EOG Resources Inc (EOG) Q2 2019 Earnings Call Transcript

EOG earnings call for the period ending June 30, 2019.

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EOG Resources Inc (NYSE:EOG)
Q2 2019 Earnings Call
Aug 2, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Tim Driggers -- Chief Financial Officer

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing second quarter 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 and they are accompanying investor presentation slides, may include estimated resource potential and other estimates of potential reserves not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to US 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. Here's Bill Thomas.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Tim, and good morning, everyone. EOG does not need high oil prices to create significant value for our shareholders. During the second quarter despite a 12% decline in WTI oil prices, EOG generated more than $350 million of free cash flow, lowered our long-term debt by $900 million and paid a substantially larger dividend than last year, all while organically growing US oil production by 20%. The EOG culture consistently making improvements throughout the company year-after-year has propelled EOG to compete financially with a very best in the S&P 500, all with oil prices averaging below $60 per barrel.

We are now capable of delivering double-digit return on capital employed and double-digit growth, while generating substantial free cash flow through the commodity price cycles. Our commitment to strong free cash flow is enabling us to rapidly grow the dividend, we've increased the dividend 72% in the last two years and our ambition is to target yield that is competitive in the S&P 500, which stands around 3%.

EOG never stops improving. We are one of the lowest cost producers in the global oil market and we continue to lower the cost of our business. In fact, we have strong visibility and high confidence in our ability to lower our costs, so that by 2022 we can earn at least 10% return on capital employed at oil prices below $50 per barrel.

Our first half results confirm that EOG is stronger than ever and we are delivering about a year and operational performance. For two quarters in a row, we delivered more oil for less capital with efficiency gains and new technology we are achieving strong capital and operating cost reduction, while at the same time delivering excellent well performance. In addition, the company has leasing acreage and testing new geologic play concepts that we believe could lower our decline rate and continue to reduce our cost to produce oil.

At EOG, we have always believed in being a good corporate citizen goes hand in hand with delivering long-term value for our shareholders and the same spirit of innovation that drives our excellence in operations is aimed at ensuring the business is sustainable in the long run. We are excited about several new environmental social and governance initiatives that will both reduce our environmental footprint, while helping to lower cost and earn strong returns.

We are a leader in water reuse in the Permian Basin, currently sourcing 90% of our water needs from recycle production water. We are busy transferring our reuse technology to other basins. EOG is also a first mover and we believe the largest user of electric powered frac fleets. Later this year we will be testing the use of solar power to generate electricity for natural gas compression. Our expanding implementation of water reuse, electric frac fleets and solar power are just a few of the many things we're doing to reduce our environmental footprint. Our goal is to be the leader in ESG performance by delivering high returns with responsibly focused operations.

We will have more details in our there is sustainability report to be published later this year. EOG culture is more than three decades in the making and the foundation of our competitive advantage. Our ability to continuously improve the company is accelerating overtime. It's not just a few items that we work on. It's every nut and bolt and every process in the company. Our culture of innovation leverage through the application of real-time data analysis with our advanced information technology systems enables everyone in the company to create value. EOG's business is better than ever and our insatiable desire to improve has excited about our future.

Next up is Billy to review our second quarter operational performance and outlook for the remainder of 2019.

Billy Helms -- Chief Operating Officer

Thanks, Bill. For the second consecutive quarter oil production beat the high end of our forecasted range, while the capital expenditures were below the low end. The performance in the first half of the year demonstrates our focus on continuous improvement as evidenced by our higher capital efficiency, lower operating cost and ongoing integration of operating practices to minimize our environmental footprint.

There are several factors that drive these outstanding results. First, our production beat this quarter is due to improved oil performance. Our new completion designs, including the use of diverters along with a continued focus on target selections are the main reasons for the improvement. Beyond the completion design itself, we have also developed proprietary technology that allows us to make real-time adjustments during the execution of the frac to minimize the impact on nearby producing wells. Thus reducing shut in volumes. Ken will expand on this technology in a moment.

Second, we continue to reduce capital costs and see line of sight to reach our goal of reducing total well cost by 5% this year. Through the first half, we have realized about a 4% reduction compared to 2018. As a result of improved operational execution, design enhancements and efficiency improvements, not service cost reductions are delivering consistently better results across each of our active areas.

Third, our operating cost performance has been outstanding. As a result, we are lowering our full-year unit cost forecast for LOE and transportation. Cash operating costs, which include LOE, transportation and G&A are expected to be under $9 a barrel for the full-year 2019 compared to nearly $13 a barrel as recently at 2014.

Fourth as Bill mentioned in his opening remarks. We are committed to sustainability. Our decision to embrace electric frac fleet is an example of how we continue to find innovative solutions to both reduce our environmental footprint and improve the profitability of our business.

We began piloting this new technology last year in the Eagle Ford and have since utilize them in the Delaware Basin. Electric frac fleets currently make up more than a quarter of the EOG fleet. We believe EOG is using about a third of the electric frac fleet available in the market. And we are looking to expand their use in our operations going forward. Our experience with this new technology has been very positive. We estimate electric fleets save up to $200,000 per well and reduce combustion emissions from completion operations by 35% to 40%. EOG continues to expand its use of in-water reuse program and the Delaware Basin nearly 90% of our water needs are currently sourced from recycled produced water. We are increasing our water reuse efforts in both the Eagle Ford and Woodford plays and are beginning to install reuse infrastructure in the emerging Powder River Basin.

In the second half of this year, we plan to initiate a pilot project that combined solar and natural gas to power compressor stations. While this first of its current system is still in the design phase. Early indications point to positive economics reduced LOE and the potential to significantly reduce our combustion emissions. Finally, looking ahead to the remainder of 2019, we modestly increased our full-year US oil production guidance as a result of better well performance.

There is no change to our activity level in 2019. We will remain disciplined and still expect capital expenditures to be within the original range of $6.1 billion to $6.5 billion. Capital is trending to the low side of expectations. So assuming the trend continues, any realized savings if spend will likely be directed to two areas, water, oil and gas infrastructure to lower our operating expenses and leasehold to support our ongoing exploration efforts

For 2020, we are beginning to evaluate multiple scenarios. But suffice it to say, it is too early to provide any color or commentary on our plans at this time. In summary, our operating teams are executing the 2019 program and generating excellent results. I could not be more proud of them.

Now I would like to provide some color on our Powder River Basin activity. In the first half of the year, we initiated a handful of delineation and completion technology test to better define our future program.

As a reminder, we announced premium inventory of more than 1,500 locations with reserve potential of $1.9 billion barrels of oil equivalent exactly one year ago. We are deliberately developed in play at a very modest pace to allow time to integrate both the build out of infrastructure as well as incorporate that data and knowledge from our delineation wells. In addition, our diverse portfolio of 11 different plays gives us the luxury of pace in the development of the Powder River Basin to maximize returns and net present value of the entire asset. During the second quarter, we completed five gross Niobrara wells with average 30 day IPs of 1,000 barrels of oil per day, 100 barrels per day of NGLs and 2.1 million cubic feet of gas per day. The Tiburon 251 oil had an IP 30 of 1,300 barrels of oil per day, 63 barrels per day of NGLs and 2 million cubic feet per day of natural gas.

Also our operating teams are making tremendous progress toward reaching our stated well cost bills. In the Mary, we completed two gross wells in the second quarter. The flat by 70 new well, had an IP 30 of 910 barrels of oil per day, 64 barrels per day of NGLs with 6.3 million cubic feet per day of natural gas. We also completed six gross Turner wells with an average IP 30 of 700 barrels of oil per day, 150 barrels per day of NGLs and 2.7 million cubic feet per day of natural gas. Our program in the Powder River Basin continues to deliver strong results and we will continue to develop at a modest pace as infrastructure is installed

In the Wyoming DJ Basin, it is continuing to deliver solid production results with improving operational execution. We completed 18 gross wells in the second quarter, with six wells having an average lateral length exceeding 14,000 feet. In all, the Codell wells delivered an average IP 30 of 800 barrels of oil per day. Next up is Ken to review highlights from our Eagle Ford and Woodford plays.

Ken Boedeker -- EVP, Exploration and Production

Thanks, Billy. The Eagle Ford continues to deliver consistent performance quarter after quarter. This world-class oil asset is off to a great start in 2019 delivering low finding costs through ongoing cost reductions. Every measure of capital productivity is better in the first half of 2019 compared to full-year 2018. This quarter all highlight recent operational efficiencies driven by rightsizing our completion design and refining its execution.

Te wellbore stimulation processes is aided by software developed in-house, using our proprietary software and data on the nearby wells geology, spacing, lateral placement and production history a unique completion design is prepared for each well in a pattern. The software allows EOG engineers to monitor real-time completions data, not only on the well we are stimulating, but also on surrounding wells. This enables the engineers to make real-time adjustments to the stimulation on a stage by stage basis.

The result is a customized stimulation that can reduce pump time by 10%. The process also yields better well performance both in the new well being completed and in the adjacent producing wells. For the new well, we can realize the same or better well performance with less sand. As a result, our completion costs were down 9% compared to last year, which is significant contributor to our overall lower finding costs.

Second, for the nearby producing wells, reduced sand loadings translates to reduced instances of sand reaching these offset wells. LOE cost come down due to reduced workover expenses to clean out sand during production and the associated downtime due to shut-ins is reduced increasing volumes. In addition to completion cost reductions, we improved drilling speed and efficiency in the Eagle Ford. Thus far, we've nearly realized our full-year well cost reduction goal of 5%.

Now moving the discussion to Oklahoma, the Woodford oil play in the Anadarko Basin continues to gain operational momentum as we increase our activity level, we've made tremendous improvements on total well costs. Drilling costs were down 10% and completion costs are down 19%, with a total well cost reduction of 18% in the second quarter of 2019 compared to 2018.

As a result, we reduced our Woodford well cost target by 14% to $6.5 million per well. Finding cost for this newer premium oil play are now less than $10 per barrel of oil equivalent, which is on par with our other more established premium assets. We've completed 15 gross well since the start of the year.

A few notable recent wells include the three Galaxy 25.36 wells. They average more than 10,000 feet in lateral lengths and produced an average of 1,100 barrels of oil per day. Each for the first 30 days. Oil equivalents average more than 1,400 barrels per day each. In addition, these wells are exhibiting the characteristic shallower declines we have seen in prior wells. We are pleased with our progress in this premium play and expect further operational gains in the second half of this year. Now here's Ezra for an update on the Delaware Basin.

Ezra Y. Yacob -- Executive Vice President

Thanks, Ken. We play 65 net wells to sales in the second quarter and continue to have an outstanding year in the Delaware Basin. Our drilling performance continues to benefit from improved downhole motor designs and increased quality assurance. Year-to-date, drilling days are down over 20% compared to 2018. And we continue to utilize proprietary software to balance our drilling speed and steering to stay within our precision targets. Completions costs are also down 10% compared to 2018 due to ongoing improvements to execution application of our new completion techniques as well as lower sand and water costs. Year-over-year, sand costs are down 35% and our all in water costs including reused have decreased by 30%. The combined impact of improved drilling and completion efficiencies has resulted in a year-to-date total average well cost reduction of 5% compared to 2018.

Well productivity similar to operating efficiencies has also improved through the first half of 2019 across all five of our Delaware Basin targets. In our Delaware Basin and Wolfcamp play 30, 60 and 90 day rates have improved

Our 2019 Wolfcamp program is outperforming 2018 performance by 10% and continues to exceed our forecast. Performance of our shallower reservoirs is also improving as we integrate geologic data collected as we develop the deeper targets along with our new completion technology. Year-to-date, we've brought on 23 net wells in the Leonard and Bone Spring with both formations performing stronger than 2018 results. In addition to tremendous progress lowering our finding and development costs through well productivity and capital cost improvements we are benefiting from our strategic infrastructure investment. Currently 99% of our water and over 80% of our oil is transfered by pipe rather than trucking and contributes to a 5% reduction in operating costs compared to 2018 . The impact of improved productivity and cost reductions have resulted in year-to-date all in finding costs below $10 per barrel of oil equivalent and an average direct after tax rate of return in excess of 100% at the current strip prices.

Our progress throughout 2019 in the Delaware Basin highlights our focus on increasing capital efficiency through high return investment. Here's Lance to provide a marketing update.

Lance Terveen -- Senior VP, Marketing

Thanks Ezra. During the second quarter, our marketing strategy paid dividends. Our execution as a result of a portfolio sales approach, that is we work to ensure each of our asset teams has flexible takeaway and multiple end markets available which provides security, flow assurance and access to optimal net back prices.

Our US crude oil price realizations average $1.18 above WTI, which was on the high end of our guidance issued at the beginning of the quarter. With respect to natural gas, despite significant volatility and Permian Basin prices and softness in the Rockies and out West in California. EOG's overall natural gas price realizations were only modestly affected. Anticipating infrastructure and transportation capacity well in advance of our development plans has allowed us to have full flow assurance to; one, mitigate most of the effects of weak local premium pricing and; two avoid long-term high fixed cost transport contracts as we expect the Waha basis will improve significantly as new pipelines in our service later this year and 2021. Downstream markets natural gas and oil basis differentials change very quickly. Our portfolio approach provides flexibility to quickly to the highest net back market. For example in the Permian and the Mid-Cush oil differential has strengthened considerably since the end of last year.

Additionally, looking ahead to the end of this year and into 2020, the market is pricing and crude oil pipeline takeaway coming into service over the next several months as seen in the narrower Permian to the Gulf Coast spreads.

Our marketing arrangements provide flexibility to sell our oil production and the local Midland market to take advantage of strength in the Mid-Cush basis or we can elect to utilize our low-cost long haul capacity to the Gulf Coast, the excess domestic refiners and export markets. Our forward-looking portfolio approach has established access to Midland, Cushing, Houston and Corpus Christi along with dock capacity to access export markets for our Permian Basin in oil production. In addition access to all these markets by our diverse portfolio of transportation and sales markets options allows us to maintain direct control and keep our low cost transportation edge.

I'll now turn it over to Tim Driggers to discuss our financials and capital structure.

Tim Driggers -- Chief Financial Officer

Thanks, Lance, EOG leverage it's outstanding operation execution in the second quarter into superb financial performance. During the quarter, the company generated discretionary cash flow of $2.1 billion, invested $1.6 billion in capital expenditures, before acquisitions at the low end of our guidance and paid $127 million in dividends. This last $352 million in free cash flow in line with our objective of further strengthening our financial position, we repaid a $900 million bond in June with cash on hand. This leaves $1.75 billion remaining in our $3 billion four year debt reduction plan, which we expect to complete in 2021.

Cash on the balance sheet at June 30 was $1.2 billion and total debt was $5.2 billion. For a net debt to total capitalization ratio of 16%, significantly lower than 24%, Just one year ago. In addition to the excess of the debt reduction plan has had an improvement on leverage metrics, It is also meaningfully reducing our cash cost.

Net interest expense as following about a third to $185 million, the midpoint of our full-year 2019 guidance from $282 million in 2016. The financial model for EOG straightforward, we can very efficiently generate double-digit organic growth at high rates of return, leverage our scale to reduce operating expenses and continue to lower the oil price required to earn a double-digit ROCE. We believe the EOG can accomplish this while supporting a growing dividend competitive with the S&P 500 and generating a rising stream of free cash flow. The combination of EOG's financial strength, industry leading cost structure and organic exploration edge can deliver a level of financial performance, competitive, not just with the best E&P companies, the competitive with the best companies in any industry in the S&P 500. And we can deliver this performance at lower and lower commodity prices.

I'll now turn it back over to Bill for closing remarks.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Tim. In conclusion, EOG is executing at the highest level in company history and improving every quarter. Our premium drilling strategy combined with our ability to achieve continuous efficiency gains and technology breakthroughs are producing record results. The company is delivering a strong return on capital employed, production growth, free cash flow, debt reduction and strong dividend growth with oil in the 50s. And we clearly are on a path to achieve strong performance with oil in the 40s.

We are accomplishing our goal of achieving results that are competitive with the best companies across all sectors in the S&P 500 through the commodity price cycles. In addition to financial returns, EOG's mission to be a leader in ESG performance. Our unique culture has embraced ESG with the same enthusiasm as everything else we do, innovation, technology and are pleased, but not satisfied cultural of EOG have a long history of producing outstanding results and we believe that our best days are still ahead of us.

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


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Questions and Answers:

Operator

Thank you. The question and answer session will be conducted electronically. [Operator Instructions] . And today's first question comes from Arun Jayaram of JPMorgan. Please go ahead.

Arun Jayaram -- JP Morgan -- Analyst

Yeah, good morning. I was wondering if we could maybe start with your thoughts on well spacing in the Delaware Basin and how you guys are managing the process to call it maximize resource recovery while mitigating the impact from adverse communication?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, good morning, Arun. Thank you for the question. Just in general, because we've been in the shale business for two decades, we have a big learning curve in the history of the company and we recognize the parent-child relationship and the importance of proper spacing to develop this assets correctly. And specifically in the Delaware Basin, we attacked that problem very aggressively back in 2017 and early part of 2018. And we really got the learning curve on that well behind us and we continually are still making progress going forward. But we really are well down the road on the maximizing the value of our asset.

And so I'd like to maybe let Ezra, he is really the expert on the Delaware Basin to give you a little bit more color on that.

Ezra Y. Yacob -- Executive Vice President

Yes. Arun, this is Ezra. Our resource estimate is based on a 660 foot spacing in the Wolfcamp oil window and 800, 80-foot spacing in the combo side of that play. And we're very confident in those numbers still, as you know, and as Bill mentioned, we've been drilling multiple targets within the Wolfcamp and actually a tighter spacing on average than what our resource estimate is based on. And so I think that you can see we've got a bit of upside we feel like not only really in our Delaware Basin place, but across the portfolio of our plays. And one way that we approach it in some of the testing that we did, as Bill mentioned, over a year ago, is really to look at the number of targets on the quality of our high-precision targets that need to be co-developed with one another. And we combine our high-precision targeting with our completions technology to really optimize that balance between a low finding cost and optimizing really the NPV per drilling unit, and we think that that's the best way to really deliver shareholder value in the long-term through increasing our corporate level returns while still capturing the NPV.

Arun Jayaram -- JP Morgan -- Analyst

Great. My follow-up is the updated guide does assume called a deceleration in capex in 4Q versus 3Q

I was wondering if you could maybe discuss the cadence of overall tales in the second half and just your general thoughts on 4Q oil growth and sustaining some of the upper gaining momentum into 2020?

Unidentified Speaker

Yes, Arun. Yeah, we're all planned and everything is going just almost perfectly, this year is going great year and performance and capital is running according to plan and we are going to be really well set up heading into 2020 and I'm going to ask Billy Helms to give a little bit more detail on that.

Billy Helms -- Chief Operating Officer

Yeah, good morning, Arun. This is Billy. So as Bill mentioned , we're exactly on plan where we wanted to be, actually our well performance is exceeding the type curves that we laid out at the beginning of year and our well cost is actually coming in lower. So what's driving that really is just the continued efficiencies. Each of the operating teams continue to have.

So we're actually able to as we go into our second half of the year in both the Delaware Basin and the Eagle Ford. Our two most active plays will see a slight reduction in rig count and frac rates there just because we don't need as many rigs and frac fleets to achieve our goals that we recently laid out at the beginning of the year -- end of the year. Now also on top of that, we have some seasonal programs like the Bakken where you'll see activity there mainly it happens in the summertime. And in the wintertime we pretty much slow activity there just because of the additional cost associated with winter operations. You will see a slight reduction also in the Powder River Basin for the same reason.

So in general, we don't really see dramatic change in the rig count, frac fleet count or the wells turned online a slight drop in the fourth quarter. The big thing to takeaway is that for 2020, while it's really early to give you an indication of what we're going to do, we don't see that will have a dramatic drop-off in the first quarter of 2020. We're well positioned and well set up to provide growth on a quarter-to-quarter basis as we enter 2020.

Arun Jayaram -- JP Morgan -- Analyst

Great, thanks a lot for that commentary.

Operator

And our next question today comes from Brian Singer of Goldman Sachs. Please go ahead.

Brian Singer -- Goldman Sachs -- Analyst

Thank you, good morning. Wanted to see on the dividend. How does your dividend goals that have shifted in terms of the focus for the 2% target yield, how does that if at all impact your volume growth target, do you still see growth in 2020 accelerating versus 2019? And how long can that growth be sustained while meeting your dividend targets until the Eagle Ford and Delaware Basin move into a more mature phase as you call it from the growth phase or until you depend more on the newer or newer place organic exploration?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Brian. Good morning. We don't see that our projection of being competitive with the S&P 500 on the yield has really slowing down our growth. We believe that our dividend, We've shown a very strong commitment to the dividend, we've increased it over 70% in the last two years. And certainly our goal with reasonable oil prices like we've seen this year is to continue to grow the dividend at least 20% per year to bring the yield in line with the S&P 500. And of course the Board considers the macro outlook in our business plan every quarter concerning the dividend. And then on growth at reasonable oil prices like we've seen this year, we do not envision our growth to be lower than our 14% that we're experiencing this year, so we have a very -- I think robust business as Tim pointed out. We are creating significant value to our disciplined reinvestment and the premium drilling and we're generating strong free cash flow. We're having a substantial dividend growth and we've got strengthening our balance sheet, all at the same time. So we believe our core business is super strong and competitive, with really any business and any sector of the market. So we've got a lot of confidence that we're creating a huge amount of value for our shareholders and we're going to continue on that plan.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you. And then my follow up is with regards to exploration. I realize that there was not a specific update here on the last call. You talked about higher quality reservoirs that could lower decline rates in your supply cost and you referred in your opening comments to potentially lowering the decline rate and reducing the cost to produce oil. Can you just give us a general update on what you're seeing within that portfolio and how aspirational that is versus how far you've progressed toward that in terms of reality is really having that confidence that the decline rate can come down and the supply cost can come down?

Bill Thomas -- Chairman and Chief Executive Officer

Brian. Yes. Thank you. We are very excited about our exploration efforts this year. It's the most robust diverse exploration effort I think we've ever had in the company, we're in multiple basins and multiple different plays testing new ideas. And they are rock quality -- rock that would be able to deliver oil at lower cost and at lower decline rates then our current inventory, the average of our current inventory. So we're really focused on corporate returns and we want to drive -- continue to drive down finding cost, that's a particularly strong focus.

So we are looking for place that have low drilling costs, low operating costs and we're working and we want to improve the decline rate of the company also, so low decline, high -- low finding cost is the direction that we're handing going in and that's what will help us continue to generate higher corporate returns going forward . So we're really excited. We're really encouraged. We're in the process of drilling and testing a lot of new ideas this year. We're also leasing very, very strong acreage positions, building very strong acreage positions at low cost and we'll be giving updates on that as we get meaningful results, it takes a little while.

We don't want to just drill one well and say we've got all this, we need to have multiple tests done. Certainly, we want to before we start talking about specifically where these plays are, we want to have the acreage captured and so it's going to take a little bit of time. So we asked the investors to be patient with us on the process, but we're very excited and very encouraged on where we're headed.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Thank you. And our next question today comes from Neal Dingman of SunTrust. Please go ahead.

Neal Dingman -- SunTrust -- Analyst

Good morning all. Question on the -- I guess, started around the Powder River. It seems like when it comes to incremental operational efficiencies and lower cost, the peers and kind of your conversations and prepared remarks on the Powder River is seen maybe the most in your portfolio. And I'm wondering if this is in fact the case that the Powder is seeing some of the most improvement. And then just wanted for overall portfolio, can you continue to see just the remarkable efficiencies that you all talked about the last couple of quarters?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, good morning, Neil. Yeah, we're super excited about the Powder, it's got a lot of obviously upside and we're in the learning curve and so we're testing as Billy talked about different parts of the play, but particularly we're testing the targeting and the completion technology. And so the wells will vary a little bit as we go through that process, but we're learning and we're not really in a hurry there. We want to take advantage of the learning curve before we increase activity there significantly, we don't have a lot of acreage exploration issues there. So we've got plenty of inventory in an all-in place and the company, so we can bring that on at the proper speed to maximum the returns to the lower cost and to build the inventory correctly.

Neal Dingman -- SunTrust -- Analyst

Okay. And then just one separate one if I could, appears to me your exploration program remains this year a bit more active than we've seen in the last year or two. I'm just kind of curious if you all are focused here on more ramp in one potential area or you're looking at several potential plays when looking at the exploration area?

Bill Thomas -- Chairman and Chief Executive Officer

I'm going to ask Ezra to comment on that.

Ezra Y. Yacob -- Executive Vice President

Yes, Neil, this is Ezra. We have multiple opportunities that we have this year that were both

leasing and testing this year, as Bill highlighted a few minutes ago, really the goal of the exploration program this year is to add quality to our inventory, not just quantity. And what we mean by that is it all starts with the rock quality and so we're looking at, we've basically -- the advantage of having activity in six different basins this year as we drill these wells, we collect a lot of data and we're able to formulate that data and that's really the basis for what has created our exploration effort this year, I'm looking at this better rock quality.

And we think that this rock quality we're targeting will really benefit from our horizontal drilling and completion techniques. And as Bill said, should provide us an opportunity to add lower finding cost and higher quality of inventory to our already robust portfolio.

Neal Dingman -- SunTrust -- Analyst

Thank you so much, guys.

Operator

And our next question today comes from Bob Brackett of Bernstein. Please go ahead.

Bob Brackett -- Bernstein -- Analyst

I had a question on the electric frac spreads, you quoted the $2 million -- $200,000 per well savings, part of that is the fuel arbitrage diesel versus nat gas and part of it is the cost you're paying in the service provider. Is there a way I can think about how those two offset each other?

Billy Helms -- Chief Operating Officer

Yeah, Bob, this is Billy Helms. You have a $200,000 savings. I'd say the majority of that is simply in the fuel cost savings. And the reason where it benefits us so much is we're using it in place where we have readily available infrastructure to be able to access gas as a fuel source relative to diesel as a traditional frac fleet might use, they also do provide us a great deal of the step up in efficiency gains too. So our efficiency gains there provide, I'd say the balance of the savings. But the majority of it is based on the fuel savings alone. So I wouldn't want to mislead you there, the efficiency gains are really good, but the majority is fuel savings.

Bob Brackett -- Bernstein -- Analyst

Great, thanks. Follow on would be, if we think about the 740 net planned completion for 2019. And wanting to hit that activity level? How would you balance that against the macro sell-off in the commodity where price fell and cash flow fell, would you stick to the plan, would you trimmed the plan in order to hit cash flow, where does that balance play out ?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Bob, this is Bill. Certainly we are going to run the business with the balance cash flow, we're not going to outspend cash flow. So depending on our view the length of that downturn in oil prices. We thought it was temporary, we might not make much adjustments, but we thought it was a super long-term, we would certainly readjust the company. Our goal is not growth specifically, our goal is returns, we are focused on increasing corporate returns going forward, generating strong free cash flow. Certainly, we're committed to the dividend very strongly as a company. So those all have super priority in the in the company. And we're here for the long term, we're going to run our business, right. We're going to generate maximum value for our shareholders.

Bob Brackett -- Bernstein -- Analyst

Thank you.

Operator

And our next question today comes from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks, good morning, everyone. Bill, I think you've kind of set the cat among the pigeons by talking about the uncertain outlook for 2020, I think we're all facing the same thing. But I wonder if I could speak to how you would see relative capital allocation in the event that we did cover downturn, it's really -- thinking more along the lines of sustaining capital and then beyond that, how you would allocate incremental dollars. If I could just elaborate a little bit as to what I'm trying to get up, the IRRs are very competitive across your entire portfolio, but the productivity is obviously very different in different place for the same return. So I'm just curious as to how reallocate or allocating capital to your highest-return plays would impact the relative productivity outlook and downturn. I know it's again the complicated issue but that's what I'm trying to get up?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, I appreciate your question, and good morning. Yeah, we have got tremendous flexibility to allocate capital, we have such an enormously strong premium inventory and it's across multiple plays. So as we -- as I answered in the previous question, we're not interested in outspending cash flow, certainly not on the long-term basis, we're going to stay super disciplined and make sure that we generate free cash flow every year.

So if we had -- we don't believe we're going to have an extended downtown, a low downturn, but in extreme case that we did that, we would just tighten the bill all across the company, we would focus our capital on the highest-return plays and we would allocate capital appropriately to the macro environment. So we're focused on returns and we believe we can generate the highest returns of any company in the E&P business at the lowest oil price scenarios, because we have the highest reinvestment hurdle of any E&P company we know. And so our premium inventory is good to go at $40 oil and that allows EOG to be the low cost provider of oil and gives us a tremendous competitive advantage.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

I know it's not an easy question to answer. So I'm going to follow up with an even worse question, I apologize. You've also -- I don't know if the language was deliberate on your dividend comment in the call on the press release, but targeting -- setting a target yield kind of starts to bring in considerations of how the market thinks about evaluations, so i'm thinking about dividend discount models, which then begs a couple of obvious question as one, what do you see is the appropriate growth rate for the dividend? This is supported basically by what you said earlier about not less than 14% oil growth. And then related to that, there is implications for the payout ratio, how do you -- do you have parameters around that that you could share with us when you're -- you've kind of laid out this subjective of 2% yield? Because basically we can all come up with long-term projections so what that could look like, but some framework around that would be really helpful?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, certainly, Doug. Our goal is to continue to aggressively increase the dividend, certainly at the 20% right or better every year and that would be in consideration of reasonable oil prices like we've seen this year, we believe we can do that or better. And so our focus is just to have a sustainable strong dividend growth every year and get the dividend up through the yield of the 2% level. We don't have a specific timeline to give you because we need to manage the business according to our view of the business environment. Obviously, going forward. But directionally, we want to be competitive with the S&P 500 companies and the dividend yield, just like we are going to be competitive in growth and in return on capital employed. And I think the dividend yield for the S&P is about 5% -- about 2% and so that's where we want to be long-term in the company.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Sorry. Bill, just to be clear, the 2%, does that also have an oil price parameter, obviously premier locations or premier inventory is at $40 oil. 2% yield is at what commodity price?

Bill Thomas -- Chairman and Chief Executive Officer

Well, no, it's not really based on that. The speed of which we can get the yield to that level of course would have to be, have oil price considerations. But we're lowering the price of the company to be very successful. As we said in the opening remarks, where we can do it very well at 50 with all in the 50s right now. But we're really heading the company to where we can be successful with oil in the 40s. So overtime, we believe we can be competitive on the dividend, returns and growth with oil in the 40s.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Understood. Thanks for taking the question.

Operator

And our next question today comes from Jeffrey Campbell of Tuohy Brothers Investment Research. Please go ahead.

Jeffrey Campbell -- Tuohy Brothers Investment Research -- Analyst

Good morning. And I've just been listening to the lower decline stuff with great interest and I just wanted to ask you if we -- if

we think of a typical first year on conventional decline is say 60%, can you roughly quantify how much of the decline rates could be modified with these new exploration plays that you've been discussing. I don't mean the corporate decline. I mean the well decline in one of these new plays?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Jeffrey. This is, Bill. We're really in the early process of testing these plays. And so we just need to get some well result behind us to give you specific numbers on that and some history. But these are plays that have better matrix permeability than a typical shale play, it's not, we're not looking for a rock that has nano Darcy firm. This is really more micro Darcy maybe even milli-Darcy[Phonetic] firm kind of rocks and there are also rocks that would respond really well to the horizontal completion technology where you can get a complex, fracture pattern, where you can drill long laterals, etc.. And you can contact a lot of this better permeability rock to the well bore. And so that combination just in general will give you a very high recovery for the amount of oil in place, but it also gives you lower decline rates in the current shale plays.

Jeffrey Campbell -- Tuohy Brothers Investment Research -- Analyst

Okay. That sounds really interesting. We look forward to hearing more about that in the future. I think my other question is I believe last quarter you said that the Eagle Ford EOR program was completed or more or less complete. I just wondered, do you have any other programs going on anywhere else in the portfolio that's experimenting with or seeing to try to capture more resource, total resource from the wells than what we typically expect and unconventional resource?

Bill Thomas -- Chairman and Chief Executive Officer

I'm going to ask Ken to comment on that.

Ken Boedeker -- EVP, Exploration and Production

Yeah. This is Ken. We have about 150 wells in our enhanced oil recovery process in the Eagle Ford and we really are seeing premium results in line with our 30% to 70% add in our primary recovery. We're really watching our program and refining our process as we go. This is a process that you want to do after your primary drilling is complete. So we're going to evaluate expanding that new water footprint in that area as we -- as we finish primary drilling in the surrounding units. As far as expanding that into other areas, we're constantly evaluating that, but we are not expanding that process into any of the other formations at this time.

Jeffrey Campbell -- Tuohy Brothers Investment Research -- Analyst

Okay, great. Thank you.

Operator

And our next question today comes from Leo Mariani of KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc -- Analyst

Hey, guys. Very impressive progress and the cost reduction initiatives. I guess, basically you're sort of an 80% of your targets here by mid-year on the well costs. Just wanted to get a sense, I know it's probably difficult question, of course no one can kind of predict the future here. But just based on efficiencies, do you guys think that it's realistic that you might be able to knock another say 5% off those cost again in 2020 or 2021?

Bill Thomas -- Chairman and Chief Executive Officer

Good morning, Leo. I'm going to ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yeah Leo. First of all, let me just say we are extremely proud of the efforts that our operational teams have made to get to the 4% hurdle halfway through the year. And when we set our 5% goal out at the start of the year. I think we had no idea exactly how quickly they would get there, but confidence that they would, and they've excelled just tremendously, being able to accomplish another 5% next year, it's a little early to say where that's going to come from. But I do have confidence that we'll be able to continue to lower cost, I mean there is no doubt in my mind that we can continue to push well costs down and not just well costs, but also our unit costs. We're making tremendous progress there. So I don't want to go without given those guys a kudos as well because they've done a great job and I guess we just have to so much confidence in our teams that I know we can achieve continued cost reductions across the board.

Leo Mariani -- KeyBanc -- Analyst

Okay, that's great. And I guess just wanted to, a quick question on sort of the guidance here. So just looking at your third quarter. US oil production guidance versus the last few quarters, just noticing that your kind of rate of growth in the US oil slow is a little bit in the third quarter. Just wanted to get a sense if anything read into that or is that just kind of timing, sort of on well tie-ins[Phonetic]?

Billy Helms -- Chief Operating Officer

Yeah Leo, this is Billy again. Yeah, the rate of growth, certainly slowed a little bit in the third quarter, but really it falls directly in line with what our plan was laid out at the start of the year. And as you know, most of our activity and capital expenditure was in the first half. So that's where you're going to see most of your production growth.

So it will modestly decrease the rate of growth or modestly decrease a little bit in the third and fourth. But we're still on pace to really stay within our plan. And then, we're not concerned at all about how that sets us up for the following year. We're still in great shape as we go into the next year as well.

Leo Mariani -- KeyBanc -- Analyst

Okay, that's very helpful. And I guess just any follow-up thoughts on US exports, obviously you guys unveiled incremental volumes that you'd be shipping out last quarter and certainly made a point putting your slides. As you kind of look at the marketing side over the next couple of years, do you guys think that US oil export is going to become even more important for you and is that an area you really looking to expand going forward?

Bill Thomas -- Chairman and Chief Executive Officer

Well, let me -- let Lance comment on that.

Lance Terveen -- Senior VP, Marketing

Hey, Leo. Good morning, this is Lance. How are you?

Leo Mariani -- KeyBanc -- Analyst

Great.

Lance Terveen -- Senior VP, Marketing

Yeah. Good. Hey, yeah, on exports, it's definitely exciting. As we've talked about in the past, we've got our -- today we've got our existing Houston capacity, we're taking advantage of that. But we get more excited about next year with our capacity growing in Corpus. So I think one of the things that really to think about us from an EOG standpoint, what really differentiates us is, when you think about the Corpus capacity, we're going to have the capability to really show our segregated WTO that we're going to be able to show across the dock. And we're also going to be able to show our Eagle Ford as well. So I think when you look a lot of the peers and you look at a lot of our, the competition that's out there too.

Our capability with our transportation capacity, the storage tankage that we have, ability to deliver segregations into the market. We're going to be able to show multiple grades across the market. And, yes, absolutely. I think you're seeing spreads tighten up and I think we don't see any concerns as it relates to export capacity at least in the short term. But I think one of the more important points to make is, if you call export capacity right at 4.5 million barrels per day of export capacity. What we felt was very important is that we secured existing brownfield capacity. So that way, if you do see price dislocations that do occur maybe at the dock, we are advantage there because we're not waiting on permitting, we're not waiting on dock expansion.

So our capacity is going to ramp up as we move into next year and I think that's going to be key, because we can really take advantage of the values if there is a dislocation. And again we've got the flexibility that we can pivot our barrels and we can supply our great customers, our domestic refiners. But then we can also supply the international markets as well. So we've got a full range in our portfolio there. Leo.

Leo Mariani -- KeyBanc -- Analyst

Okay. Well, that's great color. Maybe just on that point, do you think there is a decent chance or could be dislocations over the next couple of years. Just want to get a sense how you're thinking about that piece?

Lance Terveen -- Senior VP, Marketing

Yeah, I'm not going to speculate. I think you're definitely seeing when you look at the four curves, you can see kind of the brand MEH spreads and that's right around $3. So it definitely shows that the export arm is open. But I think for us, you've seen, we talked about in the opening comments too about the Permian, kind of the Gulf Coast spreads have definitely narrowed. So yeah, I think really where you could possibly see the price dislocation is that you've got a lot of oil that's going to show up at Corpus and there's going to be some players that aren't going to have secured dock capacity. And so there could be a dislocation that occur there. But as it relates to EOG and what we've done, we've went ahead and kind of take that, we took that variable kind of out of play as we think about our growth and our capacity ramping up and how we're going to place barrels into the export market.

Operator

And our next question today comes from Paul Sankey of Mizuho Securities, please go ahead.

Paul Sankey -- Mizuho Securities -- Analyst

Good morning all. Just trying to bring together everything that you've talked about this morning. Bill, I was wondering, just in terms of your competitive position against the oil industry as opposed to the whole market, where do you think you are furthest ahead of the industry and where do you think there's furthest to go? And obviously, I'm talking about the various components of your business, whether it's the acreage, the exploration, drilling fracking, operating, transport and even decline rates? Thanks.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, good morning, Paul. Yeah, clearly the competitive advantage that EOG has is our culture, our culture is just amazing, it really drive all the success of the company. We have tremendous assets because the culture built out over the years through our exploration efforts, we have tremendous cost reduction, continuous sustainable cost reduction because our culture never

is satisfied. It's just continually innovative and continues to figure out better ways to run our business. So really the confidence that we have about the direction of the company to be able to be very successful, even with oil prices in the 40s is really due to our culture. And of course that's supported by a lot of different things. We have a -- we have a core competency obviously an exploration, we've got a core competency in operations, we drill the wells the fastest in the US in the lowest cost. We have a lead and completion technology. We have by far the most advanced information technology system that where we can make real-time decisions continuously across the company. And the real value of the company is coming from every person in the company. The value of EGO is not top down driven, it's really from every person in the company. So that's where we have the lead and that is not easily duplicated. It's taken us three decades to build the culture where it is right now and we believe our culture is improving as we go forward. So we're super excited about where EOG is and where we're headed.

Paul Sankey -- Mizuho Securities -- Analyst

Thanks, Bill. If I could make it much more specific. Could you just talk a bit more about the defracking, that seems to be very interesting? Thank you.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Paul, I'm going to let -- ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yeah, Paul. As far as defracking goes, we got into the, into the idea of utilizing the electric frac fleets, mainly because we are attracted by the efficiency gains as well as the cost reduction. The efficiency gains is what really we view as being sustainable to help lower our cost long-term. And that has continued to get better with continued use. We've got four of those frac fleets operating today in the Eagle Ford and the Delaware Basin. And we're always looking for ways to continue to utilize our infrastructure to enable that to be spread into other plays.

So I think as you look forward, we will look for opportunities to continue to put those in new plays. It's unique in that the fuel savings are mainly achieved through not only the cost of the gas, but really our ability, the ability of our facility teams to get ahead of the completions and come out with innovative solutions to get the gas readily available to the frac fleets. And without that infrastructure and those teams enable to do that, we wouldn't be able to take advantage of it to the extent that we are, so just super proud of that effort and where it's taken us.

Paul Sankey -- Mizuho Securities -- Analyst

Yeah, just a quick follow-up, could you talk about the capacity of that and also I think you mentioned how big you are in the market, could you just repeat, how much of it you are dominating? Thanks.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, I think what we're hearing and certainly this number might move a little bit, but there is currently about 11 frac fleets available in the market today. We're using about four of those. And then our frac fleet count varies week-to-week, but it typically run at about 16 frac fleets 15 or 16, so it's about a quarter of our frac fleet in the company.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Thomas for any final remarks.

Bill Thomas -- Chairman and Chief Executive Officer

In closing, I first want to say thank you to everyone at EOG for their tremendous contribution to our performance in the first half of 2019. We are proud and honored to be on the same team. The company is performing at the highest level in history, and we continue to improve every quarter. We're excited about the second half of the year and the years beyond. We're focused on returns and creating significant long-term value. Well, thanks for listening, and thanks for your support.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Tim Driggers -- Chief Financial Officer

Bill Thomas -- Chairman and Chief Executive Officer

Billy Helms -- Chief Operating Officer

Ken Boedeker -- EVP, Exploration and Production

Ezra Y. Yacob -- Executive Vice President

Lance Terveen -- Senior VP, Marketing

Unidentified Speaker

Arun Jayaram -- JP Morgan -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Neal Dingman -- SunTrust -- Analyst

Bob Brackett -- Bernstein -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Jeffrey Campbell -- Tuohy Brothers Investment Research -- Analyst

Leo Mariani -- KeyBanc -- Analyst

Paul Sankey -- Mizuho Securities -- Analyst

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