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Houston-based EOG Resources Inc. is one of the largest oil and gas producers in the 48 states of the United States. It hopes to give back to shareholders rather than increase production. By 2022, discipline is still the mantra.

CEO Ezra Yacob said in a conference call to discuss the results that the independent company's gas, oil and liquid production in the third quarter of 2021 was better than expected and profits increased significantly. Yacob took over at the helm after working in the U.S. Geological Survey's minerals department last month.

"EOG has never been better," he told investors. "We expand our record of reliable execution by better than expected production, capital expenditures, operating costs and product prices...

"Our high-return business model is long-term sustainable, supported by a large inventory of double premium drilling locations... We are also optimistic about the potential of new exploration areas to improve the overall quality of our inventory."

However, increasing production in view of rising commodity prices is not yet on the table. For EOG, there is no growth plan “before the market clearly needs oil”. 

Growth in 2021 and beyond will depend on "market fundamentals, not prices." EOG is looking for signs of low idle capacity and oil demand returning to pre-pandemic levels. 

The current plan is to maintain oil production at 440,000 barrels per day, which will be lower than the results in the third quarter. 

[Listen: Join Patrick Rau, Director of Strategy and Research at NGI, to gain insight into the expected content of the third quarter earnings report. From how US natural gas producers increase production to the next wave of LNG projects, from the industry’s over-focus on RSG to the upcoming M&A activities, please follow NGI’s Hub & Flow podcast. ]

Yacob told investors that EOG “permanently upgraded our investment standards” following the oil price plummet that began in 2014 and continued through 2016. "We have set a premium threshold not only to protect the company's profitability in 2016, but also to protect all future commodity cycles." 

The change paid off. By the second half of 2016, EOG began to reinvest capital and pay dividends in cash flow. Yacob explained that it also expanded its "Premium: Oil Well" inventory by more than 30%, while increasing the inventory that reached the company's threshold. EOG's current minimum rate of return is 60% direct after-tax rate of return, and the oil price is $40/barrel, which was initiated in the down cycle last year.

Although EOG has no plans to increase production in the short term, the volume of oil and gas wellheads is increasing every year. Production increased 2% month-on-month to 844,400 barrels of oil equivalent/day, and in the third quarter of 2020, production totaled 716,000 barrels of oil equivalent/day.

In the third quarter of 2021, global crude oil and condensate production rose from 377,600 barrels per day to 449,500 barrels per day. US liquids accounted for most of the trading volume, at 448,300 barrels per day, compared with 376,600 barrels in the same period last year. 

The global amount of natural gas has also increased from 1.19 Bcf/d to 1.42 Bcf/d. US natural gas contributed almost all of the production in the third quarter of 2021, at 1.21 Bcf/d, which was higher than the 1.01 Bcf/d in the third quarter of 2020. Due to operational problems, Trinidad’s natural gas production has dropped from 260 MMcf/d to 185 MMcf/d per year. 

Global liquefied natural gas (NGL) production increased from 140,100 barrels/day to 157,900 barrels/day.

At the same time, EOG's unit cash operating costs were 5% lower than the midpoint of the guidance range, mainly due to lower-than-expected leasing, oil well and transportation costs. The total capital expenditure in the third quarter of 2021 was US$935 million, while the capital expenditure in the third quarter of 2020 was US$499 million. 

As efficiency increases, the cost of oil wells decreases. EOG said it can also "offset inflationary pressures by increasing efficiency in many areas," including the use of "super zipper" technology. On multi-well pads, zipper completions allow simultaneous completion of wells. For example, one well can be pumped and a cable completion can be performed on another well. 

Managers said that efficiency has improved "faster drilling time, lower cost of sand source procurement, and increased infrastructure to obtain low-cost water."

EOG plans to expand its overseas business through liquefied natural gas (LNG) exports. Lance Terveen, senior vice president in charge of marketing, told investors that EOG believes that the transportation of natural gas from "all our different basins" (including the Permian and Eagle Ford Shale) is "incredibly valuable."

EOG is already developing Dorado, a natural gas-rich discovery in southern Texas, where it accumulated 163,000 acres of leaseholds earlier this year. Dorado reserves can provide EOG with preparations to divert natural gas supply from any Gulf Coast export project. 

This formation runs through the Austin Chalk and Eagle Ford shales and is said to have an estimated net resource potential of 21 Tcf. 

Tevin said that LNG demand "clearly grows over time." With Dorado's first mover advantage, EOG has already finalized some contracts.

"We will continue to look for new opportunities from the perspective of LNG," he said. "Our positioning is very good. Once again, it's back to our transporter export capabilities and...with transaction capabilities. When we even consider new opportunities, we can definitely be very flexible."

By the end of next year, EOG will also pilot a carbon capture and storage (CCS) company to eliminate carbon dioxide (CO2) emissions from oil and gas operations. EOG is usually cautious in providing detailed information about future projects, but only provided some key points during the conference call. 

However, Yacob made it clear that the carbon dioxide (CO2) capture pilot does not indicate that EOG's business model will change. 

He said that carbon capture "is a much lower return business." "We will pay close attention to this, but our real goal of carbon capture is only to reduce Scope 1 and Scope 2 emissions, and we have made significant progress in the past few years."

Ken Boedeker, executive vice president in charge of exploration and production, said that EOG “is currently working on the engineering and regulatory aspects of the project. As we gradually complete these steps, we will have a clearer schedule. But now, we hope to start by the end of 2022. Inject carbon dioxide.” For all ongoing environmental, social and governance initiatives, EOG allocates 2-3% of its budget to the “entire value chain” to achieve net zero emissions by 2040.

Boedeker said that the burning intensity rate of EOG will increase by 43% every year in 2020, which will reduce the overall greenhouse gas intensity by 9%. "By 2025, we will continue to make progress towards the goal of zero conventional combustion in all businesses. Our more direct goal is to achieve a wellhead natural gas capture rate of 99.8% this year."

EOG's net income in the third quarter of 2021 increased from a loss of US$42 million (minus 7 cents) in the same period last year to nearly US$1.1 billion (US$1.88 per share). Revenue more than doubled, from US$2.25 billion to US$4.77 billion.

Operating net cash increased from US$1.2 billion to US$2.2 billion, and free cash flow (FCF) climbed from US$762 million to US$1.36 billion.

The board of directors approved an increase in the dividend by 75 cents per share, which is equivalent to an annual interest rate of 3 US dollars per share, which is 82% higher than the previous level. A special dividend of $2 per share was also announced. Overall, EOG promised to return US$2.7 billion to shareholders this year, or 30% of disposable cash flow. In addition, the board of directors approved share repurchases of up to $5 billion.

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As domestic production is declining and European demand for US exports remains stable, natural gas futures rose on Monday, a sharp reversal compared to the previous trading day. After falling 35.8 cents on Friday, the December contract on the New York Mercantile Exchange rose an average of 22.6 cents a day, closing at $5.017 per million British thermal units on Monday. It rose 22.4 cents to 5.104 US dollars in January. ...

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