EOG Resources (EOG 0.59%) had been the fastest-growing oil company in its class. However, once oil prices plunged, EOG slammed the brakes on growth, saying that it was "not interested in accelerating crude oil production in a low-price environment." That was the polar opposite approach of many of its peers. Devon Energy (DVN -0.89%), for example, pressed forward and drove 31% to 33% oil production growth in 2015.
However, for EOG, halting growth has proved to be the prudent move, after oil prices remained weak all year, giving the company the chance to focus on improving its returns and putting it in a position to thrive when oil prices finally improve.
With 2015 drawing to a close, here's the company's current view on the oil market, as well as its expectations for what lies ahead.
Balance is returning to market forces
In discussing the macro view on the oil market, EOG CEO Bill Thomas said on the company's third-quarter conference:
Our view has not changed. The industry is becoming more disciplined. The U.S. is on an oil production decline based on the EIA data and could exit the year 500,000 to 600,000 barrels of oil per day lower than peak production recorded in April. [Therefore,] we agree with the consensus view that $40 to $50 oil is not sustainable and supply/demand is in the process of slowly rebalancing.
After a dramatic jump in recent years, Thomas points out that oil production in the U.S. peaked earlier this year and has started to slowly descend:
US Crude Oil Field Production data by YCharts
In addition to the projected decline off the peak through the end of this year, the daily production rate in North America is currently projected to fall by over 900,000 barrels by the end of 2016. This drop is expected to cut deeply into the current glut of oil in the market, which at one time was oversupplied by more than 2 million barrels per day. On top of this decline, the lower oil price is fueling incremental demand for oil, with the International Energy Agency estimating that demand is expected to grow by 1.8 million barrels this year and another 1.2 million barrels next year. This combination is expected to slowly rebalance the oil market without the help of an artificial production cut from OPEC. And once the oil market is rebalanced, oil prices are expected to begin a more sustainable rebound.
What EOG Resources plans to do in 2016
Despite the view that the oil market is poised to rebalance in 2016, EOG Resources is maintaining its cautious approach. Thomas continued:
EOG is uniquely positioned for strong performance next year. We'll enter 2016 with a large, high-quality inventory of drilled but uncompleted wells and we've few capital commitments; therefore, we have flexibility with respect to our capex program. The highest-return use of our capital next year will be to complete many of our DUCs in the first half of the year. This will allow us to have a strong start to 2016. As always, we've no interest in outspending and expect to balance capex and discretionary cash flow. ... EOG is quickly adapting to be successful in a low-oil-price environment. We're not depending on a rebound to high oil prices; instead we're making the most of the current price environment by focusing on improving fundamentals and building future potential.
There are two key takeaways from Thomas' comments. First, EOG Resources did something unique in 2015 by pre-paying, in a sense, a number of future wells by drilling, but not completing, hundreds of wells. That's how it managed to keep its production flat in a year when Devon Energy grew its output by more than 30%. And that's why EOG has a huge inventory of wells that it can quickly complete in 2016, giving it a lot more capital flexibility than rivals such as Devon.
The second major takeaway is even more important, which is that EOG Resources is no longer dependent on high oil prices to fuel growth, because it has driven its costs down to the point that it can earn a very compelling return at the current oil price. So while it won't grow production into an oversupplied market, it stands ready to accelerate growth as soon as market conditions warrant.
Investor takeaway
The oil market is starting to slowly improve, which is great news for EOG Resources. It chose to wait the market out and not pursue growth in 2015, which really gives it a lot of flexibility in the year ahead. Even better, it no longer needs prices to improve all the way back to $100 a barrel, because EOG Resources is now able to earn high returns at much lower prices, suggesting that it just needs a moderate boost to oil prices to return to growth mode.
