Saturday, May 7, 2016

EOG 1Q16 Conference Call -- May 7, 2016


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.


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.

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:

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

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

  • 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.
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.

President Obama Missed The Bakken When He Visited Standing Rock; Maybe Trump Can Stop By Standing Rock On His Way To Bismarck --

Breien, ND, at the northernmost edge of Standing Rock Reservation is only 38 miles south of Bismarck. A "Trump helicopter" landing on the reservation and then another landing in Watford City would be some huge photo ops.

The oilpatchdispatch is reporting:
When Donald Trump visits North Dakota later this month, the leader of the state’s oil industry group hopes to hear something different than what has been said on the rugged campaign trail.
“I’m hoping now that he focuses now on more policy-driven issues rather than the combative nature of multiple candidates vying for the nomination,” said Ron Ness, president of the North Dakota Petroleum Council.
Organizers announced Wednesday the presumptive Republican presidential nominee will be the keynote speaker at the Williston Basin Petroleum Conference this month in Bismarck.
“Love him or hate him, he’s coming here, and it’s our opportunity to listen to him and try to get some North Dakota issues before him,” Ness said.
Actually, I hope Trump reminds voters that Hillary would like to see fracking banned.  And don't say she wouldn't do it. Her home state of New York bans fracking.

WOW! I've Lost My Favorite Weather Site

From Weatherspark:
Years ago we made a terrible mistake: we developed the WeatherSpark Dashboard in Adobe Flash.
Years of effort went into the Dashboard. While a lot of people loved it, and hundreds of thousands of people used the Dashboard every month, the simple reality is that online ads continue to pay less and less, and very few people decided it was worth paying for it.
At the same time, Flash as a platform is dying. The WeatherSpark Dashboard is strongly integrated with the map component, and while there were multiple Flash maps available when the project started, there is today only one and that API has been deprecated with an unspecified sunset date - one day it’ll just get turned off.
The map provider has in the past graciously offered their map services for free, something we are extremely grateful for. Recently they have however insisted on charging for their services, which is very reasonable.
Unfortunately, we have been unable to come to an agreement with the map provider going forward, leaving us little choice but to remove the Dashboard it right away.
Switching the Dashboard to HTML5, which would offer more map options, would cost vastly more than any plausible return.
This sucks, and we are just as upset and disappointed by this as you are.
We really wish we had made a better decision when we started out, but the reality is that we didn’t, and now we will all have to suffer for it.
Effective immediately:
- The Dashboard is no longer available.
- Subscriptions are deprecated, which means that existing subscriptions will not be charged again, and that it will not be possible to sign up for new subscriptions.
Thank you for your support, and we are sorry we weren’t able to make things work out better.
(This only applies to the Dashboard, the website will otherwise continue to operate as before)
I don't know if folks remember this, but Steve Jobs made the right decision on Adobe Flash/HTML5 years ago. He had to go to court to win his case, and he did. Too bad others didn't listen. 

The good news: there are still other sites which provide the information I need:

Saudi's Oil Minister, Age 80, Takes Early Retirement To Spend More Time With His Family .... May 7, 2016 ....

Well, not exactly. But he is leaving. To be replaced by Saudi's former Health minister.

The AP is reporting (the original link took you to the story below; sometime overnight, the AP had replaced that story with a story about a Saudi policeman shooting; the video is of Obama talking about Truman; AP must have left the interns in charge over the weekend; in fact, even a google search reveals that the AP link/story has been changed; easy to find other stories about the Naimi ouster):
Saudi Arabia on Saturday announced the ouster of its longtime oil minister as part of a larger ongoing government shakeup.
A royal decree announced that Ali al-Naimi has been replaced by former Health Minister and Saudi Aramco board chairman Khaled al-Falih.
Al-Naimi has long been a pillar of Saudi oil policy, leading the Ministry of Petroleum and Mineral Resources since 1995. Prior to that role he'd served as the president of oil giant Aramco.
Health minister? Whatever. Rumor has it that Saudi's health ministry helped advise President Obama on the latter's healthcare program, popularly known as ObamaCare.

No doubt Al-Naimi's "trillion-dollar mistake" made the decision to "oust" him a lot easier. The fallout of that decision continues. Saudi lost another $6 billion in the most recent report, for the month of March.

One can see graphically the results of al-Naimi's trillion-dollar mistake at this site.

When you go to the link, spend a second on the Saudi Arabia icon, but then spend a minute on Russia -- that's the real story. 
The story starts back in 2000, when Saudi Arabia’s 575 million barrels and Iraq’s 227 million made the Middle East region by far the most prominent source of foreign oil.

Fast forward 15 years, and, according to the U.S. Energy Information Administration, Canada’s exports to the U.S. have doubled to 1.37 billion barrels, while the amount sent over from both Saudi Arabia and Iraq have dropped substantially.

Canada is now twice as important to the U.S. oil supply as the Middle East. Its relative importance is all that much greater considering America’s oil imports, in general, have dropped from 4.3 billion in 2010 to 3.4 billion in 2015.
But again, as interesting as the Saudi story is, the Russia oil story is the big story.


Contemplating events in the Mideast?

EOG Can Post "Strong Returns" At $40 Oil -- EOG/CEO -- May 7, 2016

Reuters is reporting:
EOG Resources Inc has the ability to post strong returns with oil prices around $40 a barrel, and would post triple-digit returns should prices spike to $60, Chairman and Chief Executive Bill Thomas told investors on Friday.
Houston-based EOG, considered one of the most efficient U.S. drillers, has a $15-$20 per barrel cost advantage over the rest of the industry, which needs a "sustained $60-$65 oil price and 12 months of lead time" to deliver modest growth, Thomas said on a call to discuss first quarter results.
Note: this is not an investment site. Do not make any investment, financial, travel, or relationship decisions based on what you read here or what you think you may have read here. However, the reviews and comments on fast-food restaurants may be of limited help in deciding where to have lunch today. 

And with that, I'm off the net for awhile. Lots of soccer today. Have a great weekend.

For The Archives

From a Texan (?) working for The New York Times: what makes Texas Texas?

Nigerian Oil Production Plummets; Gasoline Demand Vs Gasoline Consumption; Update On Project Titan -- May 7, 2016

Gasoline demand may be a "red herring" (see next story) but the Nigerian oil output plunge is anything but a "red herring."  Bloomberg is reporting:
Nigeria is suffering a worsening bout of oil disruption that has pushed production to the lowest in 20 years, as attacks against facilities in the energy-rich but impoverished nation increase in number and audacity.
Chevron Corp. said on Friday it had shut down about 90,000 barrels a day of output following an attack on an offshore platform that serves as a gathering point for production from several fields. Even before that strike on Wednesday night, Nigerian oil production had fallen below 1.7 million barrels a day for the first time since 1994.
Q: Is Gasoline Demand A "Red Herring"?
A: No

Regular readers know my thoughts on gasoline demand. I consistently use EIA data.

However, there may be other data out there that suggests gasoline demand in the US is not rising as fast as suggested by "gasoline production" data provided by the EIA.

See this article at A couple of excerpts:
  • U.S. production of gasoline is 908 kbpd more than the post-Financial Collapse low in January 2012 but is 542 kbpd less than the peak in July 2007.
  • Meanwhile, net gasoline exports are at record high levels. Exports have increased 1,443 kbpd since June 2005.
  • So, consumption has increased but remains far below pre-2012 levels. Production is again approaching earlier peak levels but most of the increased volume is being exported. The belief that U.S. consumption is approaching record highs is simply not true.
  • Americans are driving more than ever before. Vehicle miles traveled (VMT) reached an all-time high of 3.15 trillion miles in February 2016.
  • VMT have increased 97 billion miles per month (3 percent) since the beginning of 2015 and gasoline sales have increased 187 kbpd (2 percent). The rates of increase are not proportional.
Much, much more at the link. Archived.

The Apple Page

Apple is seeking large expanses of real estate in the Bay Area for its "autonomous [self-driving] automobile project. See map at the linked site. 
Apple is looking to purchase "large expanses of real estate" in the San Francisco Bay Area for its much-rumored car project, codenamed Project Titan. Google parent company Alphabet and several car manufacturers, such as Tesla and Mercedes Benz, are also on the hunt for more space, according to Hudson Pacific, one of the Bay Area's largest landlords. 
While the size Coleman references is fairly big, car production plants tend to be even larger. Tesla's Fremont, California factory is 5.3 million square feet while Ford's Flat Rock, Michigan plant, one of its smaller factories, is 2.9 million square feet. For comparison, Apple's new headquarters is 2.8 million square feet while Google's Mountain View campus is 4.8 million square feet.

In recent months Apple has been leasing more space repeatedly for its car project in the Bay Area. In March, Apple leased a former Pepsi bottling plant in Sunnyvale, California. The Cupertino company has also leased and purchased several smaller, secret buildings likely being used to develop Apple Car technologies. In January, Apple gained approval from the San Jose city council to develop a 4.15 million-square-foot campus in the city. 
Income Equality

New hires with barely a high school diploma and no experience are now approaching wage levels nearer the salaries being paid their mid-level managers with decades of experience.

People who thought "income equality" met narrowing the pay gap between the CEO and newly hired high school graduates were, should we say, a mite wrong?

Unfortunately, we now know what was meant by income equality.

Income Equality

At least one multi-billionaire is doing his part to bring back a bit of income equality to New Jersey.

He's moving.

The New York Times is reporting
Our top-heavy economy has come to this: One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations as a greater share of income — and tax revenue — becomes concentrated in the hands of a few.
Last month, during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.
The New Jersey resident (unnamed by Mr. Haines) is the hedge-fund billionaire David Tepper. In December, Mr. Tepper declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami.
New Jersey won’t say exactly how much Mr. Tepper paid in taxes. But according to Institutional Investor’s Alpha, he earned more than $6 billion from 2012 to 2015. Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments.
Mr. Tepper, 58, declined to comment on his move. He does have family — his mother and sister — who live in Florida. But several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

School District And Dallas Cowboys Partner To Build $1.5 Billion (With a "B") Complex In Frisco, Texas -- May 7, 2016; California's Jamba Juice Will Re-Locate To Texas

Another California company moves to Texas due to high expenses in the Bay Area. The Mercury News is reporting that Jamba Juice -- as California as one can get -- is moving to Frisco, just a few miles from where we live in the DFW area.
The owner of Jamba Juice will move its headquarters out of Emeryville and defect to Texas, partly driven by the cost of doing business in the Bay Area, according to company statements Thursday and a regulatory filing.
About 120 employees in Emeryville are affected by the relocation, according to Jamba, a maker and retailer of smoothies and other beverages.
"As we continue to spread our healthy living mission globally, it has become increasingly clear that a relocation of our support center will better position the company to extend our brand," said David Pace, chief executive of Jamba, whose subsidiary is Jamba Juice.
Emeryville-based Jamba will move its headquarters and support center to a Texas suburb called Frisco, which is in the Dallas area.
That was interesting enough, but this is really incredible. The owner of the Dallas Cowboys will partner with a local school district to build a $1.5 billion headquarters for the team. The complex will also be built in Frisco, the same suburb of Dallas where Jamba Juice is moving. Sporting News is reporting:
The Dallas Cowboys' new headquarters — dubbed The Star — might be Jerry Jones' most extravagant vision to date. 
Let's start with the pricetag — a whopping $1.5 billion. Jones' AT&T Stadium was built at a cost of $1.3 billion in 2008.
The Dallas Morning News breaks down the financial structure, for example, the city of Frisco, Texas and its school district are funding a combined $90 million to the facility.
High school football is a big part of The Star's attraction, and the reason the school district is a part-owner. The integration with schools from surround areas is a major part of the facility.
The real wow factor is found in The Star's amenities. See linked story. 
There's even a hot tub for Cowboys players named "Lake Landry," which is reported to be one of the largest ever built and is described as having "insane" technology.
I think the school district is getting a great deal. The new Williston High School (not including the price of the land) was in the neighborhood of $60 million. Frisco school district will get use of a $1.5 billion sports facility for an entry cost of $90 million.

Yes, Texas takes its sports very, very seriously.

And, some of us take food seriously. 

Chopsticks For The Very First Time

I was behind Sophia in the first picture to help her use chopsticks for the very first time. I think Sophia has tried using chopsticks before; not really sure how seriously in the past. But this time she used them as well as she used a fork for the first time.

Three hints if you try this at home:
  • don't do it until the child has seen them used many, many times
  • use sticky rice -- the rise will stick to the chopsticks regardless
  • do not try to teach the toddler to use the chopsticks; just place the pair in their hands
One may want to cup your own hand under the toddler's chin to catch the really pricey food, like salmon or tuna sashimi

For newbies: that little bit of folder up paper is the paper wrapping in which the chopsticks came. My Japanese mother-in-law taught us to take the wrapping paper, smooth it out, and then fold it (according style) and then use that as a resting place for one's chopsticks.

Also, as long as I'm digressing. Use the fat end of the sticks to take food out of a common bowl and then flip them around to use for eating. If that makes sense.