EOG Resources (EOG) Q3 2021 Earnings Call Transcript

EOG Resources (EOG 0.25%)
Q3 2021 Earnings Call
Nov 05, 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 third 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, sir.

Tim Driggers -- Chief Financial Officer

Good morning, and thanks for joining us. This conference call includes forward-looking statements. Factors that could cause our actual results to differ materially from those in our forward-looking statements have been outlined in the earnings release and EOG's SEC filings. This conference call also contains certain non-GAAP financial measures.

Definitions and reconciliation schedules for these non-GAAP measures can be found on EOG's website. Participating on the call this morning are Ezra Yacob, chief executive officer; Billy Helms, president and chief operating officer; Ken Boedeker, EVP, exploration and production; Jeff Leitzell EVP, exploration and production; Lance Terveen, senior VP, marketing; and David Streit, VP, investor and public relations. Here's Ezra Yacob.

Ezra Yacob -- Chief Executive Officer

Thank you, Tim. Good morning, everyone. EOG is delivering on our free cash flow priorities. Yesterday, we announced an 82% increase to our regular dividend to an annual rate of $3 per share, a $2 per share special dividend and an update to our share buyback authorization to $5 billion.

These cash return announcements reflect EOG's consistent outstanding performance and are the direct result of our disciplined approach to high-return investment. During the third quarter, we set new quarterly earnings and cash flow records. Adjusted net income of $1.3 billion or $2.16 per share and free cash flow of $1.4 billion. The strength of our current and future earnings and cash flow that supports both dividend announcements can be traced back to 2016.

Amid a potentially prolonged low commodity price environment, we made a permanent upgrade to our investment criteria. Our premium hurdle rate was established not only to protect the company's profitability in 2016, but all future commodity cycles. The discipline to only invest in new wells that earn a minimum 30% direct after-tax rate of return, assuming a $40 oil price for the life of the well continues to improve our capital efficiency, profitability and cash flow. Our employees immediately embraced the challenge of this new investment hurdle.

And by the second half of 2016, EOG was reinvesting capital and paying the dividend within cash flow. We have generated free cash flow every year since. From 2017 to 2019, we generated enough free cash flow to significantly reduce net debt by $2.2 billion, while also increasing the dividend rate 72%. We also expanded our inventory of premium wells by more than three times.

While adding inventory that meets the minimum premium threshold increases quantity, our goal through technical innovation and organic exploration is to add higher quality inventory. Our employees, empowered by EOG's unique culture applied innovation and efficiencies to raise the return of much of the existing inventory while adding higher rate of return wells through exploration. The premium standard established in 2016 and the momentum that followed provided a step change in operational and by extension financial performance, which set the stage for the second upgrade to our reinvestment hurdle rate, double premium. Double premium, which is a minimum return hurdle of 60% direct after-tax rate of return at $40 oil was initiated during the depth of last year's unprecedented down cycle.

That capital discipline enabled EOG to deliver extraordinary results in a $39 oil price environment last year. Using such stringent hurdle rates prepared the company not only for 2020 but for our stellar results this year. There is no clear indication of the impact premium and now double premium has had on our confidence in EOG's future profitability than the 82% increase to our regular dividend announced yesterday. Combined with the 10% increase made in February of this year, we have doubled our annual dividend rate from $1.50 per share to $3 per share.

After weathering two downturns during which we did not cut nor to spend the dividend -- suspend the dividend, the new annual rate of $3 per share reflects the significant improvement in EOG's capital efficiency since the transition to premium drilling. Going forward, we are confident that double-premium will continue to improve the financial performance just like premium did five years ago. We are also confident in our ability to continue adding to our double-premium inventory without any need for expensive M&A by improving our existing assets and adding new plays from our deep pipeline of organic exploration prospects, developing high-return, low-cost reserves that meet our stringent double premium hurdle rate, expands our future free cash flow potential and supports EOG's commitment to sustainably growing our regular dividend. EOG's focus on returns, disciplined growth, strong free cash flow generation and sustainability remain constant.

Just as our free cash flow priorities are consistent, so remains our broader strategy and culture, EOG's competitive advantage is our people and today's announcements are a reflection of our culture of innovation and execution. Looking toward 2022, oil market supply and demand fundamentals are improving but remain dynamic. While it's unlikely the market will be fully balanced by the end of 2021, we will continue to monitor macro fundamentals, as we plan for next year. We are committed to maintaining production until the oil market needs additional barrels.

Under any scenario, we remain focused on driving sustainable efficiency improvements. We are well-positioned to offset inflationary price pressures to help keep our well costs flat next year. To summarize this quarter's earnings release in three points: first, our fundamental strategy of investing in high-return projects consistently executed year after year is delivering outstanding financial results. Second, we are still getting better.

As we continue to expand our opportunity set to add double-premium inventory through sustainable well cost reductions and organic exploration, EOG is set up to improve performance even further. And third, we are well-positioned to execute our high-return reinvestment program in 2022 to deliver another year of outstanding returns. Here's Tim to review our capital allocation strategy and our free cash flow priorities. 

Tim Driggers -- Chief Financial Officer

Thanks, Ezra. As we have been progressing premium in the last five years, our capital allocation decisions have been guided by a set of long-standing, consistent priorities. First is high-return, disciplined reinvestment. Our returns on capital investment have never been higher.

However, market fundamentals remain the No. 1 determinant of when to grow. Second is the regular dividend, which we believe is the best way to return cash to shareholders. We have paid a dividend for 22 years without suspending or cutting it.

At the new level of $3 per year, we can comfortably fund both the dividend and maintenance capex at $40 WTI. The combination of our low-cost structure, high returns and strong financial position will sustain this higher regular dividend. This resilient financial position is backstopped by our third priority, a pristine balance sheet with almost zero net debt. We remain firmly committed to a strong balance sheet.

It's not conservatism. It's a competitive advantage. Fourth, we regularly review other cash return options, specifically special dividends and share buybacks. Yesterday, we declared a special dividend for the second time in 2021 and updated our share buyback authorization.

Share buybacks have always been part of our playbook and will remain an opportunistic cash return alternative. We are cognizant of the challenges of successfully executing a share buyback in a cyclical industry. We know and expect there will be periods in the future when the stock will be impacted by macro factors such as the commodity cycle, geopolitical events and other unforeseen events like the COVID pandemic in 2020. The updated $5 billion authorization provides the flexibility to act and take advantage when the right opportunity presents itself.

We believe our strategy for the use of other cash return options is well designed to deliver value through the cycle. Finally, we are not in the market for expensive M&A. It is simply a low return proposition. We can create much more value through organic reinvestment and our shareholders can do better with their excess cash.

Our premium strategy generates back in their hands. Since our shift to premium in 2016, EOG has generated nearly $10 billion of free cash flow. With that cash flow, EOG has reduced debt $1.5 billion increased the cash balance by $3.6 billion and will have returned more than $5 billion to shareholders by the end of 2021. This is a significant amount of shareholder value driven by premium.

Today, EOG is positioned to translate that value creation into even more cash returns to shareholders. In the third quarter, we generated a record $1.4 billion of free cash flow bringing our year-to-date free cash flow to $3.5 billion, which is equal to the total return of capital paid and committed this year to our regular dividend to special dividends and debt repayment. You can expect us to continue returning cash going forward. There might be times when we strategically increase or decrease the cash balance, but over time, the cash will go back to our shareholders.

Here's Billy.

Billy Helms -- President and Chief Operating Officer

Thanks, Tim. As a result of the -- to the consistency of our operating performance, we delivered another quarter of outstanding results. I couldn't be more proud of the engagement of our employees and their culture of continuous improvement. Their execution of our 2021 plan has been near perfect.

For the third quarter in a row, we produced more oil for less capital. That is we exceeded our production targets while spending less than our forecast for capital expenditures. Well productivity, driven by our double premium hurdle rate, continues to outperform, while our drilling and completion teams pushed the envelope on new sustainable cost savings and expand those efficiencies throughout our active operating areas. Examples include in-sourcing and redesigning drilling equipment, adopting innovative techniques to reduce nonproductive time, expanding super zipper completion operations and reducing sand and water sourcing cost.

Our ability to continue to lower cost and deliver reliable execution quarter after quarter is tied to a common set of operating practices that together form a sustainable competitive advantage for EOG. First, we are a multi-play company with activity spread across four different basins in the U.S. As conditions change, we have the flexibility to shift capital between plays to optimize returns. Second, we are organized under a decentralized structure.

Decisions are made by discrete focused teams closer to the operation rather than dictated by headquarters. Our culture is non-bureaucratic and entrepreneurial. We empower our frontline employees to make decisions, bringing them to drive innovation and efficiency improvements. Third, we have established strategic vendor relationships with our preferred service providers.

We are typically -- we are not typically the biggest beneficiary of price reductions during downturns, but we also tend to not be on the leading edge of price increases during the inflationary periods. Fourth, we have taken ownership of the value-added parts of the drilling, completions and production supply chain by applying our operational expertise and proprietary technology to improve efficiency and lower cost. Examples include sand, water, chemicals, drilling fluids, completion design, drilling motors, the marketing of our products and much more. As a result, our operating teams have complete ownership of driving improvements in every step.

And finally, we apply world-class information technology to every part of our operation. Our data gathering and analysis capabilities continue to improve, which we leverage to better manage day-to-day field operations for more efficient use of resources, as well as discovering new innovations. As a result of these strategic advantages, we are confident in achieving our target of 7% well cost savings this year. This is an incredible accomplishment given the state of inflation.

And as we move into next year, we are on track to lock in 50% of our total well cost by the end of this year. We have locked in 90%-plus of our drilling rigs at rates that are flat to lower than 2020 and 2021. We've also secured more than 50% of our completion crews at favorable rates. While it's still early, the savings from these initiatives and other improvement efforts will continue to be realized next year, helping us offset the risk of additional inflation.

And thus, we remain confident that we will be able to keep well cost at least flat in 2022. Now, here's Ken. 

Ken Boedeker -- Executive Vice President, Exploration and Production

Thanks, Billy. Last month, we published our 2020 sustainability report. As detailed in this report, we are focused on reducing emissions in the field. Our flaring intensity rate decreased 43% in 2020 compared to 2019, which drove an overall 9% reduction in greenhouse gas intensity.

We continue to make progress toward our goal of zero routine-flaring across all our operations by 2025 with our more immediate goal of 99.8% wellhead gas capture this year. We also made significant progress on methane last year, reducing our methane emissions percentage by one-third to less than one-tenth of 1% of our natural gas production. Since 2017, we've reduced our methane emission intensity percentage by 80%. Our sustainability report profiles the technology and innovation that contributed to these improvements and illustrates why we are optimistic about future performance on our path to net zero by 2040.

Examples of how we are addressing emissions in the field include closed-loop gas capture, which helps us continue to reduce flaring. We're leveraging information technology and our extensive data analysis capabilities from both mobile platforms and our central control rooms to better manage day-to-day operations. In addition, we are piloting technology in the field such as sensors and control devices that complement our already robust leak detection program. These are just a few examples of the initiatives we have underway.

Like all efforts at EOG, our sustainability strides are bottom-up-driven. Creative ideas to improve our ESG performance come from employees working in our operating areas every day. We have a long list of solutions we expect to pilot and profile in the future. Our record of significantly reducing our GHG intensity over the last several years speaks for itself.

And we are committed to continuing to improve our emissions performance. Now, here's Ezra to wrap things up. 

Ezra Yacob -- Chief Executive Officer

Thank you, Ken. Our record-breaking operational and financial results throughout this year and the cash return announcements we made yesterday deserved to grab some headlines. However, the real story behind our performance is consistency of strategy supported by our unique culture. At the start of the call, I said there is no clear indication of the impact premium and now double premium has had on our confidence in EOG's future profitability than the annual $3 per share regular dividend.

And while establishing the premium standard back in 2016 shifted us into a different gear culminating in the magnitude of our cash return this year, our fundamental strategy executed year after year by employees united by unique culture, dates back to the founding of the company. That's ultimately what gives me confidence that EOG's best days are ahead. We are a return-focused organic exploration company that leverages technology and innovation to always get better, decentralized, non-bureaucratic. Every employee is a business person first focused on creating value in the field at the asset level.

Our financial strategy has always been and remains conservative, not just to offset the inherent risks in a cyclical business, but to take advantage of them. We are committed to the regular dividend and believe it is the best way to create consistent and dependable long-term value for shareholders. We have a proven track record that our strategy works and going forward, investors can expect more of the same, consistent execution year after year. Thanks for listening.

We'll now go to Q&A. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question will come from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng -- Scotiabank-- Analyst

Thank you. Good morning. Two questions, please, Ezra. First, you have the authorization for the buyback.

But quite frankly, I don't recall EOG ever done any buyback for the past 20 years. So can you talk about what is the conditional criteria for you to actually act on it? And in theory that if you're going to budget when the market is suffering the downturn, does that mean that you should have a really strong balance sheet going into the downturn maybe at a net cash position in order for you to be able to afford it? Like last year that in the -- at the top of the pandemic, your share price was really attractive, but I'm not sure that you have the balance sheet or that will to do the buyback at that point? So that's the first question. The second question is on the hedging. You have been quite aggressive putting in a lot of natural gas hedges.

Two is that, I mean, with your low breakeven requirement and a very strong balance sheet, why put on the hedges so aggressively. And to some degree, even though you have the physical barrel or MCF to support it. But is that -- the fundamental basic is that you become a speculation on the direction of the commodity prices when you're doing in that way. Thank you.

Ezra Yacob -- Chief Executive Officer

Yes, this is Ezra, Paul. Thanks for the question. Let me start by just outlining a little bit on the buyback, and then I'll hand it to Tim Driggers for a little more detail on it. You're right, buyback authorization we've had one previously, and we haven't exercised that in quite some time.

What we've done right now is we've refreshed it to a size that's a little more commensurate with the scale of our company today. And we plan to exercise the buybacks in more of an opportunistic way rather than something programmatic, is how we expect to be able to use it. And I'm going to ask Tim to provide you a little more details on exercising it. 

Tim Driggers -- Chief Financial Officer

Sure. My microphone, I'm sorry. First of all, we will evaluate buybacks like any other investment decision, how does it create long-term shareholder value. So that will be the first thing we'll have to look at every time we make this decision.

Specifically, to answer your question about could we have started during the pandemic, but didn't have the financial wherewithal to do that. You're exactly right. At that point in time, oil was negative. The price of oil was negative.

We had two bonds coming due totaling $1 billion. So had we been in the shape we're in today, that would have been a perfect time to buy shares, but we weren't in that same position we are today. That's why continuing to work on the balance sheet and positioning ourselves for the future has been so important to EOG. So we should not ever have that situation again.

We have positioned the company to be able to opportunistically take advantage of these situations. 

Ezra Yacob -- Chief Executive Officer

And Paul, on the second question regarding our hedges, specifically gas, but really, in general, our hedging strategy hasn't changed at all. As you know, we invest on a very, very stringent hurdle rate, our premium and not double premium rate. That's based on a $40 oil price, but it's also based on a $2.50 natural gas price for the life of the well. And so, when we can opportunistically look to lock in some hedges north of $3, we feel very good about the returns that we're generating going forward on the gas price.

In general, we like to have a bit of hedges put on; whether oil or gas, it just give us a little bit of line of sight into our budgeting process as we enter into a new year. And so, really, that's the commentary on both the gas and the oil hedges. 

Operator

The next question will come from Arun Jayaram. Please go ahead.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Yeah, good morning. Ezra, the 2021 cash return to equity holders has tallied just under 30% of CFO. If you add in debt, it's around 36% of your CFO. I know there's no formal framework in place, but how should investors be thinking about cash returns on a go-forward basis? And could this 30% be viewed at some sort of benchmark?

Ezra Yacob -- Chief Executive Officer

Yes, Arun, this is Ezra. No, I won't -- I would not take that as any type of benchmark. I think, we've been very clear for the last couple of years in talking about our framework for cash return, really just our free cash flow priorities. The emphasis, the priority really is on a sustainable growing regular dividend.

We think that's the hallmark. It's forward-looking. That's a hallmark of a very strong company. It hopefully sends a signal to everybody that -- of our confidence in the growing capital efficiency of our company.

Obviously, we've talked about some low-cost property bolt-on acquisitions. We've highlighted those on the last call and in the slide deck today. We, obviously, covered a very strong, not just strong but really a pristine balance sheet. And then, to the last part of -- really the other part of your question is our other cash return options for excess free cash flow, which are the special dividends, and then as Tim was just mentioning some of the share repurchases.

And as we've said, we're very committed to returning excess free cash flow. We have stayed away from a specific formula because we like to be able to -- we try not to run the company on a quarter-to-quarter basis. We try to take a longer view of things. We realize that there are times when potentially the cash on hand may need to move up or down, but regardless of it over the long term, I think, we've demonstrated, especially this year that we're very committed to returning that excess free cash flow. 

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. And my follow-up, was the dividend increase to $3 on an annualized basis, Ezra that will represent just over $1.75 billion in annual outlays to equity holders for the dividend. How should investors be thinking about future growth? Does this temper? How we should think about longer-term production growth given the higher mix of dividend payments? 

Ezra Yacob -- Chief Executive Officer

Yes, Arun, the step-up this year in the regular dividend is really a reflection of what we've been doing for the last five years and reinvesting this in the premium wells. We've been seeing it slowly but surely show up in our financial performance, as we've lowered the cost basis of the company. And the confidence going forward really is what we're seeing with our change in focus over the past 18 months to these double premium wells. We feel that it's providing another step change in operational performance that should filter through to a step change in financial performance, as we've witnessed with that change to premium.

And then, our inventory, of course, is spread across multiple basins. We have 5,800 of these double premium locations and over 11,000 of the premium locations, and we're adding to that every day. Our employees are working through either identifying low-cost bolt-on acquisition opportunities, sustainable well cost reductions. As we've highlighted this quarter, stronger well productivity.

And then, of course, our low-cost entry into organic exploration opportunities to further expand both the quantity and the quality of that inventory. So I think, as we continue moving forward and sticking to our game plan of investing in double premium, it has the potential to continue to expand the free cash flow potential of EOG and thereby continue to provide an opportunity for us to remain committed to sustainably growing our dividend.

Operator

Our next question will come from Jeanine Wai with Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Good morning, everyone. Thanks for taking our questions. Our first question is on special dividend. In terms of the timing and the process for that, when you look at the potential to announce one what did you see this time around that perhaps you didn't see last quarter when you decided to forgo a special dividend? 

Tim Driggers -- Chief Financial Officer

Jeanine, this is Tim. So as already been stated, we are committed to our free cash flow priorities, and that has not changed. So we look at all the factors every quarter to determine when is the right time to do either a special dividend or now the share buybacks or increase the regular dividend. So when we looked at our cash balance at September 30, it was sitting at $4.3 billion.

That gives us -- that leaves us well-positioned to pay off our bond in 2023, and provide this $2 special dividend. So it's a combination of all those factors. And we felt this was a meaningful amount of cash to return at this time. 

Jeanine Wai -- Barclays -- Analyst

OK, great. And then, my second question, maybe following up on Arun's question on the base dividend. So the large increase in the base. It seems like it's a catch up to close the gap between what the business can support given the premium and double-premium wells like you just said and what was actually getting paid out.

So I guess, in terms of the timing also on the base, we're just curious how much of a factor the potential that you now see in your exploration plays factored into the decision to increase the base?

Ezra Yacob -- Chief Executive Officer

Yes, Jeanine, this is Ezra again. It's not just the exploration plays. It's really just our confidence in being able to expand the overall inventory, the quality of the inventory into that double premium. And some of it comes from the announcements that you saw in this quarterly on the quarter results, the stronger well productivity supporting better than guidance volumes, the better-than-guidance capex, driven by sustainable well cost reductions.

So when I think about that, I think about our existing inventory increasing in performance and quality. And then, I think about converting some of our premium wells into double-premium status. And then, of course, we have identified small bolt-on acquisitions where we can continue to grow and expand that inventory level for us. And then, as you highlighted, we've got the organic exploration mix.

We're drilling 15 wells this year that we've talked about that are not in the publicly disclosed plays. Those plays are at various states of either initial drilling, collecting of data or kind of evaluating, as we've talked about on other calls, repeatability, production performance of those plays. And so, we're very excited and confident in our ability to continue to expand. And as I said, increase the quality of our double premium inventory.

And ultimately, that's what gives us the confidence to be able to see that we can continue to lower the cost base of the company, increase the capital efficiency of EOG and continue to support a sustainably growing base dividend, which is our commitment. 

Operator

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

Scott Gruber -- Citi -- Analyst

Yes, good morning. So in your deck, you mentioned a carbon capture pilot project, which is interesting. Ezra, can you speak to your early ambitions in carbon capture? Are you looking strictly at EOR? You investigating pure storage and what level of resources have you committed internally to the initiatives? 

Ezra Yacob -- Chief Executive Officer

Yes, Scott. I appreciate the question. I'm going to ask Ken Boedeker to address it. 

Ken Boedeker -- Executive Vice President, Exploration and Production

Yes, Scott. We're continuing to make good progress on that initial carbon capture project that we've talked about. We've finalized many of the below-ground geologic studies and we're currently working on the engineering and regulatory portions of the project. As we work our way through these steps, we'll get more clarity on timing.

But right now, we hope to initiate CO2 injection in late 2022. In terms of capital that we're allocating toward it, it's roughly 2% to 3% of our budget. It's gonna be allocated toward all of our ESG projects, is what we see. 

Scott Gruber -- Citi -- Analyst

Got it. And as you investigate the opportunity, how are you thinking about participating in the value chain? Would you be interested in entering transport. Obviously, it's an exciting opportunity, but get more capital intensive as you kind of broaden participation. So just how are you thinking about the broader opportunity in participating across the value chain?

Ken Boedeker -- Executive Vice President, Exploration and Production

Yes, Scott, we're really not going to change the business that we're in. We're looking at carbon capture right now to significantly reduce our Scope 1 and Scope 2 emissions at this point. That business is a much lower-return business than what we see with our well development that we have. So we'll keep an eye on that, but our real goal for carbon capture is just reducing our Scope 1 and Scope 2 emissions, which we've made significant progress on it in the last several years.

Operator

Our next question will come from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys. Just looking at the guidance here for fourth quarter, we can certainly see some pretty significant growth in U.S. gas. Obviously, looking at gas prices right now, we're at multiyear highs at this point in time.

Should we see that as a bit of a signal that EOG is perhaps flexing up a little bit on the natural gas side to try to capture what are probably some fantastic returns at the current prices here?

Billy Helms -- President and Chief Operating Officer

Yeah, Leo, this is Billy Helms. So on the capex side, certainly, part of our program, as we laid out earlier this year, was just advance some of our Dorado prospect in South Texas, as you know, it's a very competitive gas play with the rest of the plays in the U.S. And we've been very pleased with the results there. But we remain disciplined to only complete the 15 wells we targeted and laid out at the start of this year.

And it's really a little bit early to be talking about what we're going to look like next year. But obviously, with the results we're seeing, we're very pleased with the results being -- meeting or exceeding the type curves we have laid out. That certainly gives us an option to look at increasing activity there. So it's a little bit early yet to be saying what we're going to do next year, but we're very pleased with what we've seen. 

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK, that's helpful. And I guess, obviously, in your prepared comments, you still spoke about the fact that probably be challenging to kind of meet all the necessary conditions at year-end '21. And that you all have laid out to put any type of real oil growth back in the market at this point in time. But I guess, I've certainly heard some rumblings lately that perhaps we might already be at kind of pre-pandemic demand levels here as we work our way into November.

I think, OPEC+ has a plan to reduce its spare capacity pretty dramatically by mid-'22. Just wanted to get a sense if you think perhaps in the mid- to second-half part of '22, there's a good shot at kind of hitting the conditions that EOG has laid out to potentially put a little growth back in the market. 

Ezra Yacob -- Chief Executive Officer

Yes, Leo, this is Ezra. As Billy said, typically, we don't provide guidance for the following year on this call. But in general, our focus on 2022 the potential for that and us, as you highlighted, the things that we're looking at, we're focused on remaining disciplined and that hasn't changed. As we look into 2022, there are the three items that you referenced that should signal a bit of a balanced market.

At first, is demand, which has probably surprised to the upside a bit with just how quickly we've approached pre-COVID levels. The second is gonna be the inventory numbers, which for us, we'd like to see at or below the five-year average, which they're currently there right now, but that brings up kind of that third item that you spoke to, which is the spare capacity. And we'd like to see that spare capacity back to low levels more in line with historic trends. So as we sit here today, 2022 is looking like a year of transition.

Spare capacity is going to come back online at the scheduled rate that should translate into rising inventory levels. And if things move forward, we could be looking at a balanced market sometime in the first half of '22. For us, for EOG in a scenario like that, we could probably return to maybe our pre-COVID levels of oil production around that 465,000 barrels a day mark. That would represent no more than 5% growth next year.

But again, that's as we're sitting here today, we'll be officially firming up that 2022 plan and watching how the market develops over the next couple of months. But as we're witnessing, bringing spare capacity back online has hit some snags. So we're watching to see if is that more routine start-up challenges or is that more structural in nature due to underinvestment. And those two factors are going to be just as important as seeing how the continued demand recovery from COVID really develops with any potential future lockdowns, so on and so forth.

So ultimately, we continue to remain to be disciplined going forward. 

Operator

Our next question will come from Charles Meade with Johnson Rice. Please go ahead.

Charles Meade -- Johnson Rice -- Analyst

Good morning to you and the whole EOG team there. You actually anticipated -- large part of my question with your answer to the last one, but maybe just to dial in on it a little more closely. How far out do you think your view holds or your ability to look at the balance or unbalance in the oil market? And then, once you did see a call to increase your oil activity, how long would it be before we actually saw it in the public markets in your quarterly financials?

Ezra Yacob -- Chief Executive Officer

Yes, Charles, thanks for the question. I'll answer the first part of it and then ask Billy to provide a little bit more color also. How far out we can see the balance or the imbalance? To be perfectly honest, we're watching a lot of the same things that all of you are, those three things that we highlighted. Demand has recovered pretty aggressively, I would say.

I think, it's surprised to everybody. And then, the inventory numbers in concert with the spare capacity coming back online. And the spare capacity, again, if you simply look at the schedules that have been laid out and everybody sticks to the schedules and the supply actually comes back online, that would contemplate some time in the front half of the year. But as I highlighted and everyone's been seeing, there are some challenges or hurdles to getting all that spare capacity back online.

As far as the color on what we would be looking at, perhaps Billy can speak to it.

Billy Helms -- President and Chief Operating Officer

Yeah, Charles, as far as how long it would take before we'd see any response, especially showing up in our financials, if you just simply look at when we see the signal and then the time we deploy rigs and get the wells completed and on production, takes usually three to four months. So you'd start seeing it no earlier than that, but probably some time a quarter or two after, so to have a meaningful difference in financial performance. 

Charles Meade -- Johnson Rice -- Analyst

Got it. So if I'm understanding you correctly, it would be two quarters, maybe you start to see it nearly three quarters before there was a real delta.

Billy Helms -- President and Chief Operating Officer

That's correct.

Charles Meade -- Johnson Rice -- Analyst

Great. And then, just one quick follow-up for Tim. And I think, you partly addressed this in your earlier comment. In the past, I recall you guys have talked about a target of $2 billion of cash on the balance sheet.

With this new $5 billion share authorization in a slightly different posture about wanting to have some dry powder, does that mean that your target for $2 billion of cash? And I recognize you're not always going to be at the target, but does that mean that the target has gone north of that? And if so, has it gone to $3 billion or $4 billion? Or what's your thinking? 

Tim Driggers -- Chief Financial Officer

No, we haven't changed our target. We will continue to monitor that through the cycle and see there's all sorts of factors we have to take into consideration for the cash balance, as you know, working capital changes, for example, as prices swing up and down. So that's a big consideration. But no, it has not changed.

The authorization has not changed our philosophy on the cash balance. 

Operator

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

Neal Dingmann -- Truist Securities -- Analyst

Good morning. I don't want to belabor this just on the growth in reinvestment. But I just want to make sure I'm clear on this, you guys have been quite clear about returns. I just want to make sure that I'm certain around the priority about the moderating reinvestment rate in order to drive the cash returns.

Is that what I'm hearing over growth? 

Ezra Yacob -- Chief Executive Officer

Yes, Neal, when we think about moving forward, we've done a lot on reinvesting and building this company to take a bit of a step away from the commodity price cycles by focusing in on the premium wells and now double premium strategy. The growth for us has always been an output of our ability to reinvest at high rates of return. Through 2017 to 2019, during a period of rapid growth for the industry. In fact, we are reinvesting only at a rate of about 78% and still generating free cash flow every year and putting that toward an aggressively growing base dividend.

So the strategy for us hasn't really changed. I think we've talked about potentially watching the macro environment a little bit more to help formulate our plans year to year. And that's where it falls in line with what we've been discussing over the last couple of questions. We still remain very committed to that.

We don't want to push barrels into a market that's oversupplied or doesn't need the barrels. And so, we'll be looking for the right time to see if the market needs our barrels before contemplating any return to growth.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Very clear. And then, just to follow up on -- I asked earlier about -- it looks like you all had been adding a little bit of gas hedges. Is that in relation to -- does that mean that you've been increasing the focus on the Dorado play, given what natural gas prices are doing? So I guess, I'm just wondering are the two correlated? Or are you adding to that activity in the Dorado?

Billy Helms -- President and Chief Operating Officer

Yeah, Neal, this is Billy Helms. So as far as the volume of gas hedges and what we've been doing there, it really is not focused strictly on Dorado. It's simply -- it goes back to our premium strategy as we displayed out. It's based on a $40 oil and a $2.50 gas price.

We saw the opportunity to lock in gas prices above $3. So it gave us encouragement of locking in returns over the next several years at those prices. We have gas production quite a bit, as you know, in Dorado, but also quite a bit in other plays as well. So it just helps ensure locking in returns over a multiyear period. 

Operator

Our next question will come from Scott Hanold with RBC. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah, thanks. I'm going to try, as I know you'll probably give me the answer, that you'll talk about the budget next year. But if I could talk about it more big picture, if we all think of just a base maintenance spending levels into 2022. Has the capital changed too much from what you all did this year? Like what would be the puts and takes from that? Because it seems like your well costs are going to hold pretty steadily.

So is sort of your maintenance capex case this year somewhat similar to what it would be next year, all as being equal? Or is there anything else to consider? 

Ezra Yacob -- Chief Executive Officer

Yes, Scott, this is Ezra. And we'll talk about next year's budget next year. I'd say that a little bit facetiously for you. But quite frankly, I think we haven't updated our maintenance capital number yet.

We'll provide that number commensurate with our plans laid out next year. But I think, what you can see is that our team continues to make great progress in sustainable well cost reductions through their efficiency gains and applying innovation and technology. And I think, Billy highlighted pretty well that we feel very confident that we achieved our first initial goal, I should say, a 5% well cost reduction, and we're in line to reduce our cost 7% this year. And we feel that a lot of those costs are what's going to insulate us against some of the inflationary pressures out there. 

Scott Hanold -- RBC Capital Markets -- Analyst

And how about like just on -- was there anything unusual you'd say this year that we should think about next year in terms of like exploration play or ESG spending? Is there any reason for us to think about that any differently? 

Ezra Yacob -- Chief Executive Officer

No, Scott, really, over the last few years, a lot of our percentage dedicated toward exploration and ESG have been pretty consistent. 

Operator

Our next question will come from Doug Leggate with Bank of America. Please go ahead.

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

Oh, thanks. Good morning, everybody. Ezra, I think your share price reaction today, I think you can see the market's response to the greater cash returns. I'm wondering why is it reluctant seemingly still from EOG to provide a framework around the proportion of cash returns? It seems to be a persistent barrier perhaps to recognition of sustainable free cash flow, which at the end of the day is what defines the value.

I'm just wondering why there's a reluctance not to commit to or at least lay out some kind of framework as to how you think about the go-forward cash returns as opposed to one-off special dividends. 

Ezra Yacob -- Chief Executive Officer

Yes, Doug. It's a question that we've been answering. And we feel that we have provided a framework for our free cash flow priorities. It's as you mentioned, the sustainable growing base dividend, to strengthen the balance sheet, these low-cost property acquisitions.

And then, more on point with your question, the other cash return options, which are special dividends and opportunistic share repurchases. And in a lot of ways, when we look back, I think we've shown our commitment to that, not only this year, with committing to $2.7 billion return in dividends over year-to-date free cash flow generation of about $3.5 billion. But I think, we added a slide into the deck that shows longer term what we've been able to do in providing just over $5 billion of free cash flow return since 2016 on about $10.9 billion of free cash flow generated. And so, I think, we've laid out a framework.

I think our two announcements this year on special dividends totaling $3 per share on the specials really demonstrates our commitment to it. And as far as having the ability for our investors to see through and capitalize on that number, I think we've demonstrated our commitment to the point where the investors can capitalize on some of our excess free cash flow. To us, we still remain committed to delivering on those free cash flow priorities. We do want to continue to make decisions based on what we think.

We will create the most significant long-term shareholder value. And that means sometimes not necessarily running the business on a quarter-by-quarter basis, but really taking a longer-term approach. And so, locking ourselves into a formula that might have to change as conditions change is really at the heart of our reluctance to do that. 

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

Yeah, I understand that. I guess, it's a moving piece. Maybe my follow-up is related then. I want to talk specifically about the buyback.

There's been a lot of reference to the '16, '19 period. And you know the history. It was a subsidized environment. You doubled production.

Saudi was taking oil off the market, and we all see how that ended. So we know what the response to the industry has been. But I want to get specifically to your view of mid-cycle and how you think then about the relative priorities around mid cycle. What is your definition of mid cycle? And how should we think about growth versus growth per share given the buyback announcement?

Ezra Yacob -- Chief Executive Officer

Well, Doug, I don't think I'm comfortable getting into mid-cycle metrics on here. But what I would tell you is we continue to think of this buyback as opportunistic. We think, again, with our authorization in place, we want to use it in a way that we feel confident we're gonna be generating long-term shareholder value. More often than not, for us, that's going to tend toward special dividends and we're going to reserve our buyback authorizations to be used really just in times of dislocations and you use it opportunistically rather than a more programmatic method. 

Operator

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

Bob Brackett -- Bernstein Research -- Analyst

Good morning. It looks like you turned a couple of pads on in Dorado in the third quarter. Any color or commentary there, hitting expectations, exceeding?

Ken Boedeker -- Executive Vice President, Exploration and Production

Yeah, Bob, this is Ken. As Billy said earlier, we have turned on several wells in the last few months. And the color is, as all of them are at or above our type curve and what our plans were going into the year. We do have one drilling rig active in the play right now, and we're really moving rapidly up the learning curve.

Again, just to reiterate, this play is really double premium returns and it's competitive for capital with our oil plays. 

Bob Brackett -- Bernstein Research -- Analyst

Great. Thanks for that.

Operator

Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning. Good morning, team. As every new CEO has an opportunity to put their own thumbprint on the business and recognize that you're a part of the prior leadership team as well. But just talk about your early observations as the new leader of the organization, any subtle changes that you're making? And talking about your messages to your internal and external stakeholders that you want the market to be aware of.

Ezra Yacob -- Chief Executive Officer

Yes, Neil, I appreciate the question and the opportunity. I think, the biggest thing for our investors, our employees, everyone who's listening to the call is that EOG has got a proven track record. Our strategy works. The shift to premium strategy has put us on a different trajectory and the shift to double premium is going to do that as well.

The culture of EOG, the people at EOG has always been our competitive advantage, and that will continue to be that way. Honestly, Neil, the most important thing we can do as a leadership team is put our employees in a position to succeed where they can really contribute to the best of their abilities. And that's what we try to do every day. And that's going to translate into, not only our operational performance that would you see the results of this quarter, but to our financial performance as well. 

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Ezra. The follow-up is that I appreciate the slide that shows the breakdown of the well costs and how you guys are ahead of your competition in terms of managing and mitigating some of these inflationary pressures. As you step back and think about the U.S. oil industry broadly, do you think this is ultimately going to be a challenge? These inflationary pressures to restart the shale machine and -- in which of these bottlenecks do you worry about the most in terms of being a constraint on the ability to -- for the industry to grow again? 

Billy Helms -- President and Chief Operating Officer

Yeah, Neil, this is Billy Helms. Certainly, as an industry is seeing, we're seeing quite a bit of inflationary pressure, mainly in three areas, I would say, steel prices, so tubulars; labor, which is certainly affects all industries and then fuel. Those are probably the three inflationary pressures that are throughout our industry and really throughout all industries. The one thing that I think is going to be -- or maybe two things, two top priorities would be probably steel.

I think, availability of tubulars is something that I think most companies are struggling with or dealing with, I guess. And then, the other one would be labor and is getting enough people to manage the activity levels. Just to maybe give you a little bit color then on where EOG sits. Each year, we try to get ahead of the curve and lock in a certain amount of our services to secure activity, but in this case, also protect us from inflation.

So for instance, in 2021, we protected about 65% of our well cost going into the year. And as a result of that, plus the improving efficiencies, we were able to reduce our average well cost by about 7% as Ezra stated earlier. So during the year, though, we also took advantage and renegotiated many of our services at lower rates and lock them through -- in through the end of next year. So going into 2022, we expect to have about 50% of our well costs secured.

And with over 90% of our drilling rigs secured at lower rates and also 50% of our frack fleets secured. So we expect to see inflation certainly in items such as steel, labor and fuel, just like everybody else. But by doing that, we've given ourselves visibility into areas of also improving efficiencies that we expect to offset much of this inflation. So we're still confident we can keep well cost at least flat going into next year. 

Operator

Our next question will come from Michael Scialla with Stifel. Please go ahead. 

Michael Scialla -- Stifel Financial Corp. -- Analyst

Yeah, hi, good morning. It's not a high-level question. Ezra, on your long-term outlook, as you think about the energy transition, how are you thinking about oil versus natural gas? Is there any preference there? And are any of the exploration plays focused on gas? Are they all on oil? 

Ezra Yacob -- Chief Executive Officer

Yeah, thank you, Michael. Long term, we believe that hydrocarbons are going to have -- be a significant part of the energy solution long term. Obviously, we need to do, as an industry, a better job with our emissions profile. But when you think about oil and natural gas, they both go to different markets, dominantly.

Your natural gas essentially is more on your power side and potentially in direct competition with things such as coal and your renewables. And then, your oil transportation -- your oil, obviously, is a little more focused on transportation. In general, when I think longer term, I think the energy transition is gonna be significantly slower than oftentimes you hear about, and we're very bullish on the prospects for both. As far as the exploration plays go, as we've said in the past, dominantly, the exploration plays are all oil focused. 

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK, thanks for that. And Ken, you had said on your CO2 pilot -- or excuse me, your CCS pilot, I think you said you plan to inject in late '22. That seems to suggest you would not need a Class VI permit. So I'm wondering, is it fair to say you're reinjecting CO2 into an EOR project? And when you say it's not really economically competitive with your upstream business.

Are you planning on capturing 45 tax credits with any of your projects? 

Ken Boedeker -- Executive Vice President, Exploration and Production

Yes, Michael, this is Ken. To answer your question on the tax credit side, we are planning on capturing 45Q tax credits. Our goal in terms of what class a permit that we would secure. We believe that we will initially secure a Class II permit that can be converted.

We'll go through all of the regulatory requirements to be able to convert it to a Class VI later in its life. But that's what the plan is for our CCS project at this point. 

Operator

Our next question will come from Paul Sankey with Sankey Research. Please go ahead.

Paul Sankey -- Sankey Research -- Analyst

Hi, guys. Just very quickly on -- can you talk about your LNG or downstream natural gas strategy?

Lance Terveen -- Senior Vice President, Marketing

Thanks, Paul. Hi, good morning, this is Lance. Hey, thanks for your question, and good morning. Yes, we're -- the team is definitely executing.

You've seen several of our slides that we've put back talking a lot about our transportation position, is so incredibly valuable. We can move gas from all our different basins from the Permian Basin, from the Eagle Ford. We talked a lot about Dorado earlier. And then, with that, it gets access as you look along the Gulf Coast and you look at the LNG demand, especially that's growing over time.

Obviously, we've got a position there that we started and just really speaks to being a first-mover, especially when you think about LNG. We went through a whole BD effort kind of '17 and '18. We got the contracts finalized in 2020. And in 2021, obviously, we're definitely seeing the value of that contract.

So being a first-mover, it is absolutely important. And yes, we're going to continue to look at new opportunities from an LNG standpoint and very well-positioned. Again, it gets back to our transport, our export capacities and just having that ability to transact, we can definitely be very nimble as we even think about new opportunities.

Paul Sankey -- Sankey Research -- Analyst

Got it. And then, a follow-up on the buyback. I'm not clear. Are you saying that it's a shelf ability to buyback shares when you want? Or are you actually going to try and get through this amount in, let's say, the next 12 months? 

Tim Driggers -- Chief Financial Officer

Paul, this is Tim. We do not have a time line on when we plan to buyback the $5 billion. When the opportunity presents itself, we will be in the market.

Operator

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

Ezra Yacob -- Chief Executive Officer

Yes. We just want to thank each of you for participating in our call this morning, and thank our shareholders for their support. As I highlighted at the start of the call, EOG's competitive advantage is our employees, and they deserve all the credit for delivering another outstanding quarter. So thank you, and enjoy the weekend. 

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Tim Driggers -- Chief Financial Officer

Ezra Yacob -- Chief Executive Officer

Billy Helms -- President and Chief Operating Officer

Ken Boedeker -- Executive Vice President, Exploration and Production

Paul Cheng -- Scotiabank-- Analyst

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Jeanine Wai -- Barclays -- Analyst

Scott Gruber -- Citi -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

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

Bob Brackett -- Bernstein Research -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Michael Scialla -- Stifel Financial Corp. -- Analyst

Paul Sankey -- Sankey Research -- Analyst

Lance Terveen -- Senior Vice President, Marketing

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