Houston—EOG Resources, which sent its share price into a tailspin last month after saying it might grow oil production up to 10%/year as early as 2022, clarified its position March 17 and stressed that it will only begin a growth mode once oil markets are balanced.
In a presentation to the virtual Evercore ISI Elite Energy conference, Thomas reiterated EOG will not resume production growth "until the market clearly needs the barrels," and added oil demand recovery to pre-coronavirus pandemic levels could occur as early as second-half 2021 and more probably by December."We believe demand is significantly increasing," he said. "It's very realistic that demand could be at pre-COVID levels as we get into 2022."
But demand isn't the only signal EOG needs to see to raise its growth levels–which industry currently frowns upon given recent years of oil price volatility stemming from too-high crude production levels. Thomas said he would also like to see global inventory levels at or below the five-year average, including US inventories, as well as OPEC's ability to restore its current output cuts without causing crude prices to fall.
"OPEC needs to get oil back on the market, and get spare capacity down," he said. "When those three things align, we'll begin growth again. If that doesn't happen, we'll moderate our growth rate. We may not grow at all, or may grow at a smaller rate than 8% to 10%. But we won't put oil to a market that doesn't need it."
Betting on double-premium wellsOn Feb. 26, after the company said it could resume oil output growth as early as 2022, EOG shares dropped $6.03 to $64.56 from the prior-day close of $70.59. But a rebound came a few days later, and on March 17 they closed at $73.33/share.
This year, EOG plans to keep its oil production at 440,000 b/d, roughly flat with 2020 output levels.
The company, which also disclosed last month that it now averages a roughly 60% after-tax rate of return on its premium wells at flat prices of $40/b for oil and $2.50/Mcf for natural gas, said its new exploratory plays which are now being tested should even best those return rates.
Its wells averaging 60% returns or more, which EOG calls double-premium wells as opposed to simply premium wells which previously commanded at least a 30% return at $40/b and $2.50/Mcf, also provide an uplift in oil recovery of about 39% in the first two years.
"And the new plays we're working on are even better than that," Thomas said.
Moreover, double-premium wells have a "super-low finding cost and lower decline than those we drilled in the past," he said. "We can break even at a $32/b" oi price.
EOG is spending $300 million of its $3.9 billion capital budget this year on exploration worldwide, although it has not yet revealed the location of the plays.
Typically the company holds its cards close to the vest until it fully understands the play and can gain a leasing advantage, and only then reveals them publicly.
The reason it is focusing this year on new exploration is simply that "its returns are higher," Thomas said.
Exploring 'low risk' plays"These are very low-risk plays [and] we're not expecting any dry holes at all," he said. "They will not be much different from the wells we're currently drilling. Some will be significantly better than [current] wells ... we expect them to be additive very quickly."
The company's Dorado dry gas play in South Texas, which it unveiled in November 2020 during its Q3 conference call, may have "some of the lowest emissions gas in the world," Thomas said.
A large percentage of wells in the South Texas Austin Chalk play, where Dorado is located, are achieving double-premium well returns, he said. EOG will drill 15 of those wells this year.
"The first couple of years, we want to get the cost down as fast as possible," he said. "As soon as we do, we'll have more room and confidence in accelerating [it]."
EOG is not "super-bullish" on gas, but "not bearish either," Thomas said. "We think gas will be a very significant part of the energy transition down the road, and if so the returns go way up."
The play is sited near the border with Mexico, which needs gas, and also the US Gulf Coast market where it can be exported. The site is also close to a variety of LNG terminals, Thomas said, adding EOG would like to get "more exposure" to LNG as that market develops further over time.
"All that is very beneficial," he said. "It gives us lots of options and exposure to a lot of upside."
Dorado "is very competitive at $2.50/Mcf gas," he added. "We'd be more prone to accelerate it [if gas prices were] $3/Mcf or $3.50/Mcf, or if we had an LNG deal."
