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EOG Resources Answering Opportunity's Call in Permian Basin

While low commodity prices continued to offset significant well productivity improvements, senior executives at EOG Resources Inc. touted extraordinary production and efficiency gains in 3Q2016 and talked bullishly about the rest of the year and their company's prospects in the 2017-2020 period, with a new focus on premium well locations centered in the Delaware Basin in the Permian.

Early this year, EOG identified 3,200 new drilling locations representing 2 billion boe of reserve potential, EOG CEO Bill Thomas said during a quarterly earnings conference call with analysts on Friday. Thomas said to meet the company's new "premium" standards, wells must earn a 30% return at $40/bbl oil.

"The process calls for first defining premium [locations], and second, identifying them, which has ensured in 2016, the second year of the price downturn, that we did not spend a single dollar drilling uneconomic wells," Thomas said. Since the start of the year, more than 1,000 wells have been converted to premium status, he said.

With the recent Yates Petroleum Corp. acquisition, which doubled EOG's holdings in the Permian, EOG added 1,700 premium locations, boosting the company's self-proclaimed 20-year resource potential to 5 billion boe and 6,000 locations, doubling the potential and almost doubling the locations since the start of 2016, Thomas said (see Shale Daily, Sept. 6).

Through continuing productivity gains and cost reductions, Thomas and other senior officers at EOG are touting growing returns at $50/bbl and $60/bbl oil without adding any rigs to its current 15-rig fleet (five in the Permian, six in the Eagle Ford, and four in the Rockies).

Billy Helms, executive vice president for exploration/production, said the Delaware Basin was where EOG is ramping up its efforts at capturing its efficiency and production gains, leveraging the Yates acquisition as a reason for increased bullishness.

"With the combination of technology gains, cost reduction, and the Yates transaction, we increased the Delaware Basin's resource potential by 155%, bringing the new total to 6 billion boe, from 6,300 net locations," Helms said. "That is 3.7 billion boe larger than our total announced a year ago."

Helms said that in the second Bone Spring formation, EOG has updated its resource potential estimates from 580 million boe to 1.4 billion boe, three times what it was a year ago. Helms and Thomas emphasized that EOG has significantly increased the size and productivity of its holdings in the Permian.

COO Gary Thomas said EOG is on track to drill 90 more wells and complete 80 more than was estimated for 2016, and as a result, the 4Q2016 oil production -- before the Yates acquisition -- is now forecast to be 36,000 b/d above the company forecast at the start of this year. When Yates and international volumes are included, production is expected to hit the company's all-time high in the fourth quarter, he said.

While industry analysts are now predicting big service company cost increases next year, Thomas said that EOG is "well insulated" against this and is forecasting well costs to be flat in 2017. Similarly, EOG has cut into its backlog of drilled-but-uncompleted (DUC) wells this year and it expects a total of 140 DUCs at year-end, what Thomas called "a normal level."

The CEO said EOG eventually will be looking to sell noncore assets as it completes a full assessment and evaluation of its portfolio.

Thomas said the "premium" emphasis is resulting in rates of return/well that are "significantly higher" than the industry averages, and EOG's strategic goal is to be the industry leader in levels of returns. "That is a position we have historically held, and a distinguishing factor in the company," he said. "We want to stay efficient and continue to get better, so the goal is to get better -- not just get bigger."

For 3Q2016, EOG reported a net loss of $190 million (minus 35 cents/share), compared to a net loss of $4.1 billion (minus $7.47/share) for the same period last year.

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