EOG says exploration may push up its already high well returns

EOG Resources sees exploration drilling as a means to push per-well returns even higher than its current 60% threshold, its top executives said May 7.

The company, which earlier this year said it was increasingly focused on drilling wells which it dubbed "double premium" with a 60% return rate, said some new exploration plays it is currently testing are expected to yield 80% returns or even higher.

EOG's exploration effort is focused on making "another step change" to its inventory of 11,500 drilling locations throughout the company, 5,700 of them classified as double-premium, Ezra Yacob, who in January was named EOG's president, said. Yacob was previously executive vice president-exploration.

"It's focused on adding low-decline, high-impact plays that really increase the overall return profile of the company," whose operations are overwhelmingly located in the US but with a few select international plays, Yacob said.

Double-premium wells can achieve the 60% after-tax return rate at $40/b and $2.50/Mcf gas. They are EOG's best targets and are slowly supplanting premium wells - a concept the company introduced in 2016 - which yield at least 30% at those same commodity prices.

Double-premium drilling yields more output per well and lower decline rates. For example, cumulative oil production in EOG wells' second year are about 39% higher than premium wells. That translates to tens of thousands additional barrels and millions more dollars per well.

Moreover, the company's exploration is focused on double-premium wells, its executives said.

EOG is spending $300 million in 2021 on exploration drilling, after a lesser focus last year due to capital pullback during the height of the coronavirus pandemic.

The company's new exploration plays are in different phases of mostly appraisal, Yacob said, adding EOG feels "very confident" with early results and could provide some results soon.

One potential new play EOG recently entered is the Beehive prospect offshore Australia's Northwest Shelf, a prolific hydrocarbon region. It offers a shallow-water opportunity that Yacob said may be "impactful."

'NICHE OPERATOR' IN SHALLOW WATERS

"We're forecasting it has the potential to compete with our domestic returns," he said. "It's the type of play industry has really moved away from" but which EOG still finds profitable in Trinidad, for example, after 20 years there as "kind of a niche operator."

The company has developed operational procedures and geologic techniques it believes can be applied to shallow-water prospects to make and achieve "very, very good returns," Yacob said. Not only that, but it has offtake and oilfield service availabilities, as well as a low entry cost and "an exciting amount of upside."

"We're looking for new plays that historically haven't really been drilled routinely with horizontals [and also] a higher quality of rock so we can apply the horizontal drilling and completions technology to," he said.

Moreover, the higher permeability and higher porosity lends itself to a shallower decline rate, he added.

"Potentially, those are going to be the new reservoirs industry eventually [will] apply horizontal drilling to in the future," he added.

EOG said its decline rate in 2018 was 31%, 29% in 2019, and an estimated 28% in 2020. The company is targeting a decline rate less than 25% in 2023.

In Q1, EOG's total production was 778,900 boe/d, of which 431,000 b/d was oil, the company said in a statement. Those figures were each about 11% below production for the same year-before period and 3% lower sequentially.

O1 OIL OUTPUT ABOVE GUIDANCE

However, Q1 oil production was 6,000 b/d or slightly more than 1% above guidance. The US accounts for 99.5% of EOG's oil production and 82% of its natural gas.

In addition, EOG continues to receive a "steady stream" of federal permits, Billy Helms, EOG's chief operating officer, said. That is consistent with other upstream operators' comments in recent weeks.

US President Joe Biden, who imposed a 60-day moratorium on new permitting and leasing on federal lands shortly after taking office in January, had pledged during his campaign to halt new permits and lease sales. His administration is currently reviewing those programs although the moratorium expired in March and since then officials have issued permits for existing applications.

Helms said EOG was "active in obtaining permits prior to the administration change just to protect our activity levels," adding the company is "receiving permits in all of our areas."

"I think the working relationship we've been able to maintain with the regulators and working through the process with them has benefited us real well," he said.