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EOG Resources (NYSE:EOG)
Q2 2020 Earnings Call
Aug 07, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to the EOG Resources second-quarter 2020 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

Thank you, and good morning. We hope everyone has seen the press release announcing second-quarter 2020 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, in 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 are in the accompanying investor presentation slides, may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S.

investors that appears at the bottom of our earnings release issued yesterday. Participating on the call this morning are Bill Thomas, chairman and CEO; Billy Helms, chief operating officer; 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

Thank you, Tim, and good morning, everyone. EOG's second-quarter results demonstrate the company's ability to quickly adapt to an unprecedented drop in commodity prices. We exceeded our own expectations by delivering more oil for less capital and lower operating costs, allowing the company to generate significant free cash flow during the quarter. In May, we published our revised plan, which aggressively reduced our full year of capital, more than 45%, and LOE more than 20%.

EOG employees rose to the challenge, not only achieving the incredible reduction targets we set but beating them. Compared to our aggressive plan and guidance for the second quarter, we produced 7% more oil, spent a whopping 26% less capital and our cash operating costs, which includes LOE, transportation and gathering and processing were 10% lower. With the rapid reduction in capital and operating costs, the company generated nearly $200 million of free cash flow, while oil prices averaged less than $28 a barrel. Our second-quarter results are a testament to the return-focused culture of EOG employees and our ability to pivot quickly in response to the unprecedented level of market volatility and industry conditions.

Last quarter, we laid out seven strategic focus points for the remainder of 2020. Here's a quick progress report. Our first strategic point is only to invest capital if it generates a premium rate of return. Premium return is defined as a 30% or higher direct after-tax rate of return using a price deck of $40 flat oil.

In this downturn, we have raised the return bar even higher by using $30 oil instead of $40 to calculate our 30% rate of return. Our second focus point this year is to exercise operational flexibility to quickly reduce costs. With capital 26% below target and cash operating cost 10% below target, our second-quarter results demonstrate our ability to move quickly in a volatile environment. Our third focus point is to accelerate our technical innovation across the company.

This is an area we're most excited about. While we anticipated some additional opportunity for innovation because of the slowdown in our pace of development, our employees' ability to accelerate innovation even while working remotely has exceeded our expectations. We recently completed our yearly technical conferences across each discipline, all via video conferencing. We are amazed at the volume of new innovative ideas presented from creative ways to cut costs to new tools to identify and evaluate prospects.

I am confident that the tremendous progress we've made this year will accelerate EOG's lead as these sustainable improvements start paying dividends in the future by driving down the price of oil required to generate double-digit returns and extend EOG's industry leadership and return on capital employed. Our fourth focus point is to exit 2020 with momentum into next year by increasing production into the price recovery. As Billy will cover in a few minutes, we've increased our quarterly and full-year production volume estimates. In addition, with the cost reductions we're making this year, we have improved our maintenance capital outlook for 2021.

We now expect we will be able to maintain higher volumes for the same capital and cover both capital and the dividend with cash flow at less than $40 oil. Our improvements in volume, coupled with reductions in well and operating costs, are setting us up for strong performance next year. Our fifth focal point this year is to remain hyper-diligent about maintaining our financial strength. Our goal each year is to spend within cash flow and maintain an impeccable balance sheet to support operations and protect our dividend.

This downturn has demonstrated the value of EOG's historically strong balance sheet more than ever. With this goal in mind, we reduced capex more than 45% to $3.5 billion, so that full-year cash flow funds capex in the low 30s. If oil prices average $40 for the year, full-year cash flow also funds the dividend and generates free cash flow. Sixth, our focus is to continue to invest in the long-term value of the business.

In fact, once again, this break in our pace of development has actually accelerated our progress by creating more time to fine-tune our quality exploration market. We continue to drill on prospects that we believe will further improve company performance. You will hear from Ezra in a moment regarding recent exploration progress. The seventh focus point this year is the most important.

Protecting and enhancing EOG's culture is the key to our continued success. We have highly skilled employees who are focused on constantly improving every area of the company. We remain committed to our employees as they are the ones who are making EOG a much better company during this downturn. Armed with extensive data, proprietary apps and information technology, EOG employees are overcoming the challenging conditions by continuing not only to innovate but to accelerate innovation.

We believe we're in the process of making another significant improvement in EOG's performance similar to the last downturn when we initiated our premium drilling program in 2016. As a reminder, with premium standards in place from 2017 to 2019, EOG delivered an industry-leading average return on capital employed of 14%, generated $4.6 billion in free cash flow, increased the dividend by 72% and reduced net debt $2.2 billion and increased proved reserves by 55%. The EOG culture is rising to the challenge again with innovation that is significantly improving the company's current and future performance. EOG's long-term game plan has not changed.

We remain focused on high-return reinvestment, disciplined organic growth and generating substantial free cash flow to fund a sustainable growing dividend and maintain a strong balance sheet. EOG will emerge from the downturn a much better company and our commitment to creating long-term value for our shareholders has never been stronger. Before I turn it over to Tim and Billy, I want to note how excited we are to continue our progress toward reducing GHG emissions. We are near the start-up of our eight-megawatt solar and natural gas hybrid electric-powered compressor station.

In addition, we recently formed a sustainable power group within the company. This group will support our innovative culture to bring return-focused, low-emissions technology and projects forward quickly. EOG is committed to being an innovative leader in sustainability and the long-term energy solution. Next up is Tim.

Tim Driggers -- Chief Financial Officer

Thanks, Bill. EOG proved to be exceptionally resilient during one of the most severe quarters for the industry in our memory. I'd like to review the high level changes in EOG's cash position during the second quarter. EOG had $2.9 billion of cash at the end of the first quarter.

During the second quarter, the company generated discretionary cash flow of $672 million. And after deducting capex of $478 million, we generated $194 million of free cash flow that nearly covered dividend payments of $217 million. Over time, EOG's working capital position tends to be fairly balanced between current assets and liabilities. However, during periods of market volatility, our working capital balance can fluctuate significantly from quarter to quarter.

Changes in working capital in the second quarter represented a net cash outflow of $1 billion, which was more than offset by net cash inflow from working capital in the first quarter of $1.2 billion. We expect changes in working capital will be approximately neutral for the full-year 2020 based on the current outlook for commodity prices. Moving on to the financing side of the ledger. EOG issued $1.5 billion of new debt and paid off a total of $1 billion of maturing notes during the quarter.

This left the company with $2.4 billion of cash on hand at the end of the second quarter. Considering total debt of $5.7 billion, this yields a net debt to total cap ratio of 14%. In addition to cash on hand, our very strong liquidity position is further supported by a $2 billion unsecured revolving line of credit, which has no borrowings against it. Looking ahead, we expect discretionary cash flow to exceed capex and dividend payments for the remainder of 2020 at oil prices in the mid-30s.

In late April and early May, we elected to close out most of our hedge positions for the remainder of the year as the volatility in commodity markets had abated and prices seem to have more upside than downside. We effected this primarily by entering into offsetting contracts for those hedge positions we elected to close. Therefore, the timing of cash received or paid for settlement of these closed-out hedges will remain in the periods for which they are effective. We expect to receive $360 million in net cash payments in the second half of 2020 from these hedge positions that have been closed.

As 2021 comes into focus, we will be opportunistic about adding hedges if prices look attractive relative to our assessment of market fundamentals. Next up is Billy to review our operational performance.

Billy Helms -- Chief Operating Officer

Thanks, Tim. Last quarter, we made the decision to shut in existing production and defer new wells rather than sell into an uncertain and low-price market. Our intent was that our lowest activity levels, lowest capital expenditures and lowest production volumes would coincide with the lowest point of the commodity price curve. In doing so, we enhanced the cash flow and margins for each barrel produced and maximized the rate of return for our investments.

Our employees' execution of our challenging new plan during the second quarter was stellar. They answered the challenge by beating by a wide margin nearly every capital expense and production goal we targeted under the new plan. After rapidly reducing our full-year capital plan by nearly half, second-quarter capital came in an additional 26% below target. We also reduced our cash operating expenses a total of 10% compared to the target.

One of the hallmarks of EOG is driving for continuous improvements, but the downturn brought a new intensity to this effort. Our employees delivered even more by continuing to innovate capital and expense reductions that will benefit future operations. For example, we increased our full-year total well cost reduction target to 12%, up from 8% just a few months ago. Our operating teams continue to drive efficiency in every aspect of our business.

Drilling times are consistently improving, yet completion costs have seen the most improvement during the quarter, down more than 15%. About half of the capital savings can be attributed to cost efficiencies and the other half to service cost reductions. Our drilling rigs and frac fleets are largely under existing term contracts, so service cost savings have been more from ancillary services. As rig and frac fleet contracts expire, we expect to see further cost reductions.

Therefore, we believe most of these savings to be sustainable. Our cash operating costs were down more than $50 million or 10% relative to our second-quarter guidance. Our operating teams went into high gear to identify opportunities to reduce expenses during the second quarter with a focus on every category. Some of the largest cost reductions are our reduced work over expenses, water disposal and lease maintenance and repairs.

These reduced expenses played a major role in helping to generate free cash flow during the second quarter. It is also important to note that we have reduced our full-year cash operating cost guidance by almost $20 million or 6% on a per unit basis. On the production side, we also beat our forecast. This is mainly due to bringing the shut-in volumes back on sooner than anticipated.

One observation from our production data revealed that almost every well exhibited some level of flush production before returning to its previous decline profile, further evidence that the well sustained no damage from the shut-in period. In addition, the decline observed from the base production was less than previously forecasted, also contributing to the production beat. As a result, we have raised our full-year oil production guidance by 16,000 barrels of oil per day or 4%. Our dramatically reduced activity and the temporary shut in of production, combined with the expense reductions, generated positive net cash flow and deferred a large amount of production into a higher-price quarter.

Slide 12 of our presentation this quarter illustrates the updated shut-in volumes and the corresponding product price. While we have slowed our overall spending, we have maintained our commitment to reducing GHG emissions by continuing to invest in innovative new technologies and initiatives. Our focus on reducing flaring continues with our gas capture rate now exceeding 99.5%. To further minimize flaring, particularly when caused by unpredictable downstream market interruptions, we tested a new EOG innovation we have named closed-loop gas capture.

Closed-loop gas capture is an automated process developed in-house to reroute natural gas back into existing wells when a downstream interruption occurs. Initial results were successful and indicate that our closed-loop gas capture process has the potential to both reduce flaring and return the majority of the captured gas from the well back to production. In late 2019, we initiated a pilot project in New Mexico to combine solar and natural gas to power electric motor-driven compressors. Compressors typically use natural gas to power the engines and are a source of GHG emissions from stationary combustion.

Since solar power is only available during the day, we designed a hybrid power plant to supplement daytime solar power generation with reliable natural gas generation at night. During the day, the solar panel should produce eight megawatts of power with no combustion emissions. Compared to the traditional natural gas-powered compression, we believe our hybrid power compression will result in lower operating expenses and a meaningful reduction in emissions. This facility will become operational later this month.

Both of these projects demonstrate that we approach ESG like every aspect of our business, focusing on sound economic decisions and continuously improving our operations. EOG has a long history of adapting to changing industry conditions and using technology to improve the company. As Bill noted earlier, to further enhance our efforts to be a leader in GHG reduction, we recently announced a new strategic initiative to identify and implement returns-focused, low-emissions power generation within EOG. We are confident that this initiative led by our sustainable power group will be another area in which EOG will lead the way in finding more cost-effective methods to generate power while reducing our impact on the environment and generating a healthy rate of return.

And finally, I am extremely proud of how all of our employees have responded to this year's challenges and doing so while adapting to remote working conditions. Here's Ezra for an update on recent exploration success in Trinidad.

Ezra Yacob -- Executive Vice President, Exploration and Production

Thanks, Billy. EOG has had a very successful business in Trinidad for 27 years. About 20% of EOG's natural gas production comes from shallow water offshore fields in the Columbus Basin of Trinidad. Most of the gas is sold as feedstock into a sizable petrochemical industry on the island, primarily producing ammonia and methanol.

Trinidad has had a competitive financial profile within EOG due to our competitive advantages in the country as a low-cost operator and our long track record of exploration success. While our capital investments in Trinidad typically make up a small percentage of our overall capex budget, the returns on that capital are competitive with EOG's domestic portfolio and consistently generate free cash flow and net income. The latest round of exploration and development in Trinidad kicked off in the spring of 2018 with the acquisition of a set of modern seismic images. The combination of new seismic and updated geologic models provided a deep inventory of prospects to develop our exploration plan.

This plan included farming into new acreage held by another operator where we could apply our low-cost structure to improve the economics on these high-potential exploration blocks. Drilling began in July 2019, and we have recorded four initial discoveries with estimated natural gas potential of one tcf gross and 500 bcf net to EOG. The discoveries are located in shallow water off the Southeast Coast of Trinidad. Our two open water exploration wells support the installation of new production platforms beginning in 2021.

The final two wells in the current drilling campaign are in process and should be completed by year-end. Production from this drilling campaign will more than offset natural declines from existing wells and provide a foundation of growth for EOG's total production in Trinidad. Lastly, the initial success of this latest exploration program sets up the potential for additional delineation and exploration drilling in Trinidad in future years. I would also like to take a moment to discuss our ongoing domestic exploration effort.

We have made good progress moving multiple prospects forward during 2020 despite a reduction to our initial capital plan. Leasing across multiple basins is going well, and we are capturing contiguous positions in what we feel are the sweet spots of these plays. We have initiated drilling in some projects and are currently incorporating modern well logs and core data into our geologic models. We look forward to providing updates regarding the testing of these prospects at an appropriate time.

Next up is Bill to provide concluding remarks.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Ezra. In conclusion, I would like to note the following important takeaways. First, our second-quarter operational results were outstanding. We rapidly reduced capital and operating costs while increasing volumes.

This resulted in significant free cash flow. Second, we have improved our full-year 2020 guidance by increasing volumes and further reducing costs. Third, our 2021 maintenance outlook has improved to include more oil with no increase in capital. We can maintain higher volumes and cover both capital and the dividend with cash flow at less than $40 oil.

Fourth, as demonstrated by ou results, the EOG culture continues to rapidly and sustainably improve the company. During this downturn, we believe we're in the process of making another step change to improve profitability. And finally, EOG's fundamentals have not changed. Our focus on returns, disciplined growth and generation of significant free cash flow to fund a growing sustainable dividend and strong balance sheet have not wavered.

Our commitment to creating long-term shareholder value has never been stronger. Thanks for listening, and now we'll go to Q&A.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey guys. I was hoping to get maybe a little bit more color on some of the cost reductions on the well side from a capital perspective this year. Just looking through the slides, I mean, it looks like maybe it's a little bit more concentrated in the Permian in terms of your expectations. I know that's where a lot of your activity is occurring.

But are you seeing kind of outsized gains there maybe relative to the Eagle Ford in terms of your expectations for rest of the year?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Thank you, Leo. We're going to ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yes, you're right. Most of our capex is generally directed toward the Delaware Basin. So certainly, on a dollar basis, that's where most of the savings are as well. Just to give you a little more color on the capital savings, about a third of the capital savings are from efficiency gains, a third are from pricing improvements and a third is really just delaying facilities and infrastructure from the second quarter into the future third and fourth quarter.

So from that, we were able to see most of the cost savings probably on the completion side of our business, as I mentioned during the notes on the call. And you have to remember, we're still under some long-term contracts for drilling rigs and frac fleets. So as those roll off, we expect to be able to capture some of the market rate savings on those in the future. But we're seeing savings on some other ancillary services that I mentioned, largely things like maybe chemicals being down 20 to 25%, some of the equipment rentals being down 20 to 30% and things like that.

So you're seeing some savings on some of the other aspects of the business, not necessarily on the frac fleets and drilling rigs.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. That's helpful color for sure. And I guess I was hoping maybe you could talk a little about the potential issue surrounding federal acreage here. Certainly saw from the slides that you guys are kind of saying roughly half your premium inventory is located on federal land.

So obviously, the election is clearly uncertain, but do you guys have any thoughts as to kind of whether or not there might be any limitations going forward on the event of a Biden victory?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Leo, this is Bill. We've got a lot of experience drilling on federal land for decades. And we've been able to successfully navigate all the changes in the past. We've had many changes over the years.

And so I'm confident we're well positioned to continue to adapt and not let those changes significantly affect us. There are two reasons why I'm confident, and then I'll ask Billy to add some additional color. The first is we've got a large amount of premium quality drilling potential on nonfederal land. So we have a tremendous inventory that's really not affected federal changes that provides significant operational flexibility.

On top of that, our exploration program that Ezra mentioned, we believe, is going to provide some outstanding opportunities to continue to improve our inventory with better rock, and most of that is located on nonfederal land. So we've got a lot of confidence that we can continue to generate and add nonfederal potential that's even better than what we have. And then we've got a very strong growing backlog of approved drilling permits on federal land. And I think Billy has got some numbers on that.

And then number two, our government has a system of checks and balances that allow the voices of many stakeholders to be heard. And as a part of these checks and balances, any changes would take time and have to consider all those stakeholder interests. And so the success of our responsible development is aligned with many important states and communities where we operate. For example, from federal lands, they're shared -- the revenues are shared with the states.

And in 2019, over $2 billion of revenue was paid out to over 35 states. So it's not an easy thing to change significantly the federal drilling potential. So I'm going to ask Billy to add some more color.

Billy Helms -- Chief Operating Officer

Yes. Thanks, Bill. As Bill mentioned, we're starting with a lot of flexibility. With our decentralized culture, multi-basin approach, we have the ability to move activity around quite extensively.

On top of that, our exploration program, which is in basins really outside of our current operating areas, has the opportunity to further add to our nonfederal drilling inventory. As Bill mentioned, we have quite a few premium locations that we've announced. And about half of those are on nonfederal lands. In addition, almost half of our premium locations that work at $30 are also on nonfederal lands.

And you can look at Slide 10 of our deck that illustrates that. So the part of those that meet the rate of return hurdle at $30, about half of those are nonfederal. So a pretty good distribution of both federal and nonfederal make up that entire inventory list. And the non-federal inventory is just as high-quality as our federal.

So in fact, of our nonfederal inventory, it supports at least eight years of drilling with similar capital efficiency as we're experiencing in our 2020 plan. And Bill mentioned, we have quite a few federal permits. We have about 2,500 federal permits that are approved or in progress, which is certainly more than four years of inventory. And also in the Permian Basin, over 90% of our federal acreage is held by production.

Our government also provides, as Bill mentioned, an important system of checks and balances, which provides for due process before any regulatory changes, and these changes have to consider the interest of all stakeholders. Ultimately, regulatory and legislative changes that deny access to current property rights could amount to a government taking. So there'll certainly be some legal consequences of going through the process. And then just to point out, too, we have a very close alignment with our stakeholders, including the communities we work in.

New Mexico is a great example of that. We recently conducted a very successful partnership with the state to complete our closed-loop gas capture project that I mentioned earlier. And on a day-to-day basis, I'm very proud of that close working relationship we have built with the regulatory agencies really to have a responsible development, open communication, paying attention to their needs. It also enables us to meet our goals and operate in a timely and efficient manner.

And our success, in turn, has helped support the quality of life for the people of New Mexico, for example. In 2019, the state received nearly 40% of its overall revenue from the oil and gas industry. And that certainly supports the initiatives to increase funding for public health, education, infrastructure improvements and so on. On top of that, oil and gas development supports 100,000 jobs in New Mexico, along with the associated economic activity and benefits.

A significant amount of that revenue from oil and gas activities on federal lands is also disbursed to the state governments to support local communities. And of course, the two states that benefited the most are New Mexico and Wyoming. New Mexico received $1.2 billion and Wyoming $641 million in 2019 alone. And the BLM estimates that oil and gas activity on federal lands provided about $70 billion of economic uplift nationally and supported about 300,000 jobs.

So there's a lot of important considerations and stakeholders involved in any of these decisions to consider when changing the rules on federal land. So for these reasons, along with our diverse and really growing inventory, we remain extremely confident that EOG will be able to continue to navigate through any changing regulatory landscape just as we have in the past.

Operator

And our next question will come from Bob Brackett with Bernstein Research. Please go ahead.

Bob Brackett -- Bernstein Research -- Analyst

Good morning I'm intrigued by the comment that bringing back shut-ins led to flush production and lower-than-expected decline. Is there a learning there to apply to future developments? And is the mechanism understood?

Bill Thomas -- Chairman and Chief Executive Officer

Billy, do you want to comment on that? Or Ken?

Ken Boedeker -- Executive Vice President, Exploration and Production

Yes, this is Ken, Bob. The majority of our wells are single-zone wells under primary depletion. So as we shut those wells in, they continue to build bottom-hole pressure. And then, when we turn them on, those wells will show flush production until that bottom-hole pressure has gone down to what it was prior to that.

So it's a mechanism that's well understood for the horizontal wells that we have that are under that. We don't have any wells that are under waterfloods or multiple zones where you can have one zone damaging another. So it is well understood, and it's following exactly what we expected on the flush production profiles.

Bob Brackett -- Bernstein Research -- Analyst

And then what about the lower-than-expected decline?

Ken Boedeker -- Executive Vice President, Exploration and Production

On the base decline, in terms of the base decline, we see the lower base decline was just that we saw those wells. We had forecasted them conservatively, and the wells are performing better than what we thought they would.

Bob Brackett -- Bernstein Research -- Analyst

OK, that's great. Thank you.

Operator

Our next question will come from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning. Bill or Billy, I'm just curious, I mean, one of the comments is that with the slowdown in the activity, you have seen a substantial improvement in the efficiency because you have more time there to work on. So if we extrapolate that, I mean, even when the commodity prices are returning to a higher level, is it better off for the company from a return standpoint for you to slow your activity level and not trying to grow as fast?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Paul, thank you. The efficiencies, we've seen a substantial amount of innovative ideas that have been generated. And I think when people have more time to think, instead of doing things, they think through and able to look at the data and analyze it, they're able to come up with more ideas and a lot of creative ideas. One of the basis of our disciplined growth strategy is to grow at a pace that we can get better.

We don't ever want to grow so fast and have so much activity that we cannot get better at the same time. So it really is a balance. You can only allocate capital at a certain speed. If you go too fast, you outrun your learning curve, etc., etc.

So there is a benefit to a proper pace, and we have been able to benefit from this slowdown. Every downturn that we are in, and we experienced multiple ones over my 40 years, every downturn, we make the biggest improvements in the company. It's a challenge. The times are challenging.

This has been, though, different than any of the others, other than we're working more remotely than we ever have. And we're very fortunate to have in place our very extensive inflation technology system and our database and all of our apps in that we've leveraged all that technology to analyze and to make changes and to come up with ideas how to try to continue to improve the company. So we're super excited about where we're headed. I think we're going to exit this downturn a much, much better company, able to generate even higher returns than we have in the past and really do all of our business better than we have in the past.

So it's a very exciting time for us.

Paul Cheng -- Scotiabank -- Analyst

Can I follow up on that slightly different way? One of your major competitors is also a well-known premium growth E&P company had drastically shifted their business model and taken a more balanced growth and cash return and with a well-defined cash flow reinvestment approach or a distribution approach. And one of the arguments that they also make is that while growing faster may, on paper, see a higher net present value but in the margins, you are at the mercy of OPEC. And I think the behavior of MBS and Putin in the recent times show that that may no longer be reliable to depend on. So I mean do you guys agree with that kind of argument? And if not, why not? I mean we're trying to understand why a premium operator like EOG will not want perhaps to have a more balanced growth and cash return business model and trying to grow at a slower pace than what you previously has been, even when the commodity price is getting much higher?

Bill Thomas -- Chairman and Chief Executive Officer

Paul, yes, that's an excellent observation. And we are fundamentally a return-focused company, and that's what we've been doing for a number of years. If you look back at the last three years -- we gave out these numbers, they're on our slide deck, and I talked about it in opening -- we've been a leader in the industry in return on capital employed. So we're focused on improving returns every year, and we've also been a leader in generating free cash flow.

We generated $1.5 billion of free cash flow over the last three years, every year, for $4.6 billion. And that funded a very sustainable growing dividend. We increased the dividend by 72%. And we reduced our debt, our net debt by over $2 billion.

So we've been a very disciplined company, and we did all that at a spending level that was our cash -- our capex to cash flow ratio was about 80%. So really, what you're hearing from really the rest of the industry is we're now moving into the model that EOG has been working really for the last three years. And we're thrilled about that. That is fantastic for the industry, for investors.

And certainly, it's very positive for oil prices as we move forward. So we agree. They're doing the right thing. And that's the thing that we've been doing for a number of years, and we fully support their move.

Operator

Our next question will come from Neal Dingmann with SunTrust. Please go ahead.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning. Nice to see the continued diversified approach. My first question is around comments in your release about the improved 2021 maintenance capex leading to a higher 4Q exit rate. And really, I guess, Bill, my comments on this, based on this, could you speak to what this means for the trajectory for next year, as well as what this potentially could mean for even '22?

Bill Thomas -- Chairman and Chief Executive Officer

Billy, do you want to address that?

Billy Helms -- Chief Operating Officer

Yes. Neal, this is Billy. So our 2021 maintenance capital, previously, in the previous quarter, we outlined the same capital number for about 420,000 barrels a day, which was believed to be, at that time, what our exit rate would be for 2020. And certainly bringing on a bunch of extra production this year, but also incorporating the cost savings we're achieving this year, we believe we can do the same capital dollar number, $3.4 billion, but maintain the exit rate we're seeing this year of 440,000 barrels a day, which is a significant improvement again in our capital efficiency number.

So we believe we can maintain that as we go forward. That is not just meant to be a single snapshot. I think one thing it doesn't bake into -- and to make sure everybody understands this, it's forecasted on what we're achieving today. It doesn't bake in any improvements in well performance that we expect to be able to continue to see, as well as cost reductions.

If things stay where they are and we're staying in this environment, we're extremely confident we'll continue to see cost improvements that will drive our maintenance capital number improvements in the future. So yes, I'm extremely confident we can have an ongoing maintenance capital program in this same kind of area that we're talking about today.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Very good. My second question, just around your technical innovations. Given the strength that I think you all have really above anybody else on the upstream side, would this ever lead you to consider broadening the business by considering any sort of clean tech or NGL-related investment?

Bill Thomas -- Chairman and Chief Executive Officer

Neal, yes, our focus on GHG reductions is -- and forming this sustainable power group within our company is to really focus on technology, bringing technology forward more quickly inside the company, and it's really another organic like we do everything else inside the company to really improve our emissions but also make sure that we can do it at a very high rate of return. And so it's really to facilitate our ongoing culture. We have tons of ideas that are coming from our divisions and our folks involved in the field operations. And so we're really excited about the technology and the innovations that's coming forward, and we're really excited about continuing to reduce our emissions.

And certainly, any kind of technology in this area, we believe, will not only benefit EOG, but it could benefit the industry. And so we're open with that. It's not a proprietary thing. It's something we're doing to really continue to improve our environment.

Operator

Our next question will come from Phillips Johnston with Capital One Securities. Please go ahead.

Phillips Johnston -- Capital One Securities -- Analyst

Hey, guys. Thank you. Just a follow-up on Paul's question. EOG really stands out because unlike all your peers, you never cut the dividend over the last six years.

And you also resisted all the pressure to buy back your stock over the last few years, while most of your competitors destroyed a lot of value doing that. The company that Paul talked about has laid out plans to start paying variable dividends or special dividends on top of the regular base dividend. I realize you guys want to continue to grow the base dividend at a healthy clip. But my question is, is there any appetite at the board level to supplement your regular dividend with a recurring variable dividend? And if not, what kind of flaws do you see with that type of payout strategy that would prevent you guys from going down that road?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Phillips, yes, your observation is right. We believe a sustainable growing dividend backed by an impeccable balance sheet is certainly the best way to return cash to shareholders, and we're very committed to that. And we don't want to take anything away from that.

Having said that, we're certainly open to consider other additional options. And so we certainly welcome any shareholder input on that, and we remain open and flexible to do what's best for everybody.

Phillips Johnston -- Capital One Securities -- Analyst

OK. Are there any flaws or drawbacks that you kind of see with that type of variable dividend strategy?

Bill Thomas -- Chairman and Chief Executive Officer

Well, I think the biggest one is it's kind of unknown and inconsistent. And the feedback we've received from many folks is they would rather us focus on a more consistent growing dividend. And certainly, as you pointed out, we've never ever cut the dividend. And we want to make sure it's sustainable and certainly backing it up with an impeccable balance sheet.

And so the mix we've had over the last several years, as we talked about, we believe, is a really good mix, and we believe that that will create a very, very significant shareholder value going forward.

Operator

And our next question will come from Doug Leggate of Bank of America. Please go ahead.

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Doug, I think as we stated in the opening remarks, fundamentally, we believe we've got a very, very strong game plan. And we've got a tremendous track record to back that up, being the leader in return on capital employed in the industry while generating very significant free cash flow and giving it back in a very strong dividend increase and strengthening our balance sheet. And we believe that was the right strategy before the downturn. It certainly has put the company in a tremendous position where we are right now.

And going forward, we believe that's the right strategy going forward: to continue to create significant shareholder value going forward. So we believe our game plan is really solid. Our growth has always been very disciplined. Again, we've only allocated about 80% of our cash -- the capex.

And so we've been able to grow the company at a very disciplined pace. And as we go into 2021 and in the future, obviously, we need to keep our eye on the macro view of oil. We need to be aware of the market conditions. We're not interested in growing oil volumes at a strong pace in an oversupplied market.

Certainly, that's not the right thing to do. But we want to continue -- when the time is right, we want to continue to grow the company at a disciplined pace, at a pace to where we can continue to improve our returns and improve our performance.

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

Bill, but as a footnote to the question, I think people would really appreciate your leadership as a company here because you are one of the bigger companies, and capital discipline needs to be defined, and I would urge you to try and do that. My follow-up is maybe an obtuse way of asking the same question. You're running 10 or 11 rigs right now. You've got the potential clearly to run three times that amount.

So I guess what I'm really trying to get at is, are you planning to retain the same operational capability? In other words, the risk that you'd move back to that level or is -- like, some of the other companies, is there an opportunity here to address the cost base of the company by rightsizing to perhaps a lower level of activity? And I'll leave it there.

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Doug, the -- we are really committed to our employees. They are the ones that are making our company better. They're the most valuable asset we have in the company. And so we have a lean, we run lean.

We actually peaked on employment about four or five years ago. Even though we've gotten a much bigger company, our employee base has really not grown. And so they're very highly productive. They're highly motivated.

And they're certainly the part of the company that we want to keep intact and take care of and encourage. So we believe we're at the right size to be effective, to be ready as the downturn is over. So we're focused on continuing to maintain and to actually increase our culture, our ability as we go forward. So we're very committed to keeping the company in great shape going forward.

Operator

And our next question will come from Scott Gruber with Citigroup. Please go ahead.

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Good morning, Scott.

Scott Gruber -- Citi -- Analyst

Good morning. Can you hear me?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, sir. We can hear you. Yes.

Scott Gruber -- Citi -- Analyst

I actually think -- your rig count today, I think, is around half a dozen rigs. Correct me if I'm wrong on that number. Given the continued efficiency gains that you guys continue to achieve, what is the new level of maintenance rig activity and frac activity?

Bill Thomas -- Chairman and Chief Executive Officer

Billy, do you want to answer that one?

Billy Helms -- Chief Operating Officer

Sure. Scott, this is Billy. So yes, you're right, we have actually seven rigs, counting the one in offshore Trinidad. So six domestically and one offshore.

And our maintenance capital plan would require about 20 rigs and 10 frac fleets, and we're generally running, as I mentioned, seven rigs and five or six frac fleets today. So we're well under. And when we pulled back our activity, we dropped to a level well below our maintenance capital level. And that's important to note.

So the plan, certainly, going into the third and fourth quarter, is to be looking at whether or not we want to add a rig or two going into the next year to get to that maintenance level or not.

Scott Gruber -- Citi -- Analyst

Got it. And then you had mentioned also that you have -- most of your rigs and frac is under long-term contracts. I imagine those were the ones you kept just given the cost of ending those contracts. Are these generally multiyear contracts in support of new e-frac fleets? Or did the majority roll off over the next 12 months? I'm trying to ascertain when those savings manifest.

I imagine the rigs and frac crews today, given the deflation on other services, these rigs and frac crews may be pushing toward 40 or 50% of your direct well cost. So just trying to get my head around when you could see those savings roll through.

Billy Helms -- Chief Operating Officer

Yes. Sure, Scott. Yes, they are multiyear contracts. And I'd say there are various terms on the contracts.

But in general, they're starting to roll off in the next 12 to 18 months. I think the one thing that's important to note is we build what we think are valuable relationships with our most trusted service providers. And we work through this in partnership with them to make sure we retain not only the performance and the high-performing equipment and personnel but the ability to ramp back up when we need to. So it gives us a lot of flexibility as we work through this.

And I think certainly, we build a lot -- by building that relationship, it's a very trusted relationship we have, it allows us to capture some cost savings, just being able to capture rates at below market rates in current times, but also maintain the high-performing levels of activity that we need to sustain our business. So we're very proud of our relationships we have with them. But they typically roll off in the next 12 or 18 months. And we'll kind of reassess where we need to be working with those trusted partners.

Operator

Our next question will come from Juan Jarrah with TD Securities. Please go ahead.

Juan Jarrah -- TD Securities -- Analyst

Yes. Thanks guys, and thanks for squeezing me in. Congrats on the exploration success in Trinidad. I did want to follow up a bit on your onshore exploration efforts.

And I know this is easier said than done, but can you comment on any other exploration efforts you'd consider pursuing outside of the Lower 48? And with that, Canada comes to mind. And as you know, one of your peers recently announced adding a position to their Montney in Canada. So just curious on that, and I'll stop there.

Bill Thomas -- Chairman and Chief Executive Officer

Ezra?

Ezra Yacob -- Executive Vice President, Exploration and Production

Thanks, Juan. This is Ezra. As you know, we've got -- you mentioned our Trinidad exploration effort, and then our domestic exploration effort. And so when we think about anything else outside of the lower 48, it really comes down to how competitive can it be with our preexisting domestic portfolio.

And that's the main driver on it. When we talk about any of our new exploration ideas, whether it's Trinidad or the new domestic portfolio, we're exploring for prospects and rock quality that will be additive to the front end of our preexisting inventory. At 10,500 premium locations, I'm not sure if we necessarily just need more to continue to backfill that deep inventory. What we're really trying to do is add to the front end of it.

And that's what the exploration effort is focused on.

Juan Jarrah -- TD Securities -- Analyst

I had to ask. But thanks for your time.

Operator

The next question will come from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer -- Goldman Sachs -- Analyst

Good morning You mentioned in the 10-Q that you expect to replace the 750 million of debt coming due next year with other long-term debt. And I thought that was interesting because you've been talking a while, I think, about paying down debt and having the cash on the balance sheet to do so. And so I wondered if you could add a bit more color on, a, how you're thinking about the right level of free cash flow to pursue; and then, if not allocated to paying down debt, where you see the best areas of allocation between incremental drilling, returning it to shareholders or keeping a high amount of cash on the balance sheet or deploying it elsewhere, like M&A.

Bill Thomas -- Chairman and Chief Executive Officer

Tim?

Tim Driggers -- Chief Financial Officer

Yes. So the reason we chose to keep the debt and long-term debt at June 30 was just the uncertainty of the market going forward between now and February when our next debt is due. Certainly, the goal has not changed, and that goal is to pay down debt. So if market conditions play out as such that we have the cash -- sufficient cash, then we will pay down that debt.

But to be conservative, we left it in long-term just because of the uncertainty in the market. And I guess Bill will address the capital allocation portion of your question.

Bill Thomas -- Chairman and Chief Executive Officer

Yes, the right level of free cash flow, Brian, is really a function of -- it's obviously variable every year, number one, based on the oil price. We -- normally, we have and we will continue to kind of use a conservative view, our macro conservative view, of what oil prices will be that year. And then we certainly have a goal every year to generate significant amount of free cash flow. As an example, the last three years, we've generated about $1.5 billion a year, on average, free cash flow.

And we want to use that to continue to, as Tim said, consider paying our debt down. Our goal is to continue to pay our debt down more and certainly continue to work on our dividend when the environment is healthy. And then after that, we will allocate the capital, continue to allocate it at a very disciplined level just like we have in the past. And discipline means that we're not going to allocate the capital at a speed that's too fast to where we cannot learn and grow and get better.

We want to always be increasing our capital efficiency, lowering our funding costs, continuing to lower our operating costs and those kind of things. And so you have to go at the proper speed to do that every year, and that's really the governor on allocating the capital. And whatever free cash flow is left over after all those things are done, obviously, that will be variable year by year according to the commodity prices. We will continue to be committed to using that capital to continue to create shareholder value and making sure we get the highest return possible avenue on using that cash.

Brian Singer -- Goldman Sachs -- Analyst

Great. And then my follow-up goes back to the exploration program. I think Ezra, you mentioned a couple of comments I thought was interesting. One was that the exploration you're pursuing is even better than what you have and then that it's in basins outside the current operating area and largely not on federal land.

And I wondered if you could add a bit more color on what type of impact the onshore exploration you're pursuing could have on your potential production or capital investment one or two years out, what the proximity is to being able to really move these plays into development and have a level of materiality on your production and then whether there are aboveground issues that need to be worked out with the areas from a midstream or other perspective.

Ezra Yacob -- Executive Vice President, Exploration and Production

Yes, Brian. This is Ezra. Let me try to unpack that one by one here. First, I'd say our -- as we've talked about in the past, our domestic exploration effort, these aren't really in frontier or wildcat basins.

These are in basins where there is established legacy oil and gas production. And so if these prospects work out, the way that we think they will, and they're additive to the front-end quality of our inventory, we should be able to move them into an active development basis pretty quickly, obviously, pending results. The second part of that, going back to just the quality of what we're looking for, this is -- it's a better rock quality, as we've talked about before. A lot of what we're looking at is tied to what we think we can develop with our horizontal completions technology.

And what I mean by that is just exactly how does the rock, how is it going to respond, how is it going to actually be stimulated and fracture in combination with our stimulation designs. And so those are the two things we think are really -- we're focused on. It is definitely not traditional, unconventional types of rocks that have been focused on in the past. And so as we continue to kind of push these prospects forward and get data on them, we will update you guys with our results on the testing.

But we're feeling very confident, everything that we're seeing to date, that they are going to continue to be, as I said earlier, additive to the front end of our -- of what really is a pretty deep inventory to begin with.

Operator

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

Bill Thomas -- Chairman and Chief Executive Officer

In closing, first, we want to thank all EOG employees for the outstanding job you're doing to improve the company during this historic and challenging downturn. As we said, the company is improving very rapidly. And we're going to emerge from this downturn a better and stronger company. And so we're eager to extend our leadership in return on capital employed, disciplined growth, free cash flow generation and sustainability.

Thanks for listening, and thanks for your support.

Operator

[Operator signoff]

Duration: 67 minutes

Call participants:

Tim Driggers -- Chief Financial Officer

Bill Thomas -- Chairman and Chief Executive Officer

Billy Helms -- Chief Operating Officer

Ezra Yacob -- Executive Vice President, Exploration and Production

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Ken Boedeker -- Executive Vice President, Exploration and Production

Paul Cheng -- Scotiabank -- Analyst

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Phillips Johnston -- Capital One Securities -- Analyst

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

Scott Gruber -- Citi -- Analyst

Juan Jarrah -- TD Securities -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

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