EOG Resources (NYSE:EOG) is taking a much different approach managing the oil market downturn than the rest of the industry. Instead of investing every penny of cash flow -- and then some -- to push as much production growth as possible, EOG Resources is simply refusing to grow production at all in this environment. Instead, it is focusing on getting its costs as low as possible to boost its returns. Those were some of the key things EOG wanted to make sure investors took away from its second-quarter report.
1. Production is up and costs are down
EOG Resources' second-quarter production only increased 1% year-over-year after adjusting for the sale of its Canadian operations. However, that was actually ahead of the company's own forecast as improved well productivity delivered stronger-than-expected production. Driving this improvement is the integration of the company's latest high-density completion designs, which are really yielding some monster well results.
Not only are well results improving, but the company is seeing a significant improvement in overall costs. In just the past quarter alone its per unit lease operating costs are down 17%. In addition to that capex costs to drill new wells also continue to come down. This combination is enabling the company to produce more oil for less money, which is enabling it to make higher returns at lower oil prices.
2. The Bakken just keeps getting bigger
One thing EOG Resources took the time to detail in its earnings report is the fact that the Bakken keeps getting bigger. The company revised its Williston Basin resource potential much higher as it now expects to recover 1 billion barrels of oil equivalent, or BOE, from the Bakken and Three Forks shale plays. That's a significant increase from the 600 million BOE it had previously estimated. Driving this increase is the fact that the company has grown its drilling inventory from 580 to 1,540 drilling locations as a result of successful down-spacing and advances in technology. This is giving the company decades of high-return drilling potential, even in a low oil price environment.
Not only is the company's resource potential in the Bakken improving, but so are its well results. During the quarter the company set a new industry record with the largest Bakken well. Thanks to the aforementioned high-density completion technique, its Riverview 102-32H well came on-line at 3,395 barrels of oil per day plus 6 million cubic feet per day of natural gas. Gushers like these will make a lot of money in nearly any commodity price environment.
3. Still not interesting in growing production
One thing that EOG Resources made abundantly clear is that it still has absolutely no interest in growing its oil production into an oversupplied oil market. As a result, the company is keeping its 2015 oil production guidance unchanged, which will result in roughly flat production from 2014's level.
That being said, because the company's costs have fallen so dramatically it doesn't need to spend as much money as previously planned to keep production flat. Because of that it's pulling $200 million out of its capex budget. That's really very noteworthy as virtually every other energy company is reinvesting any capex savings into additional wells and to further boost production. EOG Resources on the other hand would rather save its drilling inventory for when prices improve.
EOG Resources CEO Bill Thomas said in the company's press release that the company's goal is to "continue our progress and remain the industry leader in capital returns." Those aren't mere words as the company is backing them with actions as it's refusing to grow its oil production until prices improve, despite the fact it has the cash to invest. Instead, it remains laser focused on improving its costs so that it can deliver solid returns on the wells it is drilling in the current environment so that it can really pump out impressive returns when conditions improve.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.