By almost every metric, EOG Resources (NYSE: EOG) is having an exceptional year. Its oil production has exceeded expectations, which enabled the company to boost its growth rate. Meanwhile, costs have come down, allowing it to generate a gusher of free cash flow even though oil prices have been all over the place. Finally, it has uncovered even more low-cost oil, which gives it more fuel to grow in the coming years.
The energy company's successes this year, especially on the cost side, have it in an excellent position as we head into 2020. That was one of the key themes on its third-quarter conference call, where its management team laid out six reasons it believes the company will continue thriving in 2020.
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1. We're sticking with a plan that works
CEO Bill Tomas wrapped up his prepared remarks on the call by turning his focus to 2020. While he said it was "too early to discuss specifics of our plan next year," he outlined six factors that would define the company in the year ahead. The first: "Our priorities have not changed. We firmly believe that investing in high-return production growth, generating substantial free cash flow, and delivering strong dividend growth delivers the highest long-term business value."
That strategy of investing for returns has delivered excellent results in 2019. The company has focused its attention on drilling wells that earn a premium return at lower oil prices, which enabled it to generate strong cash flow and growth over the past year. Overall, its oil output is on track to rise 15% year over year, while it has generated nearly $750 million in free cash through the third quarter.
2. We're not banking on higher oil prices
Second, Thomas stated: "Our plan is based on a conservative outlook for commodity prices. At $55 WTI we can deliver mid-teens production growth, grow our dividend, and generate significant free cash flow." As Thomas notes, EOG can thrive in the current oil price environment. With crude currently over $58 a barrel, it's on track to generate more than enough cash to continue delivering strong production growth and high-octane dividend growth, with plenty of money left over.
3. Our operating costs will keep coming down
Third: "[W]e believe well cost and per unit operational costs will continue to decline." That has certainly been the case this year as it has reduced its well costs by 5%. The company's ability to continue driving down costs will enhance its ability to thrive at even lower oil prices.
4. Our drilling costs will come down too
Fourth: "[W]e believe capital efficiency and F&D [finding and development] costs will continue to improve." By becoming more efficient with how it invests its capital, it can stretch its dollars further, which will boost its investment returns. Meanwhile, improving its F&D costs would enable the company to convert some of its currently lower return acreage into more premium return inventory.
Image source: Getty Images.
5. We remain focused on organic growth
Fifth: "[W]e have high confidence in the ability of our organic exploration efforts to add and improve our premium drilling inventory faster than we are drilling." That confidence in its ability to find new sources of oil comes from its experience. The company again unveiled new high-return discoveries in 2019, adding the Wolfcamp M and Third Bone Spring formations in the Permian Basin to its drilling inventory. These locations added 1,700 new premium return drilling locations, which was more than double the number of wells it drilled this year.
6. We're still not interested in playing the M&A game
Finally, Thomas said: "[W]e have no plans for large expensive M&A. Any potential bolt-on acquisition must compete with our premium drilling returns." EOG's focus on organic growth differentiates it from its peers, which use acquisitions to refuel their drilling machines. Those deals, however, have typically destroyed shareholder value, which is why EOG plans to continue avoiding M&A. The only transactions it will pursue are smaller land acquisitions where it can buy top-notch drillable acreage that meets its high return hurdle for a good price.
We aim to enrich our investors
Thomas ended his outlook for 2020 by stating that EOG aims to "differentiate itself as a leader among any company in any sector of the S&P 500 by creating significant long-term value for our shareholders." That didn't happen in 2019, as the company significantly underperformed the market even though it delivered excellent results. However, since it's set up to continue generating strong investment returns, production growth, and free cash flow in the coming year, it certainly has the fuel to deliver on that goal of producing big-time total returns for investors.
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