Image source: Getty Images.
EOG Resources' (EOG +1.47%) primary goal during the oil market downturn was to pivot the company so it can thrive in a low oil price environment. The company made substantial progress on that goal, which CEO Bill Thomas detailed on the company's second-quarter conference call. He pointed to four specific highlights that show how far the company has come toward reaching its goal.
1. Costs are coming down
Thomas started off the highlight reel by saying that,
First, per unit lease operating costs decreased by 27% in the first half of 2016 versus 2015, and per unit cash operating costs in the first half are down 15% compared to full-year 2015 and 30% below 2014 levels.
To combat slumping oil and gas prices, EOG Resources focused on pushing down its production expenses to offset some of the price decline. Since 2014, the company brought its cash operating costs per barrel of oil equivalent down from $17.02 to $11.95 or roughly 30%. That drop is in line with the 30% decline in operating costs at rival Devon Energy (DVN +1.40%), which cut $1 billion out of its field-level operating costs over the past year alone, providing it with more cash flow to keep drilling.
2. Capital efficiency is improving
Thomas continued by saying that,
Second, with outstanding capital efficiency gains, we exceeded the high end of our second quarter U.S. oil production target, and we are increasing our full-year U.S. oil forecast by 2% without increasing CapEx guidance.
Not only has EOG Resources cut its operating costs, but its drilling costs are falling mainly through efficiency gains. Completed well costs in the company's top three oil plays are down 43% in the Delaware Basin, 21% in the Eagle Ford, and 31% in the Bakken. Because of this significant drop in capital costs, the company was able to slash its capex spending from $8.3 billion in 2014 all the way down to $2.5 billion this year while maintaining relatively stable oil production.
This is one of the most remarkable stories coming out of the downturn where drillers can get much more production out of each capital dollar than initially anticipated. That is why EOG Resources boosted its oil production forecast without increasing capex. Devon Energy also raised the mid-point of its production guidance by 3% without adding any additional capital that would impact 2016 production. In fact, most shale drillers boosted their production outlook this year due to the remarkable efficiency gains made over the past year.
3. Premium drilling inventory is rising
Thomas then pointed out that,
Third, we have increased our premium inventory by 34% and increased our premium reserve potential by a whopping 75%.
EOG Resources' crowning achievement in the oil market downturn is its ability to get its drilling economics to the point where a growing portion of its drilling locations are profitable at $40 oil. The company calls this its premium inventory, which it defines as wells that will generate a 30% after-tax rate of return at $40 oil. Initially, EOG Resources estimated that 3,200 of its 15,000 drilling locations were premium wells. However, it increased that estimate by 34% last quarter by pushing down costs and improving well recoveries. Further, its focus going forward will be to grow its premium inventory by either converting existing locations to premium, gaining new locations by exploration, or acquiring them.
4. The balance sheet is strengthening
Thomas concluded the highlight reel by saying that,
And fourth, we closed on $425 million of non-core property sales this year. Along with maintaining our strong balance sheet, we are updating our portfolio by investing in high-return premium assets.
To thrive in a low oil price environment, EOG Resources needed to maintain a strong balance sheet. It did that by cutting capex and selling some non-core assets. That said, because its balance sheet was rock-solid heading into the downturn it avoided the fate of Devon Energy, which needed to sell assets, issue equity, and slash its dividend to bolster its balance sheet.
Investor takeaway
EOG Resources was already a strong oil company before the oil market downturn. However, the company set an ambitious goal to reposition so that it could thrive at lower oil prices. It is a goal that the company accomplished, putting it in the position to restart high-return production growth at current oil prices.
