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EOG Resources (NYSE:EOG)
Q3 2020 Earnings Call
Nov 06, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the EOG Resources third-quarter 2020 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Driggers, CFO. Please go ahead.

Tim Driggers -- Chief Financial Officer

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing third-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 and EOG's SEC filings, and we incorporate those by reference for this call.

This conference call also contains certain non-GAAP financial measures. Definitions, as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures, can be found on our website at www.eogresources.com. Some of the reserve estimates on this conference call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S.

investors that appears at the bottom of our earnings release issued yesterday. Participating on the call this morning are Bill Thomas, chairman and CEO; Billy Helms, chief operating officer; Ken Boedeker, EVP, exploration and production; Ezra Yacob, EVP, exploration and production; Lance Terveen, senior VP of marketing; and David Streit, VP, investor relations and public relations. Here's Bill Thomas.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Tim, and good morning, everyone. Our third-quarter results underscore EOG's unique ability to organically create sustainable shareholder value through the commodity cycle. Along with substantial cost reductions and solid earnings results, we announced Dorado, our new premium South Texas natural gas play. We also introduced a three-year reinvestment and production outlook.

First, I want to highlight our stellar execution this year, then provide some context on our capital allocation and three-year outlook. We continue to make rapid and sustainable improvements to our cost structure and capital efficiency through innovation while also improving the quality and size of our premium portfolio through exploration. Our results show we can invest in both innovation and exploration to improve the company while also generating significant free cash flow, improving the balance sheet, and protecting the dividend. Capital spend for the third quarter was $2.7 billion, over $300 million less than our revised plan had forecasted.

In the third quarter, we substantially beat our cash unit cost targets, as well as each of our oil, NGL, and natural gas production targets. As a result, we have generated more than $930 million of free cash flow year to date, already more than enough to cover the full-year dividend. Our 21 Tcf Dorado natural gas play announced yesterday is a great example of EOG's ability to identify and capture high-quality rock and add substantial premium inventory to our organic exploration efforts. We believe Dorado will be one of the lowest-cost and lowest-emission natural gas plays in the U.S.

with advantaged access to both domestic market hubs and international market via LNG. EOG has a long and successful exploration history, and we continue to be excited about the potential of our current exploration portfolio. I'm incredibly proud of EOG employees' performance during this pandemic. They remain highly motivated and have demonstrated EOG's return-focused culture by improving the company at a record pace in a volatile environment.

We will emerge from this downturn an even stronger company, positioning EOG to excel through the commodity price cycles. Yesterday, we also introduced a three-year outlook. The goals of disclosing this outlook are to provide more transparency into our capital allocation process and meaningful visibility into the next three years, particularly given the ongoing level of uncertainty in the oil and gas market. Our capital and growth profile optimizes the total shareholder value of the company through the cycles.

Our strategy remains dynamic, and our operations are flexible enough to adjust our spending to match market conditions. At the bottom of the cycle, as we find ourselves today, we have no interest in growing oil into an overbalanced market. In an improved market, our disciplined growth strategy compounds the benefits of growth and continuous operational improvements to optimize returns and free cash flow potential and maximize long-term shareholder value. EOG represents a full-cycle investment opportunity.

At lower prices, EOG is clearly a sustainable business. Maintenance capital and the dividend can be funded with oil in the mid-30s. In a more constructive market, EOG has significant leverage to higher oil prices through high-return reinvestment and significant incremental free cash flow. EOG has a unique business model in our industry.

We approach this business differently, which has become more apparent than ever with recent industry developments. First, the state of recent M&A activity stands in contrast to one of our most distinctive competitive advantages, organic exploration. Capturing high-quality rock is the primary way of improving the quality of our premium inventory. It's how we create more value than our competitors.

Our newest play in Dorado is a prime example. It's great rock in a great location, and that's a resource you can't buy through M&A. Second, we're decentralized. Value is created in the field, not at headquarters.

The exploration idea behind Dorado emerged bottom-up from one of our eight operating areas. In fact, perhaps for the first time in our history, every one of our eight areas has significant potential for premium plays, plays that, if successful, will add to the top of our inventory, not the bottom. Third, the improvements we're making are sustainable. The No.

1 source of our cost reduction this year is from innovation, not cyclic service price reductions. Once again, that's the power of our decentralized organization. It's an innovation incubator and a driving force behind EOG's leading performance. Fourth, we execute our operational plans reliably and consistently.

This year, we worked hard to provide transparency in our operations by providing guidance throughout one of the most volatile periods in the industry's history, and we've delivered on our plan. Fifth, performance drives our ESG efforts, not PR. We believe the demand for oil and natural gas will gravitate toward the most efficient producers, the most efficient from a capital perspective, and the most efficient from an emissions perspective. Our goal is to be part of the long-term global energy solution while generating strong returns for our shareholders.

Finally, and most importantly, we believe we have the most talented and motivated employees in the industry. We've not laid-off employees, and we've empowered our workforce by leveraging our robust information technology infrastructure to support collaboration and innovation. Our employees and culture are a massive competitive advantage during these unusual times. And we're not standing still.

Our relentless drive to improve means that this is just a starting point. We are confident that we will continue to improve performance through the development of new plays like Dorado, further cost reductions, and well productivity improvements. We're excited about the future of EOG. Now, here's Tim.

Tim Driggers -- Chief Financial Officer

Thanks, Bill. Our goal is to maximize shareholder value through the cycles. We measure our progress against a number of metrics: return on capital, free cash flow, sustainable dividend growth, operating cost, and finding cost and financial leverage. We create business value through a balanced approach that maximizes returns, as well as the current and future free cash flow generation.

It's an integrated optimization exercise, not a simple formula. Reinvestment ratios and growth rates are outputs of this exercise. Our three-year outlook provided this quarter addresses the currently oversupplied market and assumes gradual improvement over the next three years. Our plan each year is based on conservative price assumptions.

The pace of activity is optimized to generate high returns on incremental capital, increased return on capital employed, support improvements in operating efficiencies and technical advances, and fund our free cash flow priorities. That said, our outlook is just that, an outlook. We have operational flexibility to adapt quickly to changing supply demand conditions. At $50 oil, reinvesting 70% to 80% of discretionary cash flow generates up to 10% oil growth with significant free cash flow.

At higher prices, we would expect to maintain this optimal level of activity and production growth, while returns and free cash flow expand significantly. But why grow at all? And how is the optimal growth rate determined? Volume growth drives higher ROCE, free cash flow potential, and the fundamental driver of a growing sustainable dividend. Reinvesting in high-return wells with low operating and finding costs improves the company's recycle ratio, expanding our return and cash flow leverage. We have determined the optimal growth rate from our current assets through 2023 is about 8% to 10%.

This pace of activity and growth maximizes the operational and capital efficiency of our current premium inventory. Due to the short payback periods of our investments, capital invested today is quickly recovered by free cash flow in the future. Relative to a lower growth scenario, the value of the additional cash flow we earn after the third year of our outlook far outweighs the incremental reinvestment to support our 8% to 10% plan. The proof is in our performance.

During 2017 to 2019, EOG improved our return on capital employed, improved our return of capital through the dividend, reduced debt, and grew production while reinvesting less than 80% of discretionary cash flow at $58 oil. Reinvesting at high returns and growing production the last three years is the reason we believe EOG will generate more free cash flow over the next three years at $50 oil than we did at $58 oil. Sustainable dividend growth is our highest priority for returning cash to shareholders. It is a stream of cash flow that clearly demonstrates our confidence in the resiliency of our financial model and reinforces capital discipline.

Strategically, free cash flow generated from higher oil prices should be at least partially directed to shoring up the balance sheet to preserve financial flexibility for future downturns. Value preservation and value creation are two sides of the same coin when it comes to managing the balance sheet in a capital-intensive cyclical industry. This year has demonstrated the value of a strong balance sheet like no other, and we worked hard to maintain our financial strength. Cash at the end of the third quarter was $3.1 billion, offsetting total debt of $5.7 billion for a net debt to total capitalization ratio of 12%.

We remain committed to pursuing our objective to strengthen our balance sheet further during upturns. Beyond the regular dividend and debt reduction, we regularly review performance scenarios that may present options for additional cash return to shareholders. We haven't ruled out buybacks or a variable or special dividend, and we'll consider all options for additional return of cash to shareholders when the opportunity presents itself. Next up is Billy to review our operational performance.

Billy Helms -- Chief Operating Officer

Thanks, Tim. During the third quarter, we exceeded our volume expectations across the board while spending well below our forecasted capital. The capital savings were largely attributed to achieving our 12% well cost-reduction target for the year. Our expectation for full-year capital expenditures remains $3.4 billion to $3.6 billion.

The savings provided by our well cost reductions allows us to increase activity and exit the year near the level required to maintain production through 2021. Savings will also be used this year to invest in future value drivers for the company. Our organic exploration program is as active as ever, and we are optimistic we can capture additional acreage at competitive pricing. That will further improve the quality of what we believe is already one of the best portfolios of assets in the industry.

Finally, we are excited to initiate a number of infield innovations to improve our environmental performance. These projects have the potential to both reduce future emissions and improve efficiencies to generate a healthy return on capital. In the third quarter, cash operating costs, which includes LOE, transportation, and gathering and processing expenses were 13% below target. LOE savings were generated across the board as we have streamlined our lease-up key practices and other facets of our production operations.

We track about 100 different categories of LOE spending, and 94 of these were flat to down in the third quarter compared to the second quarter on a per-unit basis. We are excited about the steady improvements we continue to make. I am confident that most of the capital efficiency gains and operating cost reductions we are making this year will sustain into 2021. With current oil market fundamentals, we plan to maintain flat oil production in 2021 at about 440,000 barrels per day, which is where we expect to exit the fourth quarter this year.

Capital required to maintain fourth-quarter production throughout the year is about $3.4 billion. Due to sustainable cost reductions achieved this year, maintenance capital and the current dividend can now be funded with oil in the mid-30s. If oil prices allow, additional funds will be allocated to, one, balanced activity across all of our premium plays, including our new South Texas gas play, Dorado, and the Powder River Basin; two, fund infrastructure investments that further improve our cost structure, increase water reuse and reduce emissions; and three, advance both our domestic and international exploration opportunities. At $40 oil, we can meet all of these priorities while spending within 80% of discretionary cash flow and comfortably funding our dividend.

In late September, we published our 2019 sustainability report that details a number of step-change improvements to our performance on emissions, flaring, water use, and safety. We reduced our total greenhouse gas intensity rate more than 15%, improving emissions efficiency across all significant sources. For the second year in a row, we reduced our methane intensity rate 45%, thanks to an effort to retrofit and remove pneumatic controllers and pumps in the field. We continue to find opportunities to reduce flaring.

Our wellhead gas capture rate improved to 98.8% last year, and we are on track to be over 99% this year. Freshwater volumes used in our operations declined nearly 30% as a result of significant expansion of our water reuse capabilities. And most importantly, our safety rates, both total recordable incidents, and lost time incidents improved significantly. The goal of preparing this report every year is to clearly demonstrate how our ESG efforts are integrated into our strategy, planning, and operations.

In this year's report, we want to step further with our commitments. We established longer-term targets for greenhouse gas and methane rate reductions. We have also set annual goals to reduce emission rates, which are tied to executive compensation. At EOG, our approach to ESG is performance-based.

While we are committed to enhancing disclosure of our policies and metrics that are important to our operations, we evaluate the success of our ESG efforts by performance and performance improvement. And just like every other area of our operations, we drive performance improvement through innovation. New ideas are coming from every corner of the company, driven by passionate employees who are excited about the opportunity to invent new ways to lower emissions, reduce our freshwater use and make a stronger positive impact in the communities where we live and work. Finally, I want to thank our employees for maintaining focus in a volatile year.

We have significantly reduced both well cost and cash unit operating cost. We kept a close eye on our environmental and safety performance. In fact, the trend indicates we will once again improve wellhead gas capture rate and safety rates this year. Constant experimentation, exceptional companywide collaboration, and a no-limits mindset are why I'm confident EOG will continue to lead the industry on performance and technology.

Here's Ken to provide details on our newest play, Dorado.

Ken Boedeker -- Executive Vice President, Exploration and Production

Thanks, Billy. We're excited to announce a major new natural gas discovery in the Western Gulf Coast Basin. Located in South Texas Webb County, we've named this discovery Dorado. With a breakeven cost of less than $1.25 per Mcf, we believe this play represents the lowest cost supply of natural gas in the United States.

We have identified an initial resource potential of 21 Tcf net to EOG in the Austin Chalk and Lower and Upper Eagle Ford formations. Both targets display premium level economics. At Henry Hub prices of $2.50 per Mcf, Dorado competes directly with our premium oil plays. This play is a textbook example of how our exploration program is focused on adding to the top of our premium well inventory, elevating the overall quality of our assets.

We first identified the potential of the Austin Chalk formation as an oil play on top of our Eagle Ford footprint back in 2016. We have since completed about 100 gross Austin Chalk oil wells in that area, capturing 59 million barrels of oil equivalent of reserve potential, net to EOG. Shortly following that discovery, we began evaluating the Austin Chalk formation in the Gulf Coast Basin and identified its potential as a dry natural gas play in Webb County. Our current 163,000 net acre position is a combination of legacy acreage and new acreage captured through low-cost organic leasing, trades, and a bolt-on property acquisition.

We believe our position covers the majority of the sweet spot of the play. We completed our first two wells in Dorado in January of 2019, targeting the Austin Chalk in the Eagle Ford. To further delineate the play and collect more data, we completed 15 more wells over the remainder of 2019. We paused our drilling activity during 2020 to evaluate both the production results and the significant amount of technical data we collected from cores, petrophysical logs, and 3D seismic surveys.

This data, including a year's worth of production history from our drilled wells, has generated a robust reservoir model, giving us confidence in our resource estimates and projections for well performance. We are leveraging our proprietary knowledge built from prior plays to move quickly down the cost curve with our initial development. We currently estimate a finding cost of $0.39 per Mcf in the Austin Chalk and $0.41 in the Eagle Ford. Combined with EOG's low operating costs, an advantaged market position located close to a number of major sales hubs in South Texas, access to pipelines to Mexico, and several LNG export terminals, Dorado is in an ideal position to supply low-cost natural gas into markets with long-term growth potential.

Dorado is dry gas with close proximity to multiple markets. Therefore, we expect Dorado's gas will have a lower carbon footprint than most other onshore gas plays in the U.S. In addition, the recently formed Sustainable Power Group we introduced last quarter is leveraging companywide expertise to build out an operationally efficient and low emissions field. As we expand development of Dorado into a core asset, we expect it will help lower EOG's companywide emissions intensity rate.

In 2021, our preliminary plan is to turn about 15 net wells to sales, with initial development targeting the Austin Chalk. Eagle Ford development, where we are expecting lower drilling and completion costs, will follow. The Eagle Ford utilizes a lower cost wellbore design optimized to a more forgiving drilling environment compared to the Austin Chalk. In addition, we can leverage water and gas gathering infrastructure put in place for the Austin Chalk.

We will evaluate the capital allocation to the South Texas gas play each year based on market conditions. Dorado adds 1,250 net locations on fee acreage to our premium inventory, with 530 of those from the Austin Chalk and 720 from the Eagle Ford. These new premium Dorado locations, along with approximately 150 new locations from other premium plays, make up the 1,400 new net premium locations added in 2020, replacing 3x what we drilled, and more importantly, improving the overall quality of our portfolio. The number of wells in our premium inventory that have returns of 30% or more at $30 oil and $2.50 natural gas has now increased from 4,500 to 6,000 wells.

We also divested the remainder of our Marcellus Shale position during the third quarter for proceeds of about $130 million. The sale of this non-core sub-premium asset will fund much of Dorado's development capital next year and upgrades the quality of our gas portfolio. This is a great example of how EOG's organic exploration strategy and disciplined capital management creates significant shareholder value. Now, I'll turn it over to Bill for concluding remarks.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Ken. In conclusion, I'd like to note the following important takeaways. Number one, EOG continues to significantly lower cost, operating costs, and well costs with sustainable technology and efficiency gains. The company will emerge from the downturn a much lower-cost company.

Number two, our organic exploration effort delivers another significant industry-leading play. We believe EOG's Dorado and natural gas play will be one of the highest margin and lowest emission gas plays in the U.S. Dorado is an example of how our robust exploration portfolio will continue to lower the cost structure and improve the future capital efficiency of the company. Number three, our multiple year outlook is designed to deliver industry-leading financial performance and free cash flow.

It's a balanced strategy that maximizes total shareholder value through the cycle. EOG represents a full-cycle investment opportunity with significant leverage to higher oil prices. Number four, EOG is a leader in innovative initiatives to lower GHG and methane emissions. Every aspect of ESG is embedded in and driven by EOG's talented and return-focused culture.

New ideas are coming from every corner of the company, driven by passionate employees who are excited about making our environment and communities a better place to live. EOG is committed to being a leader in the future of energy. And finally, EOG's third-quarter results demonstrate our unique and sustainable organic business model, whether it's exploration, operations, information technology, or ESG performance. Our culture-driven value creation throughout the company has never been better.

EOG's ability to maximize long-term shareholder value through the cycles has never been stronger. Thanks for listening. Now, we'll go to Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from an Arun Jayaram, pardon me, with JP Morgan. Please go...

Arun Jayaram -- J.P. Morgan -- Analyst

[Audio gap] about your 2021 outlook and how you're thinking about the incremental investments that you highlighted on the slide beyond the $3.4 billion sustaining number. And any preliminary thoughts on mix as it does sound like you'll be shifting some activity among the premium plays to the PRB and Dorado?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Thanks, Arun. I'm going to ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yeah. Good morning, everyone. Just to make sure I understood your question, I guess for the 2021 outlook, our maintenance capital, as we've stated, was about $3.4 billion. We are likely to evaluate.

It's early yet to say what our capital might look like next year, but we'll certainly do the same as we always have. We'll allocate it based on our outlook at oil prices at the beginning of the year, of course. And as we move into that year, we have certainly a lot of flexibility to allocate between our different plays. So as we mentioned in the prepared remarks, we can fund our maintenance capital and our dividend down to oil prices in the mid-30s.

So as we see oil prices moderate, either above that level or wherever they might be, we'll have flexibility to allocate capital to our new play, Dorado and the Powder River Basin, as we explained in our prepared remarks.

Arun Jayaram -- J.P. Morgan -- Analyst

OK. Fair enough. But you did say, Billy, at $40 oil, you could reinvest 80% of -- or have an 80% reinvestment rate and cover the dividend and some of these incremental investments. Is that --

Billy Helms -- Chief Operating Officer

Yes, that's true.

Arun Jayaram -- J.P. Morgan -- Analyst

Is that fair?

Billy Helms -- Chief Operating Officer

Yes. Well, I'm sorry. We missed the first part of your question, so I apologize.

Arun Jayaram -- J.P. Morgan -- Analyst

No problem, no problem. And just my follow-up, maybe for Tim. EOG has historically been pretty conservative on the oil and gas prices that underpin your outlook. So some question from investors on just the rationale for using $50 per barrel.

I know it is a bit longer term but which is quite a bit above the strip. And maybe if you could help sensitize those future growth outlooks, if we assumed, call it, a $40 to $45 WTI-type number?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Arun, this is Bill. Yes, the outlook, $50 is how we ran the model to determine how to optimize the company and what the most important parameters are. But I wouldn't get too hung up on $50.

Whether it's $45 or $50 or $55, the fundamentals of the outlook stay the same. We're focused on returns. The first thing that we have to determine each year are the market fundamentals. Is the market still in an overbalanced situation? If it still is, we don't want to force oil into that situation.

But if it's a balanced market, and it turns out at $45 oil, certainly, we believe the 8% to 10% growth rate, the reinvestment rate of 70% to 80%, the focus on optimizing returns and compounding the growth with operational improvements and margin improvements and maximizing current and future free cash flow and doing all that to maximize the total shareholder value of the company. And so the guidelines really apply to almost any price that would be in a balanced market.

Arun Jayaram -- J.P. Morgan -- Analyst

Great. Thanks, Bill.

Operator

The next question comes from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys. Just wanted to kind of ask a couple of things just surrounding Dorado. If memory serves me correctly, this seems to be kind of EOG's first kind of major foray into a gas play, probably harkening back to sort of the 2003, 2004 time frame, where, I think, you guys made a concerted effort to kind of move more to oil plays based on the macro, which was certainly the right decision over that period of time. Just wanted to get a sense, are you guys sensing that there may be some shifting macro-dynamics on the gas side, which can make the Dorado play something that becomes a lot more meaningful in the years to come? You guys did outline 15 wells for 2021, which in the grand scheme of things, given EOG's size, doesn't seem like a big number.

I just wanted to kind of get your sense on how that can play out over the next few years.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Leo. I think the first thing is we've had a premium price deck. It's based on $40 flat oil and $2.50 flat gas prices. And so any kind of play that would have premium economics, 30% rate of return at those flat prices, that's OK with us.

We're not particular on the commodity, whether it's gas or oil or even a combo play. So that's the first thing. And then the second thing is, yes, we do believe that gas has got a prominent future in the future energy supply. There's no doubt about that.

And this play just happens to be, we believe, one of the best play, the best play, probably dry gas play, onshore U.S. It is a fantastic play, and it's really driven primarily through the extremely high rock quality of the Austin Chalk. And so it fits everything we're looking for in the company. It upgrades our portfolio.

It gives us more exposure to gas going forward. It gives us a lot of optionality in the future to switch capital between types of plays as commodities prices might vary a little bit. But all of it is based on our premium price deck, $40 flat, and $2.50 flat gas, and this one certainly generates super high returns at $2.50 flat gas.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. That's great color. And just focusing on third quarter for a second. It certainly looks like EOG beat production guidance pretty handily, but it did also look like that the shut-ins that you had were actually slightly higher than you projected for the quarter.

So just wanted to get a sense of what kind of drove the better-than-expected third-quarter production performance.

Bill Thomas -- Chairman and Chief Executive Officer

Billy?

Billy Helms -- Chief Operating Officer

Yeah, Leo, this is Billy. So, yes, the outperformance is really driven by, and you touched on it there, the shut-in wells, bringing those back on production. As we brought the wells back on production that had been shut in for some time, we exhibited some amount of flush production from those wells as we've talked about before. And then the second part of that is we did start bringing on a few newly completed wells, and those outperformed our type curves.

So that's really kind of what drove the two parts of our beat on the volumes.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. Thanks for the color.

Operator

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

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. I wanted to ask on the maintenance capital of $3.4 billion. This is the number you've been talking about for the last couple of quarters, and I think you were a bit more upfront.

And I think it was Slide 8 of talking about in an ideal world, some of the potential other additional investments you want to fund. And I wondered if you could kind of quantify what those would represent, the ESG exploration, cost structure improvements, and balancing activity, how much is a normal level of spending there? And then potentially to offset that, I think you've talked in the past that cost savings and efficiencies and cost reductions for the last couple of quarters are not included in the $3.4 billion. What would that represent based on today's cost structure?

Billy Helms -- Chief Operating Officer

Yes. Good morning, Brian. This is Billy. So our $3.4 billion maintenance capital, you're right.

You are correct. It does not anticipate any improvements in our cost structure on a go-forward basis. It's based on our current existing cost. So that's the first thing.

And then as far as the amount of capital over and above that, as we go into the year, I think we're trying to provide a little bit of a framework on how we would think about allocating capital. As we look into next year, based on the outlook for oil prices, we're just looking at merely maintaining our exit rate in the fourth quarter into next year. So if oil prices moderate above or below where they are today, we'll look at how much money we can spend on these types of other projects, the infrastructure or exploration-related activities or ESG-focused projects in relation to what that oil price indicates and stay within our guidance of spending certainly within a 70% to 80% of our discretionary cash flow. So that's kind of the outline, the framework.

So it's a little bit early to speculate on what that magnitude of that dollar might be.

Brian Singer -- Goldman Sachs -- Analyst

Got it. Thanks. And then my follow-up is with regards to the exploration portfolio. And if we look at the plays you've announced in recent quarters, Trinidad and this, the Dorado play, they've been more natural gas-focused.

And I wondered if you could characterize the exploration optimism from here or at least the exploration portfolio from here on oily versus wet gas versus dry gas plays and how you see that playing out over the next year or two.

Ezra Yacob -- Executive Vice President, Exploration and Production

Yes. Brian, this is Ezra. Good morning. Thanks for the question.

I think as Bill highlighted, really, what we start with that exploration program, our focus right now is to find plays where we can capture the sweet spot acreage positions in those plays. And we're looking for plays that are really going to be additive to the front end of our inventory. So as we've talked about -- we've got multiple exploration plays we're currently evaluating. And we just don't want to build a deeper inventory but really strengthen that inventory.

And if we look at what we've done this year, the minimum rate of return on our 11,500 premium well inventory generates a 30% direct after-tax return at $40 oil and $2.50 flat natural gas price. But in this year's program, we've illustrated the significant value of focusing on the top end of our inventory. We've delivered lower well costs and production outperformance and high-grading our investment criteria to focus on the upper half of that inventory. And so said another way, our 60% premium rate of return median well inventory will pay out approximately twice as fast as a 30% rate of return well.

And so our emphasis on organic exploration has always been a key to our success, and it continues to be how we sustainably replace what we drill every year in our inventory. The Austin Chalk announcement today, I think, provides a very good example of what a higher rock quality can do in this exploration effort. The Austin Chalk is really more of a hybrid play, so it shares characteristics of unconventional and conventional reservoirs. And when we apply our technology, our data collection on core and log to really identify the sweet spot landing zones that will react very well to our horizontal completions technology, that's when we really get excited and see the power that these hybrid plays can add.

As we translate that into oil plays, we expect a very good outperformance with these hybrid zones. And we should be able to see a shallowing decline profile and lower finding and development costs as we move forward into those.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

The next question is from Jeanine Wai with Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking my questions. My first question is on the base decline.

I think in the 2022, 2023 outlook, you now anticipate that BOE growth will outpace oil growth. And I think some of that is related to Trinidad and Dorado, but how does the oil base decline trend in your 8% to 10% per year growth rate scenario? And is that level of growth enough to kind of allow the base to moderate?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Hi, Jeanine. I'll ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yes. Good morning, Jeanine. Yes, I think you're correct. The base decline from the oil properties is moderating over time.

That's a function of really the activity levels this year but also the quality of the inventory that we're bringing to production. The better-quality rocks just simply have a lower decline over time. So it's really those two things that are helping to moderate the oil base decline. And certainly, the outlook that we have with our maintenance capital is sufficient to maintain that on a go-forward basis.

Jeanine Wai -- Barclays -- Analyst

OK. Great. That's very helpful. Thank you.

My follow-up question is maybe dovetailing on a few of the other ones about the other capex that is going to be included in the 2021 outlook. So on the potential investments on Slide 8 that you list, we know that the amount of capex will depend on the headroom that you have in oil prices. I think I heard you say that previously. But can you comment on how that 2021 amount might compare to prior years? But I guess, more specifically, how much of that other capex is really embedded in that $50 2022, 2023 outlook? Thank you.

Billy Helms -- Chief Operating Officer

Yes. Jeanine, this is Billy again. You're right. The level of how much we spend on those different categories will certainly depend on the oil price.

And I'd say there is some amount of that baked into the $50 estimate in the outer years, but it's not a major portion of our capital spend. So I'd say it's in keeping with what we've done in the years past.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you very much.

Operator

The next question is from Bob Brackett with Bernstein Research. Please go ahead.

Bob Brackett -- Bernstein Research -- Analyst

Hi. Good morning. You've gone quite down dip in Dorado. And those 9,000-foot laterals imply some of these wells are approaching 4 miles measured depth, and so it seems cost control is absolutely critical.

Is there some innovation there to share with us?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Bob, I'm going to ask Ken to comment on that.

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah, Bob, this is Ken. We have a significant history of developing the Austin Chalk in addition to the Eagle Ford, up-dip in the oil window. So we've also had 17 wells that we've drilled in that area that have provided excellent results. And we haven't had many drilling issues or completion issues to deal with.

So keeping the costs in those areas are anticipated to be what we've shown right now in our 2021 program. So it looks like we have a very, very good confidence that we'll be able to generate those returns we've shown that are competitive with our other premium oil plays at $2.50.

Bob Brackett -- Bernstein Research -- Analyst

So I'll do a combo follow-up. So it's not sort of managed pressure drilling, say, like the Powder River. And then my follow-up would be, you mentioned domestic and international exploration activities in that seriatim that people keep referring to. Could you remind us of what is included in the international bucket?

Ezra Yacob -- Executive Vice President, Exploration and Production

Yes. Bob, this is Ezra. On the international front, I'd highlight, we did just recently wrap up our recent drilling campaign in Trinidad with some additional outstanding results. We highlighted some of the discoveries on the last call.

But I'd follow-up and say our most recent completion, a well off the Oilbird platform came on in the third quarter at over 60 million cubic feet a day of natural gas with an additional 2,500 barrels of condensate per day. We brought on a well off of our Kitscoty platform that's cleaning up right now, its flowback rates of approximately 30 million cubic feet per day of gas. And so we continue to be excited about the discoveries that we made during this campaign and look forward to sharing future results from this high-return asset. And then also during the third quarter, we entered into the country of Oman with the acquisition of about 4.6 million net acres in Block 36.

Block 36 is in the southwest portion of the country. It's located in the Rub Al Khali basin, which is a well-known hydrocarbon-bearing basin. And we've been looking really outside the U.S. for the right opportunity to apply our expertise in tight oil development, and we view Oman is really offering that.

They offer a very low geopolitical risk, and they offer access to competitively priced oilfield services and equipment that we think is going to be required to make tight oil successful. And so as part of the agreement, we plan to drill two test wells in the next two years to evaluate the potential of the acreage. And we're very excited about the low cost of entry in Oman and the option to evaluate a basin with significant potential upside. And I think maybe Ken could add some color in addition to that.

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah. I wanted to clarify something, Bob. When you talked about managed pressure drilling like the Powder River Basin, we are doing managed pressure drilling like the Powder River Basin in Dorado, but we have a significant amount of experience doing that across several plays in the company.

Bob Brackett -- Bernstein Research -- Analyst

Great. Thanks for all that.

Operator

The next question comes from Subash Chandra with Northland Securities. Please go ahead.

Subash Chandra -- Northland Securities -- Analyst

Yeah. Hi, everybody. Just doing some, I guess, bar napkin math using your decline rates and the dollar for flowing capital efficiency calculation. I'm coming up with, I don't know, maybe around $5 billion for what capex requirements are for 10%-type oil growth.

Do you think I'm in the right ballpark there?

Billy Helms -- Chief Operating Officer

Yeah, Subash, this is Billy Helms. It's a little premature to maybe give out a directional number, but I think you can approximate. With the data we've given you, I think you can derive some pretty close estimates. I'd say you're probably not too far off the right numbers.

Subash Chandra -- Northland Securities -- Analyst

OK. Great. Thanks. And then secondly, just on dividend decision.

I guess the next one comes up early part of the new year. I'm just curious, the $3 billion in cash, you talked about having the right balance sheet cushion to ride out the cycles. From a cash perspective, is there a right number that we should be assuming? And should we also assume that the cash does not go into the dividend decision, that the dividend decision is just derived from operating cash flows or free cash flows?

Tim Driggers -- Chief Financial Officer

This is Tim. And you're exactly right. It is the operating cash flows that determines a sustained dividend. As far as the $3 billion in cash, we do have a bond coming due in February.

And currently, we are anticipating being able to pay that bond off with that cash, but we have significant flexibility if the market changes to do whatever we need to do. So we're in a good position to manage that situation.

Subash Chandra -- Northland Securities -- Analyst

OK. And to ask it a different way, should we assume some sort of minimum cash that you'd want to keep on the balance sheet?

Tim Driggers -- Chief Financial Officer

Again, we evaluate it depending on the conditions at the time. So to give you a number, there's not a number I can give you. It all depends on what the stock -- I mean, the price of the commodities are at the time as to how much cash we need to have on the balance sheet and also what our budget is, our capital budget, and how much capital we'll be spending.

Subash Chandra -- Northland Securities -- Analyst

OK. Great. Thank you.

Operator

The next question is from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng -- Scotiabank -- Analyst

Hi. Thank you. Good morning. Just curious that when you look at the three-year outlook for your capital allocation and the growth target or that the maximum growth ceiling, should we assume that that's also applied for the longer term? And if not, is there any reason that the same will not be applied?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Paul, I think three years with those parameters are a good guide. We did not include any additional well cost, operational cost advancements in those projections. So certainly, we expect to continue to do that.

We have a very sustainable model of being able to do that. So as time goes on, and certainly, in three years, we expect we'll be a lot better company. So I wouldn't just apply those numbers to what we could do four years from now. I think we're hopeful.

Through these exploration efforts, getting better rock, and continuing to reduce our costs, we should be a much better company.

Paul Cheng -- Scotiabank -- Analyst

Well, I'm sure that the company will be operationally much stronger. I'm more referring to that is the ceiling of 10% growth is a variable over the longer term or that is only applied for the next two or three years?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. I think right now, it's just for the next two or three years. We'll just have to evaluate where the company is in the four or five years from now and see where we are.

Paul Cheng -- Scotiabank -- Analyst

And then my second question is whether it's the Dorado or that your overall capex spending, certainly, that the price signal is important. But with the future strip moving quite substantially from one day to another, so that's probably not a very good indicator or at least, let's say, a forecast vehicle. So what are the factors that you guys are using maybe that's more determinating how you decide on your program for a particular year if the price signal from the future market are unreliable there as we can see?

Bill Thomas -- Chairman and Chief Executive Officer

Yes. Paul, I think the first thing is what's the price based on, and that's whether we're in an overbalanced market situation or a balanced market. And we believe there's significant structural changes, obviously, have been going on in the business, particularly in the U.S. with a lot more capital discipline, a lot more return of cash to shareholders.

They need to work on balance sheet, consolidation, etc. In the international arena, there's been folks that have basically changed their business philosophy, and they're certainly not going to be investing as much in oil in the future. So there's a lot of things that go on in there. And all that leads to -- in the future, certainly, we believe OPEC will be the swing producer, really, totally in control of oil prices.

So we want to take that in consideration and make sure that the market is balanced. And we've taken all that in consideration as we formulate our plans.

Paul Cheng -- Scotiabank -- Analyst

Thanks.

Operator

The next question is from Doug Leggate with Bank of America. Please go ahead.

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

Thank you. Good morning, everyone. Bill, I'm really just looking for a little clarification on a couple of the things you've announced today. First of all, the beginning of the year, you talked about your cash breakeven being around $40.

Second quarter, you said it was a little less than $40. Now, it's dropped to the mid-30s. Can you tell us what's changed there, given that the sustaining capital is still $3.4 billion?

Bill Thomas -- Chairman and Chief Executive Officer

I'll ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yes. Good morning, Doug. It's really the cost structure of the company continues to improve. We continue to drive down our well cost.

As I mentioned earlier, we've already achieved our 12% cost reduction that we expected throughout the year. And then our unit costs, we've driven down our unit operating costs quite substantially this year. So those combination of things is allowing us to continue to reduce that breakeven cost.

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

Is the gas price a factor, Billy?

Billy Helms -- Chief Operating Officer

No, sir, it's really not. It's really driven mainly by the cost reductions, the structural changes we've made and the cost reductions of the company.

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

OK. My follow-up is really, Bill, I hate to do it, but go back to the 10% growth number. I know you've been asked a lot about it today. But I want to put a hypothetical to you.

So let's assume oil is $50, but it's only there because Saudi is still -- or OPEC+ has still got 7 million barrels off the market. That's not exactly a balanced market. So what does EOG do in that scenario?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Doug, that's exactly right. We would not want to force oil into that kind of situation. We don't want to put OPEC in a situation where they feel threatened like we're taking market share while they're propping up oil prices. So that much commitment by them, that's not a time we would force oil.

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

That's the clarity I was looking for. Thanks so much, guys. I appreciate it.

Operator

The next question is from Paul Sankey with Sankey Research. Please go ahead.

Paul Sankey -- Sankey Research -- Independent Analyst

Thank you. Good morning, everyone. Guys, could you -- on the Dorado, could you give us an activity and volume outlook to help us with valuation? And given it's an organic success, could you just talk a bit about your perspective on the consolidation that we've seen in the sector from EOG's point of view? Thanks.

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah. Paul, this is Ken. On Dorado's volume and activity outlook, it's a little early to give any volume outlook for 2021 or the future years. We have talked about a 15-well program in 2021 that we should be bringing on some gas early in the year and then toward the second half of the year from there.

As far as M&A...

Billy Helms -- Chief Operating Officer

Yeah. Paul, this is Billy. I'll touch maybe on the M&A question. I think certainly, I think the industry needed to go through some M&A, some consolidation in the space.

And I think we're certainly supportive of what we've seen so far. For EOG, we've looked at just about every possible combination that's out there. And we certainly understand the financial uplift or the accretion that you might get from a corporate M&A, but we look at that more as a one-time event. And we're really looking -- for us to be entering that market, we would look at the longer-term impact that a possible M&A would have on our current inventory.

And so we look at the inventory that a company might have in comparison to the inventory we already have or what we're seeing in our exploration program, and we just don't see anything that we need to allocate any funds to at this point in time. Nothing that really meets our objectives. And I guess it just stems from the fact we have such a high level of confidence in our current exploration program, which is mainly aimed at improving the quality of our premium inventory.

Paul Sankey -- Sankey Research -- Independent Analyst

Thought you might say that, Billy. The follow-up is you've adjusted your framework somewhat here. Could you just talk about your philosophy on hedging the latest -- if anything's changed regarding how you think about hedging? And I'll leave it there. Thank you.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Paul, thanks. Yeah, we haven't changed our philosophy there. We're always opportunistic.

We have a very robust rigorous commodity analysis, macro view. We're working all the time. It's quite a rigorous process. So we believe we're not always right, but we believe we've got a pretty good idea where oil prices are headed.

So we'll just stay opportunistic on that. And same thing with gas prices.

Paul Sankey -- Sankey Research -- Independent Analyst

So you're less hedged right now?

Bill Thomas -- Chairman and Chief Executive Officer

Sorry, what was the question? I'm sorry. I missed it.

Paul Sankey -- Sankey Research -- Independent Analyst

Which is to say that you're less hedged right now?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, that's right. We're not hedged on oil.

Paul Sankey -- Sankey Research -- Independent Analyst

OK. Thank you.

Operator

The next question is from Charles Meade with Johnson Rice. Please go ahead.

Charles Meade -- Johnson Rice -- Analyst

Good morning, Bill, to you and your whole team there. I just wanted to ask a question, kind of pull on the thread about this Dorado play you have. The Austin Chalk, the D&C cost you put for the Austin Chalk is a little higher, I believe, than the Eagle Ford. And I'm just kind of wondering what's the driver of that? Is the Austin Chalk in a -- is it perspective in a deeper session? Or is the lateral a little slower to drill? Or is that a relevant piece of the puzzle? And what does it point to?

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah. Charles, this is Ken. We just see a little bit harder drilling conditions when we're drilling the Austin Chalk compared to the Eagle Ford, so we've added in additional cost for that at this point. We always work on lowering our cost basis, and you can see that on every one of our plays.

So we anticipate that we'll be able to lower the cost in Dorado, as well as we drill some additional wells in that play.

Charles Meade -- Johnson Rice -- Analyst

Got it. Thank you. And then as a follow-up, I wanted to touch on the Delaware Basin. It's still a big driver for you guys, obviously.

Are you guys seeing anything different? Or do you expect to see anything different either in the operating environment out there or the opportunity set to continue to add out there?

Billy Helms -- Chief Operating Officer

Yeah. Charles, this is Billy. Really, nothing's changed except our continuous improvement we're seeing in the well performance and the cost structure of our Delaware Basin plays. We're extremely proud of the team we have there and the improvements they continue to make.

We haven't really changed a lot as far as the well spacing or anything like that, that a lot of other companies talk about. I think we continue to make improvements in the way we drill and complete the wells. And I think we're delivering a lot more consistent results as a result of that. So we're extremely confident in our ability to continue to execute that program and deliver superior results.

We are continuing to have success in blocking up acreage through trades, and we've been doing that really for many years. So I don't expect that's going to continue to change. But outside of that, that's kind of what we see.

Charles Meade -- Johnson Rice -- Analyst

Great. Thanks a lot.

Operator

At this time, the question-and-answer session is concluded. I will turn the conference over now to Bill Thomas, chairman and CEO, for concluding remarks.

Bill Thomas -- Chairman and Chief Executive Officer

Yes. In closing, I'd just like to say, we cannot be more proud of our EOG employees. Our third-quarter results were outstanding, thanks to everyone in the company. The culture of EOG is performing better than ever, and our ability and commitment to creating long-term shareholder value has never been stronger.

Thanks for listening, and thanks for your support.

Operator

[Operator signoff]

Duration: 77 minutes

Call participants:

Tim Driggers -- Chief Financial Officer

Bill Thomas -- Chairman and Chief Executive Officer

Billy Helms -- Chief Operating Officer

Ken Boedeker -- Executive Vice President, Exploration and Production

Arun Jayaram -- J.P. Morgan -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Ezra Yacob -- Executive Vice President, Exploration and Production

Jeanine Wai -- Barclays -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Subash Chandra -- Northland Securities -- Analyst

Paul Cheng -- Scotiabank -- Analyst

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

Paul Sankey -- Sankey Research -- Independent Analyst

Charles Meade -- Johnson Rice -- Analyst

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