EOG 1Q16 Conference Call -- May 7, 2016

Updates

This is a long note and there will be factual and typographical errors. Facts and my opinions, as well as opinions of others, are interspersed. It is often difficult to separate fact from friction, to separate fact from opinions. I go through this to help me better understand the Bakken. If this information is important to you, go to the source.

In addition, this is not an investment site. Do not make any investment, financial, relationship, travel, or work-related decisions based on what you read here or what you think you might have read here or what you might have inferred from my notes. 

These are the takeaways I see regarding EOG following 1Q16 earnings report and conference call. I understand about 1% of what I read when it comes to the and gas industry. I depend on readers to help me learn more. 

Now that all of that is out of the way, my takeaways from the original post, the transcript, and the presentation related to 1Q16 EOG earnings.

1. Although EOR got almost all of the attention, I think the bigger story for EOG was the Austin Chalk. I am not yet sold on EOR. EOR is incremental; important in some regards, but we're a long way from EOR becoming mainstream. Maybe EOR is to E&P as EVs are to the automobile industry.

2. For newbies: in the early Bakken boom, few folks were aware that "we" were talking about the middle Bakken. As time went one, "we" noted that there was a huge additional target just below the middle Bakken. This was the Three Forks and NDIC agreed that leaseholds in the Three Forks were held by producing wells in the overlying middle Bakken. Now, in south Texas, EOG appears to have found a formation overlying the Eagle Ford which is called the Austin Chalk. It sounds like drilling in the Austin Chalk has a learning curve (just like it did in the Three Forks) and that leaseholds in the Austin Chalk are held by producing wells in the Eagle Ford.

3. Fracking is now focused on clustering the stages really, really close to the wellbore. This suggests to me that the horizontal distance between horizontals may decrease. In addition, the completion techniques are going to improve productivity per well with no increased costs based on resource; the only thing changed is the way they will use the resources (amount of proppant, etc).

4. We have to be really, really careful when talking about the number of wells that will be drilled in the Bakken in 2016. We are no longer comparing apples to apples when talking about the number of wells drilled in 2014 and the number of wells drilled in 2016. There are many, many reasons for saying that, but the #1 reason is DUCs. The #2 reason is DUCs. The #3 reason is DUCs. Maybe by reasons #4 and #5 we get to pad efficiency and drilling efficiency.

5. EOR is currently estimated to add about $1 million/well, and requires no new drilling. EOR is caught between a rock and a hard place: in low-price environment (oil at $20/bbl) no one has the capital to do science experiments; in a high-price environment (oil at $100/bbl) there's little incentive to invest in EOR when E&P is so much more productive. Maybe a mid-price oil environment ($60 oil) is a sweet spot for EOR for some operators. Hard to say. At the end of the day, the guys with green visors will decide.

6. There was no additional information regarding re-fracks.

7. DUC completion is estimated to be about $3.5 million/well, and requires no new drilling (at least as I understand it). From other sources; not from the EOG earnings call.

8. The numbers were a bit difficult to follow, but (and others can correct me) but it seems the slides suggested EOR resulted in an incremental increase of 1,000 bopd (the slide said bopd, I believe); there were a total of 15 wells in the four pilot projects (1+4+4+6); 1,000 bopd/15 = 66 bopd/well. This is actually pretty good especially if it improves/minimizes the decline rate.

9. I'm not focused on decline rates; I'm more interested in a) payback time; and, b) EUR. For others decline rates are important (probably due to cash flow). It looks like EOR and decline rates may be related for the next couple of years as things are sorted out.
 

Original Post

 

See first comment at this post:

The conference call is a must read for anyone following these shale matters.

Amongst the many significant points discussed, EOG's successful EOR program in the Eagle Ford may have the most consequences.

Although they claimed proprietary knowledge precluded their discussion in fine detail, they DID say it may only be feasible in select locations.

Big, big load of information in their conference call. 

I track (to some extent, and it's getting less and less each quarter, it seems) quarterly earnings here. Sometimes, I include links to the transcripts.

This is the link to the EOG 1Q16 transcript. Over time, it will be "lost" so if interested, one may want to archive it now.

I track quarterly earnings here, although over time, it seems I'm tracking less and less. See sidebar at the right.

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PTI

Before we get to the transcript and EOG's most recent presentation, first this story from Investor's Business Daily:

EOG aid Friday that drilling new wells won’t be its first priority when oil prices recover and indicated that any uptick in industry production won’t happen until next year at the soonest.

The shale leader, which bills itself as the largest crude oil producer in the Eagle Ford formation — and in Texas — said it would take sustained oil prices of $60-$65 per barrel and 12 months of lead time for the industry to modestly grow production.

EOG management said on a conference call that the company could produce more at a lower price but didn’t give a level at which it would resume drilling. U.S. crude futures rose 0.8% Friday to settle at $44.66 a barrel.

Instead of drilling, the company’s first priority is to fund capital expenditures with cash flow, reduce net debt with property sales, and then complete drilled but uncompleted wells.

We've said the same thing on the blog: operators will work on their balance sheets before resuming much new drilling. Again: completing DUCs ≠ new drilling.

EOG also said it was picking up new acreage at lower costs than they could during the boom.

Now, back to regular programming.

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Data Points From EOG's 1Q16 Quarterly Presentation, May 5, 2016

43 slides

What's new

• announced successful EOR project in Eagle Ford
• established Austin Chalk play overlaying south Texas Eagle Ford
• exceeded US oil production forecast

EOR in Eagle Ford

• four pilot projects
• 15 producing wells
• net increase with EOR = about 1,000 bopd
• much to be learned

Slide 8: 2 billion boe (with asterisk); more than 3,200 locations; more than 10 years of drilling (I do note know if this is onshore US only)

• emphasis on fiscal discipline, not drilling
• adding locations faster than drilling
• extends US horizontal lead

Production efficiency: bbls/foot of lateral drilling

• 2014:  10.7
• 2015: 13.6
• 2016 (est): 20.9 (and completion costs down significantly since 2014)

Slide 13: Bakken well costs

• 2014: $8.8 million
• 2015: $7.2 million
• 2016 (target): $6.2 million (in line with CLR's target)

Slide 14: average drilling days, Bakken

• 2012: 20.8
• 2013: 14.7
• 2014: 12.4
• 2015: 8.5
• 2016 (record): 5.4

Inventory (also tracked here)

Acreage (Bakken: unchanged since the 3Q15 presentation)

• Bakken/Three Forks - Core: 120,000 net acres
• Bakken/Three Forks - Non-Core: 110,000 net acres
• Eagle Ford: 549,000 net acres

Drilling locations remaining

• Bakken/Three Forks - Core: 590 (330 are premium locations)
• Bakken/Three Forks - Non-core: 950
• Eagle Ford: 5,200 (1,535 are premium)

For Bakken in 2016

1. focus on premium locations
2. complete 10 net wells vs 25 in 2015
3. estimated resource potential: 1 billion boe
4. completed one (1) net well in 2016: Liberty 33-1423H, 30-day IP: 1,565

Two story lines with this one slide:

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Additional Notes From The Transcript

William R. Thomas is the Chairman and CEO

Expanded information on EOR. Sounds hopeful but benefit yet to be determined.

The Austin Chalk target in south Texas Eagle Ford looks very, very good. One well averaged 2,715 boepd for 30 days; the second well averaged 3,130 boepd for first 20 days. From the transcript:

While the Austin Chalk is not a new play, historically industry production has been inconsistent from well to well. While good wells are possible, the performance and resulting returns are highly variable across the play.

However, using proprietary petrophysical analysis, we discovered how to apply new geologic concepts to the Austin Chalk and drill prolific wells consistently. Much like the Eagle Ford, the Chalk responds very well to EOG-style completions. Our high-density completions create complex fracture systems close to the well bore, significantly improving well performance.

The chalk can be as thick as 140 feet in some areas, but our targeting efforts keep the drill bit confined to the best 20 to 30 feet of rock.

We plan to drill seven additional Austin Chalk wells in 2016 and look forward to updating you with future drilling results as we learn more.

Note: EOG plans to drill seven additional wells in Austin Chalk (in addition to the first two). This compares with EOG's plans to drill only 10 wells in the Bakken in 2016.

EOG's priorities for 2016

First:

• completely fund its capital program with cash flow
• reduce net debt with property sales
• late stages of negotiating on a number of deals

Second:

• complete DUCs
• capacity to add 40% more completions without adding any additional equipment from the service industry

Takeaway: when operators in the Bakken say they plan very little drilling in the Bakken in 2016, remember: they have about 1,000 DUCs that can be completed very quickly (and these are considered not to be new drilling activity); at the height of the boom, operators were completing in the neighborhood of 2,000 wells/year in the Bakken

Q&A

EOR:

• slow and steady;
• a 32-well EOR pilot project is mentioned
• first EOR pilot project: single-well pilot
• then, two four-well pilots
• then, a six-well pilot
• next: the 32-well pilot

Premium locations:

• non-premium locations can become premium locations as costs go down; productivity increases

Timing and field preparation for EOR

• it sounds like EOR success depends on initial drilling completion techniques
• delayed EOR may be detrimental but they don't know

Analyst tried to get input regarding EOR vs re-frac but EOG did not reply

Ah, yes: inventory. An analyst caught this (and so did I): EOG talks about adding inventory but the slides do not show any increased inventory added 

• inventory question not answered

Austin Chalk is held by production from existing wells in the Eagle Ford

Last comment on the Austin Chalk

Like I mentioned before, we have collected a substantial amount of data. Pretty much all of the Eagle Ford wells that we've drilled have drilled down through the chalk. So we have a very good set of log data, seismic data, and like I mentioned before, core data to delineate this. So that's what gives us confidence. And as well, there have been other industry wells drilled. Some of the larger operators have not necessarily drilled very good wells, but some of the smaller operators have drilled some really good wells along this trend. Some of them have cum-ed 300,000 to 400,000 barrels of oil in the first year. So these are substantial wells. And like I mentioned before, based on the data we have, we think they're very repeatable.

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Fightin' Marines

The Ballad of Ira Hayes, Peter LaFarge Probably no longer politically correct. I don't know.
From The Atlantic, 2012:

While a teacher at the University of Texas, she listed herself as "white." But between 1986 and 1995, she listed herself as a minority in the Association of American Law Schools Directory of Faculty; the University of Pennsylvania in a 2005 "minority equity report" also listed her as one of the minority professors who had taught at its law school. 

From The Hill, 2012:

In addition to Harvard University, where [she] is on faculty, the University of Pennsylvania Law School also touted [her] as a minority, according to an April 2005 document obtained by The Hill.

No doubt some of these stories will "disappear" over the next few years, if not the next few months.