EOG Resources (EOG -0.53%) is a shale drilling machine. That was evident in the recently completed third quarter when the company beat back Hurricane Harvey to post solid results. As a result, it's on pace to boost production 20% this year while living within cash flow, which is a remarkable feat considering that many oil companies can barely maintain their production at current oil prices.
The reason EOG Resources is thriving in the current market conditions is that the company does things differently. That was evident in the comments of CEO Bill Thomas on the accompanying conference call. Here's what he believes sets the company apart from rival drillers.
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We see diversification as an asset
One thing that sets EOG Resources apart from most rivals is its focus on drilling for returns and not just oil and gas. It does that by setting a high hurdle for new wells, which must generate at least a 30% after-tax rate of return at $40 oil. Currently, the company has about 8,000 future drilling locations that meet that hurdle rate, which is 2,000 more than it had at the beginning of the year.
What's noteworthy about this inventory is that it's spread across six separate shale basins, which is another thing that distinguishes EOG from rivals since most focus on just one or maybe two plays. That diversity "is s powerful competitive advantage with multiple benefits," according to its CEO.
First, he noted that it minimizes single basin risk. Consequently, "temporary conditions on a single basin, such as market tightness or weather events, will have limited impact on our performance." That was evident in the third quarter when heavy rain from Hurricane Harvey and other storms forced producers in south Texas to shut down wells, which cut into their production rates. Those weather events had a more significant impact on Sanchez Energy (NYSE: SN) since it focused entirely on the Eagle Ford shale. Sanchez Energy noted that a late-September storm knocked 4,000 barrels of oil equivalent per day (BOE/D) offline for 15 days in October. So, it expects output in the fourth quarter to come in near the low end of its 80,000 to 84,000 BOE/D guidance range.
Meanwhile, another benefit of EOG's multibasin approach is that it "allows the company to grow each asset at the optimum pace to maximize its profitability and long-term value," according to Thomas. He also noted that "each play is unique and has a technical and cost optimization learning curve. It's easy to go too fast and potentially risk the long-term value of an asset." That happened to Sanchez earlier this year when an 11-well test underperformed expectations. The company then had to revert to its previous method, so it didn't continue completing lackluster wells.
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Our focus is on quality, not quantity
That said, what's even more crucial to EOG Resources than diversification is controlling the best land in the basin. Thomas pointed out that,
The most important point to understand about exploration is that not all rocks are equal. Every play has geologic sweet spots, with superior rock quality that drives well productivity. We do not want to own the whole play. Our focus is to capture only the best rock in the best plays. We did that in the Bakken in 2005, we did it again in the Eagle Ford in 2009, and last year, we solidified sweet spot acreage in the Delaware and Powder River Basin with the Yates acquisition. Our ability to identify and capture the best rock is the major reason EOG wells consistently outperform the industry in productivity and returns.
By controlling acreage with the highest-quality rocks, EOG Resources can drill into the most hydrocarbon saturated deposits, enabling it to produce more oil and gas for less money, which is the key to earning a high return. That's why it's much more important that the company own the best land instead of merely holding vast tracts that contain marginal drilling locations.
A two-pronged approach
EOG Resources believes that the key to winning in shale is controlling the best spots across multiple plays because it amplifies its ability to drill for returns. It's a differentiated approach since most rivals either own land all over the place or in just one or two basins. So, they either lack quality or flexibility, which is why they earn lower returns and will likely grow at a slower pace than EOG if oil stays in the $50s for the long term.
