EOG Resources, Inc. (EOG) Earnings Call Transcript & Summary

All right. We're still on schedule 3:40. This never happens. So great conversation ahead, Daan Struyven, myself, are thrilled to have a conversation with Ann Janssen, EVP and CFO of EOG. We've got so much to talk about macro, operations, capital returns, exploration, which we can't talk about with many companies, but we can talk about it with you. But we wanted to give you an opportunity, Ann, to set the table for investors, what are you focused on into 2025? What are your most important strategic priorities in the year ahead? And then we'll jump in.

Okay. Great. Great place to start. We're exiting 2024 with a lot of momentum. So we're excited as we move into 2025 to execute on the EOG value proposition. So it's been a constant way of looking at the business. I've been with the EOG for over 29 years. So that value proposition has been in place for a long time. It's had a couple of modifications but overall, it stayed pretty much the same. And it's based on 4 pillars. The first pillar is capital discipline. Everything we do, we look at from a rate of return investment -- rate of return on our investment. That, in turn, we wanted to yield an ROCE in the lower double digits. And all of that comes together to the way we're looking at our business. We want to have continuous improvement in all of our investments. We want to set our balance sheet out to be in a pristine position so that it's -- we can use that to run our business. And then we want to be able to return value back to the shareholders. So that capital discipline is extremely important and we look at it with everything we do. On the second pillar that we look at is operational excellence. And what we mean by that is really looking at operational efficiencies and how can we make our business better. So that's based on our in-house technical expertise, us setting up our own proprietary information technology products as well as self-sourcing materials when we have the opportunity to do so. And when we look at cost improvements, cost efficiencies, we want them to exist over the life cycle of an asset. We want to have them be continuous improvement. So as an organic exploration company, it's very important that we're continually looking for opportunities to improve our cost structure. So that's an extremely important pillar for us. We spent a lot of time focused on that. It's been the low-cost provider, it has been a mantra of the company for my entire tenure there. And then the third pillar we look at is sustainability. Sustainability is really approaching it as being a prudent operator in all the areas we work. So that -- sustainability is about safe operations, both having safe operations and keeping our employees safe. It has to do with having leading environmental performance. And then finally, it's about being a good steward in the communities we work in, be engaging in the communities being involved, giving back to the communities where we work. So sustainability has also been there long term. And then finally, culture. I think culture is the most interesting one to talk about, but it's also the hardest one to explain for EOG. Culture is very unique at EOG. The way we look at it is we're very decentralized. We're definitely non-bureaucratic. We want to put the power of driving value down at the asset level out in the field. And it's really kind of revolutionized how we conduct our business because culture has been there, my whole tenure. You try to explain it. I interview people and they say, explain the culture to me and I try really hard to put it in words but until you experience it, you just don't realize how much power we're giving to our employees to bring ideas to the table to really look at different ways to approach our business, and having them have a seat at the table. And that in turn, empowers them because they know they're important to the organization and their shareholders. So they want to drive higher value for the organization. So we put all these 4 pillars together, and that's how we can execute on the value proposition. So as we move into 2025, our activity levels for 2024, we think we're at a good level. We're expecting to kind of have consistency of activity levels as we move into 2025, you'll see some shift in activity across some of the basins. But overall, it would be the same corporate level of activity. A couple of shifts. We spent about $400 million in strategic infrastructure projects in 2024, and that would bring our Verde pipeline on, which was put into operation during 2024. And then also, we're working on the Janus gas operating plant. That will be completed in the first half of 2025. So we've got about another $100 million of CapEx related to that strategic infrastructure. But that was another kind of mover for us in 2024 and as we moved into 2025. But we feel we're in a really good place. We feel that we've laid the business out. We always look at that value proposition improving the business across the cycle. We want to look at our portfolio overall and make sure that each portion of our portfolio is adding value and creating value so that we can return value back to the shareholders.

Thanks, Ann. I'm going to turn it over to Daan on the macro.

Thanks, Ann. So let's start with the commodity price outlook. Crude oil prices have rebounded from the lower end of their 2024 range. How are you thinking about the supply and demand fundamentals? And how would you frame the outlook for the markets, both this year and next?

Great. So oil is obviously very dynamic. We're all debating what's going to happen with oil. And I think as we kind of wind it down, there's a lot of headwinds, there's a lot of tailwinds. Some of our tailwind is that obviously, the inventory levels are low. In the U.S., you're seeing the strategic petroleum reserve levels reaching lows. The IEA came out with global inventory levels, some of the lowest in 5 years. So we've got that tailwind behind us. But the headwinds, obviously, OPEC+ has made their announcement of delivering barrels back into the market over the course starting in April about the next 1.5 years. And then you have all these other factors you can lump on top of it. You've got -- how is it going to be impacted by the China stimulus that's gone into place. How is that going to impact demand and what demand is going to come out of that. You also have the Trump coming online, talking about the max pressure campaign, what's that going to do to Iran barrels -- the Iranian barrels and how are they going to come on? How is it going to be impacted by Trump's discussions? And then finally, a lot of it has to do with the tariffs. You hear about all the tariffs that are being put in place and really, we're looking at what is Trump going to propose? Those have a broad range, far reaching. So how is that going to impact the market. So all of those variables get lumped in to try to figure out what the oil macro is going to look at. And we're cognizant of that as we're developing our plans, we have to be cognizant of what the oil macro is. And for us, as we kind of look at our plan as we're laying out our plan for 2025 and beyond, we're approaching the oil markets or the oil demand -- supply and demand that we could move to say those the situation where we are entering an oversupply market and the prices decrease. We are looking at where we put ourselves in a position that we could go to more of a maintenance program at like a 45 WTI. Even in a maintenance program, we're able to -- at that $45 WTI, we're still able to keep our production flat, and we're also able to return and pay out our regular dividend. So it's all about looking at kind of our portfolio across the board and looking at how that oil macro could possibly impact us. But we take it into consideration that base plan is not -- or that 45 WTI is not our base plan. We think it's going to be much higher. But certainly, as we're looking at our metrics, we're taking into consideration, we're still well positioned with how we've laid out our portfolio.

Ann, let's turn to natural gas. And Daan, I don't know if you want to ask about that as well?

Yes. What's your outlook for Henry Hub this year? Is there anything that surprised you in 2024? And do you have a sense of how to quantify the contribution from data centers and AI to gas demand?

Great. AI is a hot topic at this conference. For gas, it's kind of looking at the opposite side of the same kind of the coin because where we're worried about low inventories for oil and potentially an oversupply in the market for oil. On the gas side, we have inventory levels that are reaching 5-year highs. And then you have the projected increase in demand as we move into the outer years. And a lot of that is coming from the LNG and the feed gas and all those things coming online. But as we're looking at natural gas, obviously, we have the Dorado. We spend a lot of time talking on our one-on-ones, about Dorado, our great gas asset down there, a world-class gas asset. And I think we're well positioned to take advantage as we move into how is that gas demand going to play out, how are we going to be able to supply back into the market. So we think we're really well positioned on the gas side to be able to deliver into that market. So what's that market going to look like? What are the demand fundamentals going to look like? And as we kind of sketch it out over the course of, say, the next 5 years, we're expecting about a 20 billion to 24 billion cubic feet a day increase in demand. That's how EOG is looking at it. And we kind of break it down into 2 buckets. About half of that amount, about 10 to 12 Bcf per day. We're expecting to come related to the LNG to the feed gas to the plants that are under construction. And those are the ones that are under construction that are already in place. They weren't subject to the delays in the permitting process Biden put in place. So we think -- we've penciled in about 10% to 12% is coming from those supply chains. Then the other 10% to 12%, we think, is coming from a couple of different places, several different places. One is some increase in some industrial demand in the U.S. We see the exports to Mexico are going to increase as we move into the next few years. And then finally, we're looking at AI. And I think AI is kind of a little bit tougher to quantify. I think just in our discussions over the course of the morning, and there's a wide range of expectation of what that demand is going to look like. And we've put in for the next 5 years that we think the AI demands that wind up around 3 to 4 Bcf per day in demand. And again, we're watching it like everybody else, how will renewables impact that? How will batteries impact that. What's the geographic locations of these AI facilities going to be, how do all the players get involved in it. So we do think there is upside to it. But man, we're going to wait like everybody else and see how that quantifies out. But again, we're well positioned. We have great gas assets in place at EOG, and we think that we can be key players in those markets as demand increases. The other thing, we think we're well positioned in takeaways. And we've set up several contracts that are tied not just to your base structures or markets, but we also have some tied to JKM. We have some tied into Brent, which gives us a little bit of diversity in the pricing environment. And then our takeaway, we're well set up. Our marketing team has done an outstanding job of getting ahead and setting opportunities and pipelines to take gas, not only out of Dorado, but other areas. We took advantage of getting on the TLIP, on Transco pipeline. So we have capabilities there. So we really believe that natural gas is well lined out and that we're in a good position to be a key player in the gas market as we move forward. And again, we'll just continue to watch how that market develops. We want to be very conscientious of delivering into the market at the right time in that market's life cycle, not just jumping on just because there's a price shift but more importantly, kind of looking at the evolution of it and making sure that we're strategically prepared to enter at the right time.

Ann you said that was over 5 years, 20 to 20...

We're kind of factoring that '25 to 2030. That's kind of our time line of how we're...

4% CAGR, which is a little bit higher than I think where consensus is. So that's an interesting data point, which is interesting because the 3 to 4 Bs is actually probably a little bit lower.

Yes, it is probably a little bit lower.

That residual base, you have a more bullish view. So let's talk about operations. To start off with Utica. You highlighted you expect to run 2 rigs in the Utica by the end 2025. What are the puts and takes for the Utica? And how much of the year do you think you can run that second rig?

Okay. Great question. Utica, we love talking about Utica. Utica is a great example of our organic exploration, how we lean into the organic exploration. Everything that we imagine what happened in Utica has happened, or better. And so we have been running -- during 2024, we ran one rig and a part-time frac crew. And as you said, we do anticipate by exiting 2025 with 2 rigs in place as well as 1 full-time frac crew. So how does that happen? It really is about what I call the pace of play. It's how -- we're valuing that, not valuing, viewing that basin and how we're developing. We want to approach it to develop it at the right pace so that we are not moving too slow for a company our size. We want to make sure that the economies of scale work. And number two, we don't want to be moving too fast to outrun our learnings. We don't want to be in a -- just a manufacturing mode. We want to be very thoughtful about how we approach Utica and how we lay out the development in Utica. And so when that second rig comes on, a lot will depend on how that development happens over the course of the next year. So by the end of the next year -- or end of this year now, we'll be exiting with 2 rigs. But not really can't finite tell you. It's really just where in the development of that play. We put that second rig in play. The other thing with Utica, what's exciting about Utica is there's still a lot of potential there. There's still a lot of learnings that we need to take advantage of and really understand the play even more. We've been spending a lot of -- majority of our time in the vertical -- sorry, the volatile oil window. And we have about 225,000 net acres there, and we've had a lot of learnings there. We're kind of continuing to fine tune, had a lot of development there. And during 2025, -- and we're going to continue to fine-tune that well spacing for other shale plays. We've landed at about 600 feet to 1,000 feet of spacing. And so we're still kind of dialing that in. So we still view 2025 as the development year for Utica. But we're very excited about it. We think it has a lot of scalability. We are approaching it very thoughtfully, being organic explorer. We don't want to just jump in and start drilling. We want to be, again, thoughtful about it and make sure that we line it out the way we want it to be, so we can develop that basin for continuous improvement and longevity.

And is it the right strategy in the Utica to pursue their organic approach, there are privates in the area who have experience. But is it fair to say that your base case is to do this in an organic way?

Definitely, again, we lean into organic because that's where our expertise lies. So we're always looking at the best way to return the value back. And for us, we believe, leaning into organic exploration, doing the work makes the most sense. But we're always looking at options. We never want to rule anything out.