EOG Resources has a history of deftly navigating the landscape as unconventional oil activity skyrocketed in the United States.
The Houston-based exploration and production company, under the direction of then CEO Mark Papa, was a leader in developing horizontal oil production beginning with multi-stage fractured wells in the Permian Basin in 2000, in the Barnett shale in Texas in 2003 and in the Bakken in 2006. EOG continued horizontal shale exploration expanding into the Eagle Ford in 2009, and since has refined its technical knowledge of shale development.
Responding to high prices and short supply of fracking sand, in 2012 EOG opened a sand processing plant in Wisconsin, one of the largest facilities of its kind in the country. Low-cost sand allowed EOG to experiment liberally to find optimum levels of sand injection into its stimulation fractures.
Papa recognized early on that rail would be a key in moving Bakken oil to refineries. EOG christened its St. James, Louisiana, crude-by-rail unloading terminal in April 2012, giving it expanded access to Gulf Coast refining markets with new connections to pipelines, storage and barge facilities in the area. Its Stanley, North Dakota, rail terminal opened in 2009.
In 2013, EOG Resources Inc. became the largest producer of oil in the onshore Lower 48 states, reaching 300,000 barrels of oil per day of gross operated production by September, and as of June 2014 EOG was producing 19 percent more oil than its next closest competitor, according to the company’s website.
Times changed
But that was then, and now in the midst of a low oil price environment, EOG is putting on the brakes, slashing 2015 capital expenditures 40 percent from 2014.
CEO Bill Thomas told analysts in a February 2015 conference call that EOG does not believe that growing production “in what could turn out to be a short-cycle, low price environment, is the right thing to do.” So EOG is implementing a strategy to ride out the oil market slump.
However, EOG is also looking ahead and is implementing a strategy to ramp up production when oil prices recover. “It is clear that current prices are too low to meet the world’s supply needs and the market will re-balance,” Thomas said. “We would be ready to respond swiftly when oil prices improve and resume our leadership and high return oil growth.”
But that was then, and now in the midst of a low oil price environment, EOG is putting on the brakes
EOG’s 2015 capex of approximately $5 billion will focus on its “top three plays” in the Bakken, the Eagle Ford in South Texas and the Delaware Basin in West Texas and New Mexico.
“At $55 oil, these premier assets deliver a direct after-tax rate of return greater than 35 percent without factoring in the potential for additional services cost reductions,” Thomas said.
EOG is reducing the number of drill rigs and delaying well completions.
In the Bakken, EOG plans to complete just 25 wells as opposed to 59 wells completed in 2014. “Delaying completions increases returns, adds substantial net present value and prepares the company to resume strong oil growth when commodity prices recover,” the company said in a Feb. 18 press release.
EOG plans to complete approximately 345 Eagle Ford wells in 2015, a decrease of 35 percent from 2014. In the Delaware Basin, EOG will increase capex to complete approximately 95 wells, 53 percent more than in 2014.
The company will also continue efforts to lower finding costs and improve production rates. Thomas said because of cost and productivity improvements in the Eagle Ford, the company “can now generate better returns with $65 oil than we did with $95 oil just two or three years ago.”
EOG’s service costs have fallen, but Thomas said it sees room for further reductions. “Due to low oil prices, we have already seen service cost reductions in many areas and we see the potential for 10 percent to 30 percent vendor savings during this downturn.”
EOG will continue to grow its acreage portfolio “through leasehold, farm-in or tactical acquisitions” in the weak market environment, Thomas said, adding that “low oil prices mean unique opportunities to add low-cost, high-quality acreage.”
Thomas believes EOG will endure the weak market environment and emerge as a stronger company. “In my 36 years with the company I have seen many downturns, and each time EOG stays disciplined, performs well, and emerges on the other side in better shape than we entered it.”
Production momentum
EOG’s total crude oil and condensate production averaged 307,700 bpd in fourth quarter 2014, nearly all of which ― 301,500 bpd or 98 percent ― came from U.S. assets. Fourth quarter production was up 3 percent over the third quarter and up 26 percent over fourth quarter 2013.
EOG continues to view the Bakken as a high-return asset.
“While the Bakken will receive less capital in 2015, it remains a core, high-return asset in our drilling program,” Billy Helms, EOG’s executive vice president for exploration and production said. “A typical 10,000-foot lateral in the Bakken core generates greater than 35 percent after tax rate of return with a $55 flat oil price.”
