EOG Resources Earnings Call Insights: Lifting Recovery Rates and the Eagle Ford

EOG Resources (NYSE:EOG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Lifting Recovery Rates

Doug Leggate – Bank of America – Merrill Lynch: Thanks for all the color Mark on the down-spacing. You’ve talked in the past about continued efforts to try and increase your recovery rates there, obviously you’ve done a good job on that. Would you now say that 8% is the – is that pretty much target achieved or do you think there is still more running room there. I’m just curious as to what else you might do in terms of trying to lift your recovery rates, and I have a follow up please.

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Mark G. Papa – Chairman and CEO: Yes. Doug, there’s – no we can’t say that the 8% is the final, final, final answer at all in terms of what we are still looking at doing there. There is the continued work on potential additional spacing, improvements from frac enhancements and then the one that I think, is the big hitter, potential hitter out there is secondary recovery. In the case of the Eagle Ford it would be through gas injection and we have commenced our pilot gas injection project on there in the Eagle Ford and the reason I didn’t mention it on the script is that it may be as long as two years before we really have a read on the outcome of the pilot project. I just don’t even want to give a timeline on it. But just if it’s worse, our investors knowing that we are – that the pilot project is underway, but it’s not anything that we are going to be able to provide a quarter by quarter feedback as to how the pilot is coming or anything like that. But it is fair that say that we are cautiously optimistic that we will come up with a method of significantly enhancing the recovery above the 8% number.

Doug Leggate – Bank of America – Merrill Lynch: My follow-up is really going back to the – you have been very disciplined with obviously your balance sheet and so on. But when you take a write-down obviously you are inflating your net debt to cap and it kind of makes me wonder, given you have got so much resource opportunity particular the upgrade in the Leonard, is that still the right metric the 30% net debt to cap, is that still the right limiter in terms of pacing your development and if you could maybe share any updated thoughts on how you might look to monetize or bring forward some of those non-core assets, not much non-core but like you said, the Eagle Ford and the Bakken through a joint venture or something that may not be a churn out, I will leave it there Mark.

Mark G. Papa – Chairman and CEO: Yeah, the write-down cost is – I think I am right in saying, about 2% is kind of net debt penalty if you will on there. We ended the year at 29% and absent the write-down, we probably would have ended the year at about a 27% number on there. So you could say we have a little tighter boundary if we stick with the 30%. I think what we wanted to indicate – if you look at the bigger picture and we have a chart in our IR slides that we’ve released this morning that kind of shows years of our inventory if we assume that we turf up zero additional Greenfield plays, we’ve already advised we are working on additional Greenfield plays that two things show up. One is the locus of future investments is likely to shift to the Permian Basin more heavily than you would’ve expected before this earnings call, just due to what we’re seeing in Leonard and the Delaware Basin, Wolfcamp. The second thing is that as we develop into a potential free cash flow situation starting in 2014, there were questions as to what we are going to do with the free cash flow. I think that the picture is becoming clear that where that free cash flow is likely to go is in to reinvestments into both Eagle Ford and into the Permian Basin area likely, which would generate additional production growth, higher rates of production growth in the out years than we would have expected otherwise. So we’re still not, we’re still at a camp and I know that disagrees with your thinking we’re still not leaning towards JVs in any of the plays that are key plays however, hopefully that gives you an answer.

The Eagle Ford

Leo Mariani – RBC: Just a quick follow-up on the Eagle Ford. Obviously you guys increased your potential tremendously here. If I just kind of look at some of the numbers, do some quick math 569,000 net acres, 5,500 locations you’ve identified it equates to about 103 acre space and you guys are talking more about 50 acre spacing. Is it fair to say that you guys have really high-graded that 569,000 acres and are excluding maybe some of the untested areas in that number, into that potentially if those would have worked dropped the number higher?

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Mark G. Papa – Chairman and CEO: No, it’s not so much high-graded. It really live – all the acreage is good, but by the time you eliminate all the subsurface areas such as faults and everything, and then by the time you honor the lease lines that are in there, such as you can’t drill wells across the lease lines and you have to stay certain boundaries away from lease lines. The amount of effective acreage you can drill on is considerably less than that 569,000. So that’s really the difference between the 100 acres if that’s what you were quoting there and effectively the roughly 58 acres. If it’s really how much of that acreage can you really access it’s not in a geologic fault or that just due to the lease line issues or Railroad Commission limitation issues, you can really access.

Leo Mariani – RBC: Then I guess just switching gears over to the Permian, you are obviously taking your Leonard shale estimate up tremendously, 65 million boe to 550 million is a pretty big jump and you are kind of doing something similar in the Delaware with the 800 million boe. I mean as there are pretty numbers, it seems like the results you reported and you got not a tremendous number of wells. I mean what gives you confidence in sort of putting those pretty large numbers out there?

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William R. Thomas – President: Both of those shales are extremely rich. The Leonard is in most places up to 200 million barrels of oil equivalent per section and then in the Wolfcamp shale is even richer and thicker in some places, it’s up to 300 million barrels of oil equivalent. So they have a lot of resource in place and a lot to work with and each play also has multiple targets. We are working with at least two targets in the Leonard on all of our acreage and in some places we have three or four targets in the Leonard. In the Wolfcamp we are looking at, at least three targets in some parts of our acreage also. So there is a lot of potential play zone. We are able to – when we complete the wells we are able to isolate the each individual target and we have also had really good success in the Leonard at continuing to down-space. We’ve tested patterns on 80 acre spacing per target and we’ve not seen a lot of inter-serve between the wells. So that’s very positive. Also the other thing that’s going on and likely – and I will (rephrase), our frac technology is really increasing each well – the wells are getting better because of that. We have a pretty strong history. We have 47 wells we’ve completed so far in the Leonard. So we have a lot of history on actual production and then in the Wolfcamp and the Delaware Basin, as you know there’s a lot of deep penetrations by vertical wells for different plays and deeper targets over the years. So we have – on our acreage, we have over 200 well penetrations that we’ve got logs on and sub-surface control for both the Leonard and the Wolfcamp. So we have a lot of confidence that the reserve potential is there. We’ve been able to continue to reduce our cost on our drilling program. So we have got a lot of confidence that these plays are really very significant plays and we are excited about them. They are able to generate very high rates of return on the drilling that we’ve done so far right now.