EOG Resources (EOG) Q1 2021 Earnings Call Transcript

EOG Resources (EOG 0.35%)
Q1 2021 Earnings Call
May 07, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to EOG Resources' first-quarter 2021 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.

Tim Driggers -- Chief Financial Officer

Good morning and thanks for joining us. We hope everyone has seen the press release announcing first-quarter 2021 earnings and operational results. This conference call includes forward-looking statements. The risk associated with forwarding-looking statements have been outlined in our 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 to 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; Ezra Yacob, president; Ken Boedeker, EVP, exploration and production; Lance Terveen, senior VP marketing; and David Streit, VP, investor and public relations. Here is Bill Thomas.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Tim, and good morning, everyone. EOG is delivering on our free cash flow priorities and our strategy to maximize long-term shareholder value. Yesterday, we declared a $1 per share special dividend to demonstrate our commitment to returning cash to shareholders. Combined with a regular dividend, we expect to return $1.5 billion to our shareholders through dividends in 2021.

Double premium, well productivity, and cost reductions are substantially improving our returns and increasing our ability to generate significant free cash flow. In order to maximize long-term shareholder value, we will remain flexible as we carry out our free cash flow priorities in the future. By doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they've ever been. This quarter, we generated a quarterly record $1.1 billion of free cash flow and earned $1.62 per share of adjusted net income, the second-highest quarterly earnings in company history.

In addition, our balance sheet is in superior shape with a peer-leading low-net-debt-to-cap ratio. Next, Ezra will review our capital allocation strategy in more detail, Billy will go over our operational performance, and Tim will cover our financial performance before I make a few closing remarks. And here's Ezra.

Ezra Yacob -- President

Thanks, Bill. Yesterday's dividend announcement is just the latest in a long line of achievements that demonstrate the value of EOG's fundamental strategy of returns-driven capital allocation, including the impact of permanently raising our investment return hurdle rate for the second time in five years. In 2016, during the last downturn, we established our premium investment strategy which requires a 30% direct after-tax rate of return at $40 oil and $2.50 natural gas. The premium investment strategy drove a step-change in our capital efficiency and resulting financial performance.

It is the reason we entered 2020 in a position of operational and financial strength, which enabled us to generate positive adjusted net income and free cash flow in a year of unprecedented oil volatility and prices that averaged just $39. This year, we increased the return hurdle once again, doubling it to 60% at $40 oil and $2.50 natural gas. Sustainable improvements in our inventory of drilling locations and continued progress in exploration have paved the transition of double premium. The data driving our confidence to make this move is illustrated on Slide 6 of our investor presentation, which details the return profile of every drilling location.

Half our current inventory earns at least two times the premium return hurdle rate we established back in 2016. 5,700 double-premium locations is more than 10 years' worth of inventory at our current pace of drilling and is more than we had when we made the transition of premium five years ago. Just like we did with our premium inventory, we are confident we can replace our double-premium locations faster than we drill them through line of sight and through additional cost reductions that will increase the returns of existing inventory, and through exploration. A number of innovations which Billy will discuss in a moment are being piloted across our operating areas and will sustainably drive down both well costs and operating costs as we implement them throughout the company.

Our exploration program is focused exclusively on prospects that will improve on that 60% median return. In fact, our anticipated return on the current slate of new exploration plays is more than 80%. To see the impact of our premium returns-focused capital allocation strategy, a closer look at our corporate financial performance is required. As we replace our production base by drilling locations with higher well level returns, the price required to earn 10% return on capital employed continues to fall.

Prior to establishing premium, EOG required oil prices upwards of $80 to earn a 10% ROCE. As the premium strategy matured, the oil price needed to earn 10% ROCE came down and averaged just $58 the last four years. This trend is illustrated on Slide 9 of our investor presentation. For 2021, that price is just $50 and we're not stopping there.

We expect it will continue to fall as our well level returns improve. The impact of reinvesting at higher returns is also showing up in our free cash flow performance. We more than doubled the dividend over the last four years and improved our balance sheet, reducing net debt by nearly $3. As a result, net debt to total capital at the end of last year was just 11%.

But our future financial performance potential is the real prize. Our first-quarter results are a preview of what we are aiming for. Over the coming years, we expect reinvesting in our current inventory of high-return wells will continue to lower the corporate decline rate and compound the value of our low-cost operating structure. The result leads to higher margins and generates even more free cash flow, providing us tremendous opportunity to create long-term shareholder value.

We believe when we look back in a few years, it will be viewed as the catalyst for another step-change improvement in EOG's financial performance. Our fundamental strategy of returns-driven capital allocation remains consistent, and consistency is key. Prioritizing reinvestment in high-return projects is the driver behind the steady improvements we've made year after year. As a result, we are now in a position to follow through on our commitment to return additional free cash flow to shareholders.

Looking ahead, you can expect our priorities to remain consistent. Investing in high returns, generating significant free cash flow to support a sustainable and growing dividend while maintaining a strong balance sheet, followed by opportunistic return of additional free cash flow to investors, and bolt-on acquisitions. Now, here's Billy.

Billy Helms -- Chief Operating Officer

Thanks, Ezra. The first quarter of the year was about execution. We exceeded our oil target, producing more than the high end of our guidance range because wells that were offline due to the winter storm Uri recovered a bit faster than expected. As a result, our first-quarter daily production declined just 3% compared to the fourth quarter last year.

Our capital for the quarter came in under our forecasted target by 6%, mainly due to improvements in well costs across the company. The savings realized during the first quarter are in addition to the tremendous 15% reduction last year. EOG is on track to reduce well costs another 5% this year despite some potential inflationary pressure as industry activity resumes. Similar to previous quarters, these results are driven through innovation and efficiency gains in each phase of our operation.

A closer look at our operations will help explain why we are confident we can once again lower well costs. Our drilling teams are consistently achieving targeted depths faster with lower cost. The constant focus on daily performance and reliability of the tools and technical procedures is creating this continual drive toward lower cost. Some of the benefits this year stem from larger groups of wells per pad simply requiring less rig move cost per well and increasing efficiencies like offline cementing.

The larger well pads also complement our completion operations through the increased ability to utilize the technique we call super zipper. We began our initial experiments with this technique back in 2019 and it has since advanced to consistently deliver the expected well results at lower cost. We have also learned that super zipper is particularly well-suited to optimize the efficiencies of our five electric frac fleets. However, conventional spreads gain efficiencies as well.

This practice involves using a single spread of pressure pumping equipment to complete four more wells on a single pad. We split the equipment's capacity in half, simultaneously pumping on two wells while conducting wireline operations on the remaining wells. We piloted and perfected as zip-a-zipper logistics in our Eagle Ford play, and the collaboration between operating areas has accelerated its adoption throughout the company. And in cases where a minimum of four wells cannot be physically be located on a single pad, the engineering teams are working to develop new techniques where we can still utilize this improved completion practice.

Completion costs are also benefiting from reduced sand and water costs through our integrated self-sourcing efforts. The savings we realized by installing water-reuse pipelines and facilities saves about 7% of well costs compared to third-party sourcing and disposal. Longer term, we expect water reuse and disposal infrastructure will continue to lower lease operating expense in each area as well. Lease operating expenses also benefited from lessons learned through the pandemic this last year.

The number of wells one lease operator can maintain has increased by as much as 80% by optimizing the use of innovative software designed and built by EOG. The software prioritized lease operator activity throughout the day using our mobile and real-time software infrastructure. Our experience last year inspired a number of new ideas to further high-grade the lease operator's work activity throughout the day, which we believe may continue to expand productivity in a -- in day-to-day field operations. Slide 35 of our investor presentation illustrates the consistent progress we have made year after year on productivity, all powered by innovative ideas, generated bottom-up by employees.

Each of our operating -- active operating areas functions as an individual incubator to test out new ideas, many of which have -- are a homegrown innovation from EOG employees and rolled out companywide if successful. That's one of the primary reasons our well-cost improvements every year are never one silver bullet, but a list of small to medium-sized individual improvements across all elements of total well costs that result in sustainable cost reduction. As a result of the innovation spreading throughout the company to reduce capital and operating costs, I have strong confidence that the cost structure and capital efficiency of the company will continue to improve. Here's Tim to review our financial position.

Tim Driggers -- Chief Financial Officer

Thanks, Billy. Yesterday's special dividend announcement marks another milestone in the growth of EOG's profitability and cash flow. We achieved this milestone through the disciplined execution of a consistent, long-term, return-focused strategy for capital allocation, supported by a strong balance sheet. Over time, this strategy has produced increasing amounts of free cash flow.

The top priorities for the allocation of that free cash flow remain sustainable dividend growth and debt reduction. The shift to premium in 2016 drove a significant improvement in returns, profit margins, and cost, enabling the significant increase in dividend over the last four years. Since 2017, the dividend has grown from $0.67 per share to a $1.65 per share. Now, an annual commitment of almost $1 billion.

Going forward, our goal is to continue growing the regular dividend. We have never called for suspending the dividend and we remain committed to its sustainability. With the shift to double premium, we're now focused on making another step-change improvement, and the results of those efforts will guide future common dividend increases and the potential for special dividends. Since the shift to premium, we have also retired bond maturities totaling about $2 billion with plans to retire another $1.25 billion in 2023 when the bond matures.

Net debt to total capitalization was 8% at the end of the first quarter. A strong balance sheet with low debt has been at the heart of EOG's strategy throughout our existence. It's not just conservatism, it's about creating a strategic advantage. Our superior balance sheet enables us to acquire high-return assets at bottom-of-cycle prices where their exploration acreage like the Eagle Ford or for the new plays we're working on today, bolt-on acquisitions, our companies like the -- like Yates acquisition five years ago.

A strong balance sheet also gives us the financial strength to be a partner of choice in our operations, whether it is with marketing or export agreements, service providers, or even other companies in other countries unlocking new plays. Strong balance sheet extends to ensuring ample liquidity, which we have also secured with no near-term debt maturities, $3.4 billion of cash on hand, and a $2 billion unsecured line of credit. Now, EOG is positioned to address other free cash flow priorities by returning additional cash to shareholders. The $1 per share special dividend falls through -- these consistent long-tailed priorities.

At $600 million, the special dividend is a meaningful amount while also aligning with our other priorities. After paying the special dividend, we will have $2.8 billion of cash on hand, a full $800 million above our minimum cash target. This is a healthy down payment on the $1.25 billion bond maturing in two years. Going forward, our free cash flow priorities remain unchanged.

We'll continue to monitor the cash position of the company, oil and gas prices, and of course, our own financial performance. As excess cash becomes available in the future, we will evaluate further special dividends, or at the right time, opportunistic share repurchases or low-cost bolt-on property acquisitions. I think it goes without saying you should expect us to avoid expensive corporate M&A. You can count on EOG to continue following our consistent strategy to maximize long-term shareholder value.

Now, here is Bill to wrap up.

Bill Thomas -- Chairman and Chief Executive Officer

Thanks, Tim. In conclusion, I would like to note the following important takeaways. First, true to the EOG culture, our employees have fully embraced doubling our investment hurdle rate. As we drill more double premium wells, we expect our performance will continue to improve.

Our decline rate will flatten, our break-even oil price will decline, our margins will expand, and the potential for free cash flow will increase substantially. Second, while our new double premium hurdle rate alone will drive significant improvement, it represents just one source: we never quit coming up with new ways to increase productivity and lower cost. Innovative new ideas and improved technology are developing throughout the company at a rapid pace and will continue to result in even higher returns in the future. And finally, our special dividend this quarter, we are demonstrating our commitment to generating significant free cash flow and using that free cash to improve total shareholder returns.

We are more excited than ever about the future of EOG and our ability to deliver and maximize long-term shareholder value. Thanks for listening. And now, we'll go to Q&A.

Questions & Answers:

Operator

Thank you. The question-and-answer session will be conducted electronically. [Operator instructions] Questions are limited to one question and one follow-up question. We will take as many questions as time permits.

[Operator instructions] And the first question comes from Scott Gruber of Citigroup. Please go ahead.

Scott Gruber -- Citi -- Analyst

Yes, good morning.

Bill Thomas -- Chairman and Chief Executive Officer

Hello, Scott.

Scott Gruber -- Citi -- Analyst

So, the most common question we receive I know you touched on it a bit in the prepared remarks which is the framework, you know, that you guys use to determine that -- the $1 special dividend was the right amount, now is the right time, can you just elaborate on that a little bit more, you know, around the framework and the timing? You know, obviously, folks are trying to get a sense of whether the special dividend can repeat in the future.

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Scott. You know, certainly, we're demonstrating our commitment to our shareholders by returning a significant amount of cars back to them. And as you know, the $1 per share, you know, I think is a very significant number and large enough to be very meaningful. And I'm going to ask Tim to kind of go through, you know, some of the -- some of the numbers to give you a little bit of the background on the reason that we picked this number.

Tim Driggers -- Chief Financial Officer

Thanks, Bill. So, going back to our priorities over time, it's consistent within our priorities. If you look back, our regular dividend has increased 146% since 2017. That's one of our highest priorities.

We reduced that by $2.1 billion. So, that set us up to be in a position to now return more cash to the shareholders. When you look at our cash position, we were sitting at $3.4 billion of cash. So, returning $600 million at this point in time as Bill pointed out is a significant amount and it follows through on our long herd -- long-held plan to return cash to the shareholders.

So, it's simply following through on what we've been committed to for a long time.

Bill Thomas -- Chairman and Chief Executive Officer

You know, I want to add, Scott, you know, going forward, you know, our free cash flow priorities and framework haven't changed. And so, you have to put that special dividend in context with our total framework. And just a reminder, we've already said this but our first priority is sustainable dividend growth. We believe that a regular dividend is absolutely the best way to give cash back to shareholders and we certainly are working on that, and have worked to get a great history of doing that.

And then the next one is debt reduction and we've got a little work left to do with that as Tim noted in his opening remarks. Our next options are the special dividend. And certainly, in favorable times like we have right now, those are the things that we are doing. And then we'll -- also, we want to keep in mind, you know, the potential for opportunistic share repurchases in downturns, counter-cyclic opportunities in share repurchases.

And then after that, you know, we also want to be able to consider high-return, bolt-on acquisitions. And these are acquisitions that go in our best operating areas, obviously, where we've got a lot of synergy and a lot of ability to move quickly and drill wells. And some of them could be in our new exploration plays where we can capture a very high-potential acreage at a very low cost. And so, we'll just continue to evaluate all these options and work with this framework, and we'll evaluate the best use of cash on a quarter-on-quarter basis.

We're in a dynamic business environment all the time, so it's important to have the flexibility to use the cash in a way that creates the most shareholder value.

Scott Gruber -- Citi -- Analyst

Got it. And then my follow-up relates to the growth strategy in '22 and beyond. You know, if the oil markets have healed next year and you guys have been very explicit around the fact that you're looking at, and you laid out the 8% to 10% growth cadence on your last call, but there seems to be some discussion around -- now around, you know, the potential for a middle ground if you will. Maybe some growth cadence below that 8% to 10%.

So, I just want to hear your latest thoughts around 2022, you know, if the oil markets have healed and it's time to grow again, what is the right growth cadence? You know, what factors are you looking at to determine that rate of growth if the markets have healed. You know, and is there a middle ground, you know, somewhere between 0% and 8% to 10%, or is it just, you know, if it's time to grow, we're going to grow at 8% to 10%?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Thanks, Scott, for that question. We want to make sure we're really clear on that and I think we have. You know, we're not going to grow until, you know, demand is recovered to pre-COVID levels, which is -- it's on the way to do that.

I think everybody can see that. And we want to make sure that obviously, world inventories, U.S. inventories are below the five-year average. And then we're looking for spare capacity to be certainly a lot lower than it is right now.

And that just means, you know, not a lot of oil shut in to you -- to mass supply and demand. And every year, the market factors, you know, that year -- going into that year will determine our plans. And so, we want to be flexible and we want to be able to, and we will modify our growth plans to fit those market conditions. If we need to grow at a lower rate or no growth at all like we're doing this year, you know, whatever that right growth plan is, whatever fits the market conditions, that's what we want to do.

Above all everything else, we are committed to staying very disciplined and not forcing oil into a market that's not ready.

Scott Gruber -- Citi -- Analyst

Got it. Thank you. Appreciate the color.

Operator

The next question comes from Arun Jayaram of J.P. Morgan. Please go ahead.

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

Yeah. I guess my first question is kind of the dovetail on the special dividend talk. You know, Bill, this year, you've guided to $3.4 billion in free cash flow, you know, $1.5 billion for dividends, another $750 million for the debt you've already paid down. So, that leaves a little bit more than $1.1 billion of free cash flow and I know you're above your, you know, minimal cash targets.

So, I guess the question is how are you gauging, you know, the market for bolt-ons versus, you know, potentially if the oil price, you know, holds up here in terms of -- in looking at -- in more cash return this year?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Thanks, Arun. You know, we take the -- we evaluate, you know, where we are every quarter. You know, I can't give you any specific on anything, but we evaluate where we are every quarter and we're constantly looking at bolt-on potential and evaluating that.

So, we want to make sure we leave room to fully consider that, something that would make a very significant difference in the future of the company upgrade. You know, our, you know, our high-quality premium, double premium inventory. We want to do that. So, you know, we're very fortunate and we've got a lot of cash, and we've got a lot of hopefully, we believe a lot of cash coming.

So, that's a lot of great opportunities for us to consider, you know, additional special dividends, bolt-on acquisitions, etc. And we keep in mind, you know, as Tim talked about, we want to keep in mind our debt reduction targets in a year and then -- excuse me, in 2023, and also be able to, you know, continue to think about growing our regular dividend. So, we'll just keep all those in the proper framework and, you know, you just need to know that we're committed to doing the right thing at the right time for the shareholders, you know, to maximize total shareholder value.

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

Great. And my follow-up, Bill, you cited this as being, you know, the company's, you know, best free cash flow quarter in history. But I want to see if you could provide a little bit more detail on how the unique pricing conditions for natural gas given winter storm Uri, some of your leverage to JK, and how that contributed to the free cash flow, you know, how would you call that out? I know there's some incremental costs, but what was the puts and take on on the gas price this quarter?

Bill Thomas -- Chairman and Chief Executive Officer

I'm going to ask Tim to give some details on that. But just to -- before I turn it over to Tim, you need -- everybody needs to know that the special dividend has nothing to do with the storm and the natural gas process. So, Tim, do you want to give some detail.

Tim Driggers -- Chief Financial Officer

Sure. When you boil everything down, the effects of Uri was about $40 million to cash flow and net income in the quarter. Obviously, there are big components in there but that's the bottom line. It was very immaterial to our cash flow or net income.

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

OK. Great. Thanks a lot.

Operator

The next question comes from Scott Hanold of RBC Capital Markets. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Thanks. First and foremost, I want to, you know, I appreciate your very direct commentary on your desire not to grow and, you know, what the plan is. So, hopefully, that does clear the air a bit. You know, what I'm wondering is strategically, if we do stay in sort of the current environment, you know, whether it's '22 or even beyond, you all do build a lot of free cash flow.

I mean, you know, we're talking with something, you know, around $3 billion even after your base dividend annually. Do you all see if there is a benefit into setting up a more predictable return to cash -- cash return to shareholders, you know, like some of the -- your other peers did? Do you think there's a benefit to that predictability or would you rather see that more opportunistic?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Scott, you know, we -- we're always in a very dynamic business environment. So, it's important, you know, we believe to have the flexibility to use the cash in a way that creates the most shareholder value. You know, we're -- the -- one of the reasons we don't -- the biggest reason we don't want to get into a strict formula because we don't want to be put in a position to where we're growing oil say at 5% when the market clearly does not need more oil. So, we want to be in a position where we can do the right thing at the right time, and to maximize the use of the cash in our plan to maximize shareholder value.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. Thank you for that. And my next question, maybe this one's for Ezra. You know, you all talked about, you know, shifting to double premium that's generated know significant increases to EURs, and Page 8 shows just a massive uptick.

Do you all have any color on, you know, how much of that is organic versus mix shift? I would assume the shift to relatively more Permian has, you know, relative to say Eagle Ford has buys that upward. But do you have a sense on, you know, how much is mix shift versus organic?

Ezra Yacob -- President

Yes, Scott. Thanks for the question this is Ezra. Yeah, definitely in the Permian we have a higher percentage of those 5,700 double-premium locations are located in the Permian. But part of that is simply just because we have so many targets captured there in the Delaware Basin.

What I would say is we have a fairly wide variety and fairly distributed variety of double-premium wells across our entire portfolio, including the Eagle Ford, the recently announced Austin Chalk Dorado play, and the Powder River Basin as well.

Operator

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

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

Thank you. Good morning, everyone. I apologize I was just taking you off my headset. Bill or Ezra, I wonder if I could press on Scott's point.

I'm afraid I'm not quite where Scott says in thinking this draws a line under the growth story. So, my question is really simple. You currently have one of the lowest free cash flow yields in the sector or arguably a reflection of your share price. But my point is that everyone has got the capacity to spend more money.

What happens to your 10% return at $50 oil if the whole industry follows your lead and goes back to a 10% growth rate?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Doug, I want to make it really clear. We're not stuck on 10% growth rate or 8% growth rate. We are totally focused on making sure we do the right thing at the right time. So, we -- the oil price does not guide how much we're going to grow, it's the market fundamentals.

And so, we're really focused on that. We've laid out, I think, a strong set of fundamentals that we're focused on and we will adjust our plan each year, which means our growth plan each year, to those market fundamentals. And maybe certainly, we -- next year, that we don't grow at all or we may grow at 4% or 5%. We'll just have to see what the market fundamentals show.

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

That's actually a great answer, Bill. It's not set in stone is going to of what I was really trying to get to. My follow-up is Ezra, very quickly, 10 years of inventory, double premium at the current pace, if you do choose to grow back to growth, one assumes that 10 years shrink some. So, can you talk about the sustainability and how that plays into, again, the, you know, how you think about that activity level? And I'll leave it there.

Thanks.

Ezra Yacob -- President

Yes, Doug. That's a good question. Similarly, as we've done over the past few years, you know, we're consistently focused on getting better year after year. And so, by driving down well costs through sustainable well cost reductions, some of which Billy spoke to in opening remarks, but also through applying technology and innovations to increase the well productivity gains.

We're able to convert some of our existing inventory every year into that double-premium metric. In addition to that, we have two other avenues, the first which Bill has touched on is bolt-on new acreage acquisition opportunities in areas of pre-existing development. But then also our exploration effort. And as I talked about in the opening comments, you know, our exploration effort is really focused on, again, making another step-change to our current inventory.

It's focused on adding low-decline, high-impact plays that really increase the overall return profile of the company. And again, here, you know, regardless of any growth rate, when you're reinvesting in higher-return opportunities and adding lower-cost reserves to your company, you're really, you know, driving down the cost base of the company year after year. And that's essentially what translates into our corporate financials and allows us to lower that price required for a double-digit ROCE every year.

Operator

The next question comes from Neal Dingmann of Truist Securities. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning all. My -- guys, my first question is around how you look at your reinvestment rate. I'm just wondering number one, could you talk about sort of current strip, how you see the reinvestment. And, you know, again, let's assume another $5 or so higher, what would that do to that?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Neal. Thanks for the question. We're going to ask Billy to comment on that.

Billy Helms -- Chief Operating Officer

Yeah. Thanks, Neal. I think, you know, for the reinvestment rate, we're always looking at, you know, as Bill mentioned earlier, what's the market look like and what's the need for oil. And we're not certainly not going to grow into a market that doesn't need the oil as he pointed out, and just trying to make sure reemphasize that point.

And then in going forward each year, we'll do the same thing we always do. We'd kind of see where the market is and what the prices are, and what our opportunities are to develop our assets. And we balance that against the cash needs of the company. So, it's not really a straight formula, it's more about where the market is at that current time.

Neal Dingmann -- Truist Securities -- Analyst

I'm glad to hear that. I wish more others would say the same. And then just a follow-up, could you talk about, you know, I would call this question more on sort of your regional allocation process. I know, you know, Bill, you talked about sort of the new hurdles, the premium new locations.

But I'm just wondering how does that factor in when, you know, you've got some exciting, you know, but not quite as developed areas like in the PRB that I think have high potential. But if you're just strictly looking at maybe what they produce immediately, might not compete. So, I'm just wanted to how do you factor in some of those high-potential wells with this plan?

Billy Helms -- Chief Operating Officer

Yeah. Neal, this is Billy again. Let me take a stab at that. So, as we look at all of our assets, that's the beauty of having a decentralized culture where we are focused on multiple plays across our portfolio.

You have plays that are in different phases of their lifecycle as you might think about it. As you just said, you know, like the Eagle Ford is a more mature play, it's had a growth for about 10 years, it's further down that maturity window than say the Delaware Basin. And then the Powder River Basin is certainly an early maturing or early growth-phase play. So, each one of those, we certainly go in with the idea of delineating the play first, putting in the infrastructure to drive down our cost over time, and then maximize returns.

So, each one of those have a different lifecycle that commands a different amount of investment. And overall though, the company is able to maintain a very steady pace of activity and future value creation through that -- the way we operate the company.

Operator

The next question is from Leo Mariani of KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

On spending here. So, we're noticing that just based on your guidance, your capex was ticking up, you know, out here in the second quarter. I just wondered what was sort of driving that. I wasn't sure kind of, you know, what was kind of causing that.

Billy Helms -- Chief Operating Officer

Yeah, Leo, this Billy. So, the guidance on the capex, it's up a little bit in the second quarter relative to the first quarter is simply the timing of when wells are available to be completed. So, we'll have a little bit more completion activity in the second quarter than we did in the first quarter. That simply is.

I think in general, we'll have about 50% -- 52% of our capex spend in the first half, the remaining to be spent more ratably through the rest of the year. And the volumes will be really pretty much keeping with that 440,000 barrels a day per-quarter average the rest of the year. So, it's a -- we'll be maintaining 240,000 barrels a day each quarter going forward.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK, that's helpful for sure. I just wanted to ask on the exploration plays. If I'm not wrong, I think you guys are certainly diverting more capital there, particularly to the drill bit in 2021 here. I just wanted to confirm, you guys kind of drilling out, you know, multiple plays, you know, at this point.

I think you did a little bit of that in the last couple of years as well. And as a result, you know, maybe you just can kind of speak to, you know, high level what your confidence is in being able to maybe, you know, prove some of these up in the next year?

Ezra Yacob -- President

Yes, Leo, this is Ezra. I appreciate the question. Yeah, on our exploration plays, you're right, we're -- we've allocated about $300 million to the exploration effort this year. Over the last few years, we've done a little bit of drilling, those dominantly kind of leasing, putting some of the acreage together.

And then, of course, there was a pullback here in 2020 due to the reduction in capital allocation associated with the downturn in prices and COVID. But this year, we are back to drilling multiple prospects. We're at a point where the prospects have started to move at different phases. I would say we're drilling exploration wells across some of the prospects, across others.

We're into more of what I'd call appraisal wells and we're feeling very confident with where we're at, the results that we're seeing, and we hope to be able to provide some results on that soon.

Operator

The next question comes from Jeanine Wai of Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions. Maybe a question for Ezra following up on the explorations.

You're in Oman now and I believe we saw last month that you paid a nominal amount for an interest in the Beehive oil prospect offshore Australia. So, can you talk about what attracted you to Australia? And do you still have interest in other international plays?

Ezra Yacob -- President

Yes, Jeanine. That's a great question. This is Ezra. Yeah, the opportunity there in Australia, as you mentioned, it's on the North-West Shelf, obviously, everyone knows a very prolific hydrocarbon region.

It's a shallow-water opportunity that we've stepped into there, as you mentioned, for a very low upfront cost. It's exposing us to a prospect that we think has the opportunity, the potential to be impactful to our company. It -- we're forecasting it has the potential to really compete with our domestic returns. And what we've -- the opportunity that we've -- we have here in Australia is really an outgrowth of our experience in Trinidad, where for nearly 20 years, we've been operating in the shallow waters offshore of Trinidad.

And really, this is a geologic province and a type of play where industry has really moved away from. And so, we've found ourselves as kind of a niche operator and we've developed not only operational procedures but also some geologic techniques where we think we can come into some of these shallow-water prospects and make very, very good returns. The attractive thing about Australia, again, is -- not only does it fit into our experience level from operations and a technical perspective, but it has many offtake and oilfield service availability there. And of course, the low cost to entry to, you know, an exciting amount of upside in the prospect.

Jeanine Wai -- Barclays -- Analyst

OK. Interesting. We'll be looking forward to that. My second question and I apologize in advance for beating the horse again on this.

But on the special dividend, the perception in the market is simply that, you know, cash difference aren't consistent to formulate, you can't capitalize on evaluations, you don't get credit for it, etc. With that in mind, you mentioned that you evaluate the health of the business every quarter, probably more frequently than that. And specifically, when it comes to the special dividend, can you just clarify is it really a matter of just holding $2 billion minimum operating cash plus $800 million to $1.25 billion for the 2023 maturity, and then everything else kind of gets paid out in due time, and it kind of needs to be meaningful? I know you also mentioned a couple of times that having optionality for high-return bolt-ons is also one of the priorities. So, if you have any kind of commentary on what a comfortable placeholder for that would be, that would be really helpful.

Thank you.

Ezra Yacob -- President

Yeah, Jeanine. You know, Tim's given, you know, I think some answers for some of those on there. Yeah, we want to keep ample cash on the balance sheet to run the business and that's around $2 billion. And then, you know, we have set aside or looking at plans for reducing the $1.25 billion bond in 2023.

So, that's all fits in and that's part of our, you know, evaluation of how we use the cash and when we use the cash. But really, the special dividend just fits into, you know, the framework that we've already laid out and our commitment to giving back cash to shareholders. So, you know, we will look at our cash position and look at bolt-on potential opportunities. They can truly be any size, you know, from a very small.

We've done in the past, you know, $20 million, $30 million deal, but they could certainly be bigger than that too. So, we'll take all that and work it into our framework, and evaluate where the company is, and in the outlook for the business. And, you know, our goal is to continue to return cash to shareholders through that framework.

Operator

The next question comes from Charles Meade of Johnson Rice. Please go ahead.

Charles Meade -- Johnson Rice & Company L.L.C. -- Analyst

Thanks. Good morning, Bill, to you, and your whole team there. I really just have one question and it goes back to the -- some of your prepared comments, Bill, and more specifically, share repurchases. Yeah, I recognize that that hasn't been your MO in the past and they kind of have a bad reputation maybe because usually share repurchases wind up being pro-cyclical.

In the way you talked about it, you said for you, you would look at it in an opportunistic way is the word I remember, and you said, in a downturn. And I guess my question is it's easy to see a downturn in retrospect, right? You know, six months ago, you guys had a three-handle on your stock. But it's hard to recognize when you're in it. So, is there any guidepost that you can share about how you would recognize when you're in one of those downturns and it's time to be opportunistic? Or is it just one of the things, you know when you see it?

Bill Thomas -- Chairman and Chief Executive Officer

Yes, Charles. I think, you know, it goes right along with the supply demand and market fundamentals analysis that we do. You know, we can -- we've gotten more sophisticated, we've got a very sophisticated model now developed through our information technology and we're gaining a lot of confidence in it on being able to kind of be on top of the oil market and where it's headed and certainly, the oil price that's the biggest indicator. But we -- I think we'll be able to determine, you know, when is the right time, when is the opportunistic counter-cyclic kind of to maybe consider share buybacks.

And of course, now, you know, we have a lot of cash on the balance sheet and we want to continue to watch that and keep that. We will have an opportunity when we do have a downturn to have cash to do that if that happens.

Charles Meade -- Johnson Rice & Company L.L.C. -- Analyst

Thank you, Bill.

Operator

The next question comes from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, team, and congrats on a good quarter here. The first question is Bill, any updates on permitting on federal lands and how that process has been to apply for four new permits? And in general in your conversations with Washington, does it seem like some of the risks around the federal lands exposure in the Delaware has diminished?

Billy Helms -- Chief Operating Officer

Yeah, Neal. This is Billy Helms. So, on the permits -- the federal permits, certainly, we were very active in obtaining permits prior to the -- to administration change just to protect our activity levels. Since this moratorium has been lifted, we are receiving a steady stream of permits.

The permit stream is coming very well. We're receiving permits in all of our areas too. So, I think the working relationships we've been able to maintain with the regulators is -- and working through the process with them has benefited us really well. So, we're not really seeing any restrictions there.

And I think the Biden administration clearly has said that activity -- he wants to maintain activity on valid leases, so we're very comforted by the fact that we'll be able to continue then.

Neil Mehta -- Goldman Sachs -- Analyst

That's great, guys. And the follow-up is just on the macro. You guys talked a little bit about the tools that you have to evaluate, the direction of oil price, and the way things are trending. Be curious if you could unpack what you're seeing real-time and how you're thinking about the commodity price moving from here for both for oil and for natural gas.

Bill Thomas -- Chairman and Chief Executive Officer

Yeah, Neil. On oil, you know, as we already talked about, the fundamentals are definitely improving. The, you know, it's been a little bouncy on the COVID recovery and oil demand but we're seeing very very steady improvements with -- I think we're up to maybe 95-million-barrel-a-day demand right now. We think, you know, maybe by the end of the year, that will get to pre-COVID levels of somewhere around 100 million barrels a day.

We'll just have to watch it and see. The inventories are dropping and we think, you know, they'll be fairly consistent draws on inventory from here on out, especially during the summer pickup activity. And so, that's all looking really good. And then the, you know, the spare capacity, you know, is going fine.

It's been extended and drawn out a little bit farther than what it started out to be at the beginning of the year. But, you know, we believe again as demand picks up that that that spare capacity will be put back online, you know. But I want to give you, you know, our -- the data when everything's OK. We'll just have to watch and see it.

But certainly, everything is going in the right direction and I think the market, you know, as oil prices have responded to that, I think it's -- that what we're saying and seeing is not different than what the consensus view is. On natural gas, you know, we're mildly bullish. Inventories are low and supply the is less and demand is higher this year than supply. So, we're going to be entering the summer and particularly the fall of the year with pretty low inventories.

So, depending -- obviously, it always depends on the weather on gas. And so, we'll just have to see how all that turns out. But, you know, we were optimistic on gas also.

Operator

The next question comes from Michael Scialla of Stifel. Please go ahead.

Michael Scialla -- Stifel Financial Corp. -- Analyst

Yeah. Good morning, everybody. You just highlighted for quite a long time your ESG sustainability ambitions. I just want to see where you stand on the government putting a price on carbon or carbon tax.

And do you see any economic opportunities in the energy transition for EOG?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Michael. I'm going to ask Ken Boedeker to talk on that. Just, you know, before we start, so -- that, you know, that the carbon tax or issues like that, we're going to leave those up to the legislatures and not come out with our opinions on that.

You know, we'll work with, you know, whatever transpires on that. So, Ken, do you want to talk about other opportunities?

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah. We really have no interest in lower -- in a lower-return business that this might lead to, but we've really made excellent progress in reducing our emissions over the last four years. And you can see that with our intensity rates coming down as indicated in the attached slides that we've got on the presentation there. We're focused on reducing our own emissions with projects that have competitive returns before we consider a second phase of applying technology such as carbon capture to reduce our emissions.

And we do believe that we can use, you know, 1% to 2% of our capital budget every year to make substantial progress toward our goals of no routine flaring by 2025 that's been endorsed by the World Bank. And our ambition of Scope 1 and 2 net-zero by 2040.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. Thank you. And Bill, you mentioned some of the things you're doing to lower well cost, the larger pads, and the super zippers. Some of your competitors have talked about three-mile laterals in the Permian.

I think you guys have done some two-mile-plus laterals in the Eagle Ford, but do you see the trend toward three-mile laterals, particularly in the Permian? Or if not, what are the issues that would prevent that?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. Thanks, Michael. Yeah. Thanks, Michael.

So, on the three-mile laterals, you're right. We've done several, I'd say between two and a half and three-mile laterals in multiple plays where it makes sense and we do them probably more predominantly in the Eagle Ford. And then we've had some in the Bakken and also in the DJ. So, -- but there are unique circumstances that allow that to happen for us and they're more driven by geology in that particular area, but also the access issues on the surface.

You know, I think just as a general rule, I'm not sure that it always makes sense to go through two or three-mile lateral. I think you have to take into account the efficiencies of being able to complete that last mile of lateral economically, compared to a two-mile lateral, those kinds of things. And a lot of it does depend on the geology. And as you know, we spend a lot of detailed time working through the geology and how to best approach every single well location we have.

So, there are some limitations on where you can do that effectively. And so, it's not a broad-brush approach.

Operator

The next question comes from Vincent Lovaglio of Mizuho. Please go ahead.

Vin Lovaglio -- Mizuho Securities -- Analyst

Yeah, hey. Hey, guys, thanks for having me on. I wanted to ask on the double-premium locations and you might have touched on it last quarter, but if there's anything you need to the geology across these plays that lends itself to higher productivity but also the lower declines described in Slide 8. And, you know, if so, how that might affect your pursuit of new opportunities that are double premium, why you guys have differentiated in that pursuit, and also in the development of those opportunities.

Ezra Yacob -- President

Yes, Vin. This is Ezra Yacob. That's a great question. And, you know, what we're highlighting there in the slide deck, it really comes down to what you touched on with the unique geology.

These are -- the double-premium plays are usually in areas where we've really refined our target down to get -- in our existing portfolio down to get rock quality that is higher, better permeability. And really, the big step changes as we look forward into the exploration prospects. As we've talked about before, we're, you know, looking for new plays that historically haven't really been drilled routinely with horizontals. We're looking for a higher quality of rocks that we can apply the horizontal drilling and completions technology to.

And really, it's the higher permeability, higher porosity that lends itself to the shallower declines. And we think that, you know, this is not only going to be a step-change for our performance as a company going forward, but really, potentially, those are going to be the new reservoirs the industry eventually is looking at to apply horizontal drilling to in the future.

Vin Lovaglio -- Mizuho Securities -- Analyst

Perfect. Thanks. And maybe second. Any additional color that you can maybe give on conventional EUR, just where it stands in the Eagle Ford right now.

Thoughts on applicability across other plays and then maybe how that could improve your environmental footprint going forward. Thanks.

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah. This is Ken. As far as EUR goes in the Eagle Ford right now, we've high-graded our EUR process and we have some of our units that are in blowdown and other units that we're continuing to inject into EUR is much more challenged in a higher gas price environment with our double-premium returns. So, we are evaluating it for other areas based on that across the company.

Operator

The next question comes from Nitin Kumar of Wells Fargo. Please go ahead.

Nitin Kumar -- Wells Fargo Securities -- Analyst

Hi. Good morning, gentlemen, and first of all, congratulations. Your market is definitely receiving the special dividend very well. My question is perhaps a little different from some of the other ones that have been asked.

What we're trying -- I was going through Slide 9, you've migrated to this double-premium strategy. With the macroenvironment as favorable as it is, what happens to the single premium or the lower half of your core inventory here? You -- Ezra mentioned the expiration phase can have returns as high as 80%. So, just wondering is there an opportunity to -- with any market opening to monetize some of those? Or how should we think about that part of your inventory?

Bill Thomas -- Chairman and Chief Executive Officer

That's an excellent question, Nitin. We appreciate it and appreciate your compliments. Yeah, we are always evaluating property sales. And I'm going to ask Ken Boedeker comment -- to comment on that in general for the company.

Ken Boedeker -- Executive Vice President, Exploration and Production

Sure. Thanks, Bill. You know, we're always high-grading our portfolio and divesting those properties with minimal double-premium potential remaining. And we've actually sold about $7 billion in assets over the last 10 years and we will continue to high-grade our assets as we see the market giving them fair value.

Bill Thomas -- Chairman and Chief Executive Officer

And certainly, you know, in the last few years, it hasn't been a seller's market, but it is -- it will turn as people get short of inventory. And we think that the premium -- the single-premium assets that we have, you know, even those are probably some of the best inventory in the industry. So, those certainly have a lot of value.

Nitin Kumar -- Wells Fargo Securities -- Analyst

OK. And they don't -- with $60 oil and costs where they are today, they don't compete for capital within your program?

Bill Thomas -- Chairman and Chief Executive Officer

Yeah. That's correct. The 30% rate of return at $40 doesn't compete in our program right now. It needs to be a 60% rate of return at $40 flat.

It's a -- it's definitely a huge shift in our returns. And that's what we've been talking about, you know, for the last several quarters in our script and in our slide detail a lot of really good information. But certainly, the shift to double premium is we believe by far the highest reinvestment standard in the industry, and it is a clear separator for EOG. And it will drive exceptional performance for the company going forward.

Operator

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

Bill Thomas -- Chairman and Chief Executive Officer

In closing, our excellent fourth-quarter results are a testament to EOG's ability to generate significant shareholder value. We're proud of all of EOG employees and their outstanding contributions to continuously improve the company. Our excitement about EOG's ability to improve returns and increased value has never been greater. So, thanks for listening and thanks for your support.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Tim Driggers -- Chief Financial Officer

Bill Thomas -- Chairman and Chief Executive Officer

Ezra Yacob -- President

Billy Helms -- Chief Operating Officer

Scott Gruber -- Citi -- Analyst

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

Scott Hanold -- RBC Capital Markets -- Analyst

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

Neal Dingmann -- Truist Securities -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Jeanine Wai -- Barclays -- Analyst

Charles Meade -- Johnson Rice & Company L.L.C. -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Michael Scialla -- Stifel Financial Corp. -- Analyst

Ken Boedeker -- Executive Vice President, Exploration and Production

Vin Lovaglio -- Mizuho Securities -- Analyst

Nitin Kumar -- Wells Fargo Securities -- Analyst

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