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EOG CEO hits peers for 'undisciplined' spending, vows no M&A

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EOG CEO hits peers for 'undisciplined' spending, vows no M&A

Independent oil and gas producers are using every opportunity to reassure investors that they have a plan for returning cash flow to shareholders while continuing to grow production. For EOG Resources Inc., this means using "premium drilling" to meet those objectives, CEO William Thomas said May 29.

Speaking at a Bernstein conference in New York, Thomas said EOG's primary objective is to create "substantial free cash flow" to return to investors while reaching double-digits in return on capital employed and organic growth.

"We work for the shareholders," Thomas said. "We are here to deliver long-term shareholder value."

When asked why he believes that investors are shying away from exploration and production companies, Thomas slammed the sector's past approach to doing business while attempting to contrast EOG's methods.

"I think the E&P industry has been viewed as undisciplined. And they outspend cash flow and they ruin oil prices at the same time, which are really two bad things," the CEO said. "I think we've been very disciplined."

Thomas described premium drilling as a 30% after-tax rate of return at oil prices of $40 per barrel. EOG has about 3,500 of those locations spread between the Eagle Ford Shale, the DJ Basin, the Delaware Basin, the Woodford play and the Powder River Basin.

"Each one of those plays has tremendous inventory, and we're converting additional premium inventory in each one of those very fast," Thomas said. "We're not running out of locations. We're not running out of a strong platform to continue the strong growth in our premium inventories."

Calling EOG's approach a "very sustainable model," Thomas said EOG would look to put its money back into its own assets, primarily in areas where it believes that it will get the best returns.

"We've done the math," Thomas said. "There's all kinds of ways you can allocate your capital, but the best way to allocate it is to back into the highest-return things you have in the company, and that's clearly our premium drilling, so we'll continue to do that at a pretty strong clip."

Investors have reacted negatively to large M&A moves by independents over the past couple of years, savaging their stocks in response to acquisitions that altered balance sheets. Thomas said EOG will have no part in the M&A market beyond small and inexpensive bolt-on acquisitions.

"We've never done an expensive corporate M&A. We don't need to do that. And we're not even ever thinking about that. That's not even remotely in EOG's game plan. Never has and never will," Thomas said.