The ebb and flow of spot market prices hasn’t fazed seemingly unflappable EOG Resources (NYSE: EOG) as it focuses on working its premium assets while strengthening reservoir knowledge.

EOG isn’t immune to the recent dips in prices—it’s simply prepared for them with a strategy that relies on best-in-class performing wells, increasing inventory and gravitating to returns rather than a particular commodity.

In 2016, the Houston-based company shifted to a “premium strategy” that concentrated on wells capable of earning at least a 30% direct after-tax rate of return at $40 crude oil and $2.50 natural gas prices.

EOG has succeeded in generating high returns through production growth and top-shelf inventory, which it continues to build. The company has built itself into the largest oil producer in the Lower 48, operating 14 of the Permian Basin’s top 20 horizontal oil wells based on peak month oil production.

“The rate of return is tremendously different … [between] a premium and a non-premium well,” Billy Helms, executive vice president of E&P for EOG, said June 27 at J.P. Morgan’s 2017 Energy Equity Conference in New York. “The production they deliver in the first year is twice that of a non-premium well, and the finding cost is about half or less of a non-premium well,” he said. “It makes a tremendous difference in the overall economics of a play.”

That stands in contrast to many oil assets globally, which may find sustained low prices challenging. In roughly five months, prices for West Texas Intermediate crude have dived by about 17% —to less than $45 near the end of June from $54 in February, despite continued OPEC and non-OPEC efforts to reduce production and raise prices.

Staying Focused

For some, hedging has been a security blanket. Having assets capable of delivering high returns also gives EOG confidence.

The company’s growth is a result of focusing on returns, according to Helms.

“It doesn’t really matter what oil prices do. This [returns] is how we measure our investments today,” Helms said. For instance, the company did not have a net crude oil position as of March 31, according to its first-quarter 2017 results.

“[Assets] have to be able to meet that same quality standard of 30% after-tax rate of return at $40. We have a lot of properties that will generate two to three times that number,” Helms said.

This means EOG can produce more oil from fewer wells, while driving down finding costs.

“And we’re adding to the premium inventory at a rate twice that of what we’re drilling every year,” Helms said.

In October, EOG’s $2.5 billion acquisition Yates Petroleum Corp. doubled its Delaware Basin position and expanded its Powder River Basin acreage. The deal increased EOG’s premium drilling locations by 40%, adding an estimated 1,740 net premium drilling locations in the Delaware and Powder River basins.

Premium Push

Just 23% of EOG’s wells met its premium standard in 2015, Helms said. About 50% of the wells the company completed in 2016 were premium, Helms said, noting the company carried a lot of drilled but uncompleted wells into 2016 that meet its return demands.

The percentage is expected to jump to 80% this year and rise to 90% in 2018, he said.

EOG’s inventory is about 7,200 net undrilled locations with estimated potential reserves of about 6.5 Bboe.

Technology and improved drilling and completion techniques are playing key roles.

Helms gave credit to longer laterals for the bulk of the company’s productivity gains and highlighted precision targeting and advanced completions for growth in Wolfcamp.

EOG Resources, oil, Billy Helms, Permian

EOG’s four-well pattern in Lea County, N.M.—the Whirling Wind 14 Fed Com #701H and the Whirling Wind 11 Fed Com #702H- #704H—were completed with an average treated lateral length of 7,100 ft per well, EOG said in May. The average 30-day initial production rate per well was of 5,060 boe/d.

“Each well exceeded the prior all-time industry record for 30-day initial production from Permian Basin horizontal oil wells,” the company said.

With a production of 315,700 bbl/d, EOG set a company record for crude oil volumes in first-quarter 2017, up 18% compared to a year earlier. Production is forecast to rise to between 322.2 Mbbl/d and 332.4 Mbbl/d in the second quarter.

Applying unconventional techniques such as high-density completions to conventional reservoirs could lead to gains.

“It doesn’t have to be shale,” Helms said. “A lot of the siltstones or other more conventional type rocks can lend themselves to the same techniques.”

Meanwhile, Helms said the company continues to test plays and gain knowledge in its core plays.

Delaware: Testing is underway in the Wolfcamp, Bone Springs and Leonard using proprietary technology to understand each target and geosteer wells. Each zone has responded favorable, he said, but no details were shared.

Powder River: Modest drilling activity is focused on the Turner Formation in this stacked-pay system.

Eagle Ford: The EOR project will expand. Plans are to test 100 wells this year following last year’s 32-well pilot project. This year the company is testing other fields, spacing patterns and completion techniques.

Austin Chalk: The company has delineated what it believes is a zone, or multiplay zones, of the latest play it’s chasing. “[Austin Chalk] lends itself real well to horizontal drilling and the high-density fracs that we’re doing in most of our other plays,” Helms said. “But we need to better understand where it exists and where it doesn’t exist.”

Returns Driven

EOG’s is focusing on premium inventory that will help the company get back to double-digit returns on capital employed (ROCE).

With $95/bbl WTI and $3.70 Henry Hub prices, EOG’s ROCE was 14% in 2014. Post downturn, the percentage fell to 1% in 2015 and into negative territory in 2016 with $45/bbl oil and $2.50 gas.

“Through 2020 we can grow our production by 15% at a flat $50 oil price [and] by 25% at $60 oil price,” Helms said before turning to reality.

However, “we’re in the mid-$40s today. … We’re going to manage our activity to be within cash flow, and the growth will be a byproduct of that.”

EOG remains committed to growing within cash flow, including the dividend, at $47/bbl, Helms said.

“For every dollar drop in oil price, it’s on average about $100 million net cash flow to the company. Our budget would be scalable in that fashion,” Helms added. “This year we’re guiding to the midpoint of our capex guidance of about $3.9 billion, and we’re going to grow 18%. That’s at a $47 average price for the year. If we stay at these prices today the year average is about $45; that’s about $200 million of cash flow, [so] maybe not quite 18% but not far from that either.”

Velda Addison can be reached at vaddison@hartenergy.com.

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