EOG Resources Inc (EOG 0.55%) recently reported pretty solid second-quarter results as adjusted production was up while costs were down. That said, EOG Resources is much more focused on its costs and returns than it is on production right now, which is something CEO Bill Thomas made abundantly clear on its second-quarter conference call. Here are five things he wanted investors to know.
1. Our primary focus this year is on improving returns
Thomas led off his prepared comments on the call reminding investors of the company's primary focus saying,
Our goal this year is to remain laser focused on improving returns. At the beginning of the year, we noted that our after-tax rate of return at $65 oil were better than at $95 oil three years ago. We are pleased to report that we have further improved these well economics even as oil prices have declined. Through improved well productivity and lower cost, our key oil plays now are in a 30% after-tax rate of return with a flat $50 oil price.
What's remarkable is that EOG Resources has improved its well costs in several of its plays so that they now deliver better returns in the $55-$65 per barrel range than they did when oil was over $95 per barrel. We can see this in the following chart.
Source: EOG Resources
This is enabling the company to drill economical wells even in the sub-$50 per barrel range we've been experiencing of late.
2. We are an innovator
The main reason for this is because EOG Resources is a leader in innovation and technology. Thomas pointed out this is really driving results saying that,
We developed in-house, integrated completion technology that consistently drives field recoveries higher and maximizes NPV. During the first five years of drilling the Eagle Ford, we increased its reserve potential 250%. This quarter we increased our Bakken net potential reserves to 1 billion barrels of oil equivalent, a 150% increase. EOG has over 10 years of horizontal shale experience to build on and we expect to continue advancing our knowledge through innovation and technology.
As Thomas points out, by advancing new technologies and other well design innovations it has figured out how to get more oil out of each section it drills. That has helped the company to create more value out of its acreage. It also doesn't plan to stop now as it wants to continue to lead the way as this is what's driving its returns.
3. We are being very, very disciplined
EOG Resources is one of few energy companies that is purposefully holding back production growth in 2015 as it has no intention of adding supplies to an already oversupplied market. That is why the company actually cut its capex by $200 million as it chose not to spend the money it is saving on well cost reduction to drill new wells.
That said, EOG Resources intends to be an oil growth company when the time is right. Thomas elaborated on when that might be by saying,
Many of you are asking when will EOG grow oil again? We have said all along that we do not want to grow production until we see the oil market is firmly rebalancing. We will be watching the supply/demand fundamentals in the second half of this year closely as we determine our plan for 2016.
In other words, EOG Resources isn't looking at a specific oil price, but instead looking for market balance. Once it sees signs that the market is balancing it will accelerate growth.
4. We are the low-cost leader
The reason a specific oil price isn't EOG Resources' key signal to drive growth is because the company is focused more on its costs and therefore the margin it can earn. With that in mind, Thomas said that the company was in a sense, "resetting the economics of our business" as it is the low-cost leader for U.S. shale oil. This will enable the company to be "successful in a low oil price environment" if that's what the future holds.
5. We see upside to the oil price
That said, the company doesn't hold the view of many of its peers that oil will remain lower for longer. Instead, Thomas said that,
[...] We believe current oil prices are not sustainable and the market will rebalance. Low oil prices are slowing supply growth and encouraging demand worldwide. We believe that U.S. oil production will have significant month-over-month declines in the second half of this year. So our assessment is, there is more upside to the forward curve than downside.
In other words, EOG Resources sees the potential for a much higher oil price heading into 2016. It's one of the reasons why the company refuses to grow production right now as it sees much better days ahead.
Investor takeaway
Thomas made one thing abundantly clear on the call and that's the fact that the company won't chase short-term volume growth into an oversupplied market. Instead, it's focused on using technology, innovation, and any other lever at its disposal to get its costs lower so that its returns will be strong during the current environment and out-of-this-world when conditions improve, which is something it sees on the near horizon.
