planning assumptions for the commodity because even we believed your stock is very undervalued here, and I wonder if share buybacks becomes a consideration at some point?

Yes, Doug. This is Billy. I might give you some thoughts and then maybe Bill would want to answer. But since you directed the question to me, I guess, yes, the point is that we're going to stay disciplined on our capital program. So we'll certainly adjust downward if commodity prices show that this is going to last for a sustained period of time. But if they do rebound, we will not outspend our capital that we've allocated for this year, and we're going to stay disciplined with that. In that, the reason is, is we're going to -- as we've stated in the past, we only will continue to fund to the point, which we can continue to get better. We have a lot of different agendas to try to improve this year. And including the exploration projects we talked about and many of the other projects that we've got underway, and we certainly want to see those through. So if oil prices suddenly jump way up, we're not going to rush out and increase capital. So our plan is really set based on conservative outlook. At the time, we set the plan, and that's not going to change as we go through the year.

Yes, Doug. I'll just comment on your question about would we consider share buybacks, and just reiterate our priorities really have not changed. Number one, as Tim talked about, the best way to create business value is -- there's no question about it any way you want to run it, is reinvesting at high rates return. And that's what we're committed to and that's what we really want to stay focused on. The next priority is sustaining and growing the dividend, and we believe the dividend is the best way to return cash to shareholders over the long-term. And obviously, we have demonstrated a very, very strong commitment to that this year and previous years. So that's the way that we want to continue to focus on returning cash to shareholders.

And our next question will come from Arun Jayaram with JPMorgan.

Yes, Bill, I was wondering if you could comment on how EOG is thinking about some of the demand impacts from the Coronavirus and the state of the oil market today. And what would be the company's game plan if we did move into an environment where we have sustained oil price that caught in the low 40s for some bit of time?

Yes, Arun, certainly, this is a huge world event, and it's developing. And we like everybody else is watching really daily the developments around the world, and we certainly hope and pray it's a short-term event. But if it turned to a longer-term event, as Billy said, we're in a fantastic position. Number 1, we got a great balance sheet, and we are committed to that, and that's certainly been a strength of EOG for years and years and years. And so that puts us in a great position. And then we're very flexible. We have an operational ability to adjust activity. And I think I'll let Billy comment a little bit more about that, maybe some of the specifics.

Yes, Arun. So the way I would add to that is we have the capability to adjust our rig activity and frac fleets down to really be in line with our sustainable CapEx or smart maintenance capital numbers. So we've set out a plan that really allows us to capture the highest performing rigs and frac crews in the market, but we have a tremendous amount of flexibility to adjust downward if we need to and so -- and the same would apply to our allocation of capital to our infrastructure spend and other things. We have the same capability to adjust that downward if needed. So we'll just be patient here and watch to see how the market unfolds and adjust accordingly.

Fair enough. Bill, in your prepared comments, you talked about some of the infrastructure spend, which is designed to lower your operating cost. I was wondering if you could maybe give us a little bit more color on the magnitude and the level of these investments. What exactly are you investing in on the infrastructure side?

Yes, the infrastructure is just very critical to build out that infrastructure ahead of the drilling because it has significant well cost reduction and which certainly increases the returns. It has a significant influence on lowering operating cost significantly also. And it allows us to, I think, certainly market our products and get our products online, reduce flaring, just all kinds of tremendous benefit. So, it's really important to stay ahead of that. And maybe, Billy, would -- you could give a little bit more color on some of the specifics.

Yes. On the specific side of that, Arun, as Bill mentioned, there's a lot of things that we'd like to fund. And I would -- all of these projects have a direct impact not only on our capital cost and the future of our drilling program, but also lowering our unit operating costs. So I would point you to Slide 16 in our deck that shows in the last several years we've reduced our cash operating expense tremendously, 33% since 2014. A large part of that decrease came from investment in infrastructure. It allows, even as Ezra talked earlier about, our inventory and our ability to convert these wells to premium. Part of that cost goes back to investing in infrastructure. So there are things like -- the most economic part of that would be getting trucks off the road and reducing our transportation costs, getting water on pipe, oil and gas infrastructure in place well ahead of the drilling program so that we minimize not only our capital cost for that upcoming year and future years but also the biggest impact on lowering our full-year's LOE and certainly our transportation cost. So that's largely what it entailed.

The next question comes from Neal Dingmann with SunTrust.

My first question is on your 2020 plan. Specifically, how fluid is your allocation to the various high return plays along with how actively you might change your well spacing and other development plans based on what the commodity prices do?

Neal, this is Bill. On the last point, I don't think we would change spacing that much based on the commodity prices. Really, we're already facing our economics on all of our drilling on $40 flat oil. So we're -- even with a drop in price, we still have a very strict reinvestment hurdle. So that part we wouldn't really change too much. As far as the plays, the reason it's really easy for us to, I guess, ramp down activity is that we're in multiple plays. We're developing 6 plays out of multiple divisions. So you just take 1 rig per play, which is an easy reduction out of each play. It is really easy to do, and it makes it really fluid. You can take 2 rigs out of each play, that's 12 rigs. So we have -- because of our decentralized organization and multiple plays it's not that difficult to systematically reduce as the commodity price changes.

Got it, that makes sense. And then my second question, Bill, for you, or the team is just on infrastructure. You all suggested in the release that you'd allocate a bit more to infrastructure. Just wondering will there come a time down the road where your infrastructure reaches a size where you consider monetizing? Or does this remain too critical in keeping your costs lower?

I'll ask Billy to comment on that.

Yes, Neal -- yes, I would say that the infrastructure is just a critical component of our development activities on a go-forward basis. And it really doesn't make sense for us economically or financially to monetize that because it is a big part. As I mentioned earlier, it's a big part of driving our unit cost down and improving our returns long-term. So we plan to -- we look at each case independently to see where it makes sense for us to invest in that infrastructure versus others. And a large part of that goes back to our need to control how we get those products to market also to capture the biggest process in not only domestic markets, but also be able to export that as we need to.

The next question is from Brian Singer with Goldman Sachs.

My first question is on the Eagle Ford Shale. There's been much made about the shift from east to west within the portfolio and concerns over falling EURs. On Slide 42, you highlight the extent to which well costs were lower in the Eagle Ford, which arguably offset some of that last year, about 11% well cost reduction. In 2020, your target for well cost reductions is a bit more modest at 4%. And so I wanted to ask how you see well productivity playing out in the Eagle Ford in 2020 and your outlook for the trajectory for capital efficiency there?

Yes, Brian, thank you for the question on the Eagle Ford. I think the main thing that's really important on the Eagle Ford is that due to the dramatic cost reductions we continue to have there, our economics remain very, very, very strong. And so -- Ken is the expert on the Eagle Ford. I'm going to ask him to comment on specifics there.

Yes. Yes, Brian. As we've moved to the west over the last few years, we've continued to lower the cost basis in the Eagle Ford and improve our returns. If you look at the cost basis, so everything that it takes us to find, develop, produce and market our oil there, you can see that cost basis has continued to reduce even though our percentage to the -- going to the west has increased by several percent over the last few years. Out in the west, it's less structurally complex. So we're able to drill longer wells. And as we bring our cost reductions into that area, along with our improved targeting and better completion strategies, we expect those costs to continue to reduce. Our field crew there in the Eagle Ford is just doing an outstanding job in driving those costs down.

And so in net-net, in 2020, then, just a follow-up, do you continue to see at or better capital efficiency when you think about the cost reduction potential? And then how you see your well performance?

Yes, we would expect to see actually better capital efficiency in 2020 than we saw in '19 in the Eagle Ford.

Great. And then my follow-up is with regards to acreage acquisitions. You talked about that and some capital being earmarked for that this year again. Can you characterize what stage you're in there, the acreage that you're -- or the capital that you're earmarking? That's it -- is that capital that is for -- based on well results that you know of that are already meeting your return thresholds? Or is this acreage that is essentially being bought in advance of testing? And then one of the items that's also on your list for use of excess cash is premium property additions, and perhaps you can give an update on how that market looks?

Brian, I'm going to ask Ezra to comment on the acreage.

Yes, Brian, this is Ezra. As far as the acreage and the exploration plays, we really spent, I think, as I just mentioned, last 12 to 18 months, putting together acreage in what we consider to be the highest quality, kind of the Tier 1, if you will, parts of these exploration plays. And we've been doing that at relatively low cost, really, well under $1,000 per acre, I'd say, across all of those plays. And we've gotten at least 6 of those plays, as we mentioned, to a point where there will still be some additional acreage to put together, but we're at the point on those plays where we plan on drilling and testing those this year. And then we'll still be leasing across some of the other exploration plays as well. And obviously, with these exploration plays, just to keep our competitive advantage up, we probably don't want to say too much more than that.

Yes. Brian, as far as the -- maybe bolt-on acquisitions, we really don't plan on doing any significant bolt-ons this year, maybe a few really small ones in our exploration plays. But with the commodity process what they are, we're going to be really careful with cash and make sure that we focus in on things that are going to generate super high returns.

The next question will come from Leo Mariani with KeyBanc.

Just wanted to get a sense of whether or not in this type of market, which clearly has been quite weak and it feels a little bit like 2016 right now, whether or not you guys would take advantage of your strong balance sheet to maybe look at some chunkier bolt-on M&A type situations like you did with the Yates back then?

Yes, Leo. Yes, I think we just talked about that. No, we don't really have any big plans to do any bolt-on or larger deals. We've been very fortunate. As Ezra talked about over the last 1.5 years, we've accreted a significant amount of acreage in a number of what we think are very, very high-quality plays, and we've accreted that at very low cost per acre. And so we're going to be focused on testing those this year. The whole increase in the exploration spend this year is all in drilling. So we're really set up to test those this year, and we're excited about adding new higher quality potential and improving our inventory through our exploration efforts.

Okay, that's helpful. And I guess, just with respect to the well cost reductions, it looks like you guys beat your target last year of 5%, came in at 7%, new target here is 4% in 2020. I just wanted to get a sense of where do you kind of see as the high level kind of big drivers, I guess, none of this is service cost in terms of what can lead to those cost reductions here in '20?

I'm going to ask Billy to comment on that one.

Yes, Leo. There are several factors. There's not one single thing as you might imagine. We're seeing certainly some softness in the tubular side. We'll be -- probably be about 8% lower on tubulars this year relative to last year. Certainly, on the completion side of the business, that's probably the area of the biggest decreases we'll see this year. And a large -- even part of that still is on sand cost. That could be down again this year just due to mainly getting sand even closer to the wellhead than we did last year. And you're even seeing some softness in drilling rig rates. So the biggest thing, though, I think, that's going to drive that is just our continued push. So those all were service-related issues. The biggest cost drivers will be on efficiency gains. We're -- we just continue to get better and better at everything we do. Drilling wells much faster, the use of diverter, improving our completion efficiencies and lowering our well cost. Those things all drive the biggest majority of our savings year-over-year.

And our next question will come from Paul Cheng with Scotiabank.

2 quick questions. I think, Billy, you have said that you may -- in the event that you need to reduce the activity level that you could be very easy to just maybe take out 1 rig per play. But is that the plan or that you will be more looking at say a particular play you're going to see more the -- 1 or 2 is going to be target first? Or that you will be targeting on the infrastructure or that we saw development spending?

Yes. If I understand the question, Paul, you're asking where would we reduce? Will there be any specific plays, that we would reduce more other? Or will we maybe look at infrastructure reduction?

That's correct.

I'll have Billy comment.

Yes. Yes, Paul, this is Billy. Just to give you a sense, we have a lot of flexibility in all areas. So we would look at each part of our plan and accordingly adjust as we need to. So it would be not only just drilling, it could be infrastructure projects as well. And we like to get out ahead of the drilling just to put it in the infrastructure to maximize our benefit. But if we slow down drilling in an area, we would certainly slow down infrastructure spend as well. So that's one way to think about it. As far as one play relative to the other, as Bill mentioned earlier, it's really easy to adjust each play down. And we'll certainly make those decisions when we see the market unfold. So as we mentioned earlier, we'll just be patient and kind of watch to see what happens before we start making any adjustments.

Okay. The second question, just, I think the Cheniere LNG export terms, just starting up soon. So can you tell us that? I mean, how much you pay for the toll and that there are physical terms there?

(inaudible) the property that is going to get them to the 440 million cubic feet per day?

Okay. Paul, thanks for the question. First off, related to the contractual terms, just due to the confidentiality, we can't disclose that. But I can walk you through a little bit of when that started up. So we actually did start with Cheniere. We're excited about that. We actually had our first listing on January 20, and so that is 140 million a day, that will be linked to JKM. So that started up in January. And then that will ramp up to 440 million a day, with 300 million of that being linked to Henry Hub. So that's currently what's in place today.

Our next question will come from Scott Gruber with Citigroup.

Just coming back to the infrastructure question. Did some of your spend on facilities, GP&T and environmental projects could be about 20% for the total this year? How should we think about that over time we're going to go as some of these strategic investments stayed?

Yes, Billy will comment on that, Scott.

Yes, Scott, we typically budget every year the overall infrastructure part. Facilities and G&P is usually about 15% to 20% of our typical plan. And this year, we've allocated a little bit more closer to the 20% number you just mentioned. And that varies year-to-year depending on where we are in the development of each play and our need for infrastructure to expand those plays and get our cost reductions that we anticipate. So this particular year, it's a little closer to the high end. But I think, in general, it's usually between 15% and 20%.

Got it. And then -- I appreciate the disclosure on the maintenance CapEx. How should we think about the infrastructure percentage within that figure?

It would probably be on the low end of that number, the 15% to 20% that I mentioned earlier, would be on the low end of that. Certainly, we would focus in on our core areas where we have a little need for additional infrastructure expansion. And that would just remind you that that's a maintenance capital number for this year based on keeping this year's number flat.

Next question comes from Joseph Allman with Baird.

On the dividend, what analysis do you do to determine that the dividend is sustainable and to determine how much to increase it? I know Tim commented on this earlier, but like how many years do you look out, 3 years, 5 years, 10 years or more? And what are the factors that you model? And what type of stress testing do you do?

We'll ask Tim to comment on that.

Joe, yes. When we model it, we model it on several different scenarios. But as far as how far out we look, we look out about 5 years because that's really about as far as you can look out as far as the strip goes to get an idea of what -- how to model commodity prices. And we stress tested on just about every metric you can imagine to come up with a recommendation to the Board on where to move the dividend. And so then, as you can imagine, there's lots of discussion around all that analysis, and then the Board either agrees with us or doesn't, and then we move forward with that increase.

That's helpful, Tim. And then on Slide 9, the maintenance CapEx slide, I assume that, that's a dynamic metric. So could you describe how that might change over the next few years?

Will ask Billy to comment on that.

Yes, Joe. So it's important to understand how we come up with the maintenance capital number to start with. It's a very detailed bottoms-up approach, starting with this year's plan, our 2020 plan, and then scaling that down in each one of our plays to make sure we maintain kind of flat growth in each one of our premium plays. So that's kind of the approach. So each year, certainly, depending on what our volumes were, would determine what that level of maintenance capital would be needed to replace or at least maintain the prior year's production number. So, again, this number would fluctuate just depending on what kind of target we're trying to hit. But we would approach it the same way, and then that it's pretty important to note too that, that covers both the capital and the dividend at $40. So it's a pretty good number. It just demonstrates the improvement in our capital efficiencies. And basically, this assumes also that we don't see any improvements in either our production performance or additional gains in our lower -- in lowering well cost. So it's taking the existing conditions as we have today.

Our next question will be from Bob Brackett with Bernstein Research.

Bill, you mentioned that inventory was last on the list of things that you worry about. Could you go to the top of that list and talk about the things specific to EOG that you worry about?

Well, Bob, of course, oil prices would be #1. It's always #1. So that's the most difficult part in our volatile environment that we deal with. Really, the company is in such fantastic shape, I don't really spend a lot of time up at night worried about the direction of the company. As we said, we've got tremendous confidence in our ability to really continue to have very, very, very good success. And the main -- and the reason is simply what we stated before, it's our culture. I mean, we have, I think, a very unique incredible culture and the bottom -- and the value of the company is bottom-up driven. It's not me driving it. It's not me making decisions on how to drill the wells or how to get the cost down. It's literally every person in the company is a business person, and we give them -- they have the data, they have the ability to analyze it and make decisions. And it's just really -- the results that we have in the company are very sustainable because they come from a thousand different places. And so that takes the pressure off of me, and it really is just a fantastic organization. So that really is the basis of our confidence.

And our next question will come from Jeanine Wai with Barclays.

This is Jeanine. My first question is on inventory quality, back to that Slide 13, where you show rate of return versus your premium well count at different oil prices. For that curve, what does the distribution look like by basin? And can you point to kind of where 2020 -- where that sits on the curve?

Yes, certainly. On the curve, the distribution of the wells -- or the returns is about the same in each one of our plays. It looks very much the same. We have single premium, double premium, triple premium wells in really every play that we're developing. And then our 2020 plan, the returns on our 2020 plan would reflect about the median there. When we look back on our scorecard for last year, our 2019 plan, our returns at the current process are at a $40 flat oil, we're about the median. So that represents the median returns there, which are 53% at $40 -- I mean, 58% at $40 flat and an incredible 83% after-tax rate of return at $50 flat oil prices are about the returns that we're getting on our drilling program.

Okay, great. That's really helpful. My second question is on the balance sheet. And maybe we're just being a little too nuanced here. But we noticed that there was a slight change in messaging on the debt reduction program from -- I think the slide went from targeting $3 billion in debt reduction to "Evaluating Options for Current Maturities." So can you just provide a little color on this? Or have you have any new debt or cash targets in response to the macro view? And I guess, the reason why we're asking is because we had thought that getting through your $3 billion debt reduction program was potentially a trigger for doing share buybacks or other things of the free cash flow.

Yes. Tim will comment on that.

Yes. So there was a slight change there, and the reason was is where we're at in the commodity cycle. We will pay off our 2 bonds that come due this year. One is due April 1 and the other is due June 1. They're $500 million each. So obviously, we'll pay those off. We'll then evaluate where the market is currently and where it looks like it will be going long-term to see where commodity prices are going and make a decision -- a prudent decision whether or not to refinance those bonds or not. The goal is still to pay off $3 billion over that period of time, but we have to be prudent and look at the conditions at the time and decide where to go.

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

Well, first of all, 2019 was the best operating performance in the history of the company and that is just due to just what we've been talking about is to everybody in EOG. So thank you, everybody in EOG for doing a fantastic job. We're excited about carrying that momentum into 2020. The company has got a great balance sheet. We've got operational flexibilities. We've talked about industry-leading premium inventory and a unique EOG culture. So the company is set to weather the storms and weather the downturns and to continue to deliver strong results in the future. We're really excited about where we are and where we're headed. So thanks for listening, and thanks for your support.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.