EOG Resources Inc

NYSE:EOG

Earnings Call Transcript 2020-Q4

[Operator]

Good day and welcome to the EOG Resources' Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note that this event is being recorded.

I'd now like to turn the conference over to Tim Driggers, Chief Financial Officer. Please go ahead, sir.

[Tim Driggers, Chief Financial Officer]

Good morning and thanks for joining us. We hope everyone has seen the press release announcing fourth quarter 2020 earnings and operational results. This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and EOG's SEC filings and we incorporate those by reference for this call.

This conference call also contains certain non-GAAP financial measures. Definitions as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com.

Some of the reserve estimates on this conference call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday.

Participating on the call this morning are Bill Thomas, Chairman and CEO; Billy Helms, Chief Operating Officer; Ezra Yacob, President; Ken Boedeker, EVP Exploration and Production; Lance Terveen, Senior VP Marketing; and David Streit, VP Investor and Public Relations.

Here's Bill Thomas.

[Bill Thomas, Chairman & Chief Executive Officer]

Thanks Tim and good morning, everyone. Last year was historic and we were tested like never before. In a challenging environment, I am proud to say our EOG employees who personify our unique culture, responded exceptionally without a beat. I'd like to thank our employees for delivering such outstanding performance. We generated $1.6 million free cash flow, earned adjusted net income of $850 million and ended the year with $3.3 million of cash on the balance sheet. We increased our sustainable dividend rate by 30% and short up what was already an industry-leading balance sheet to a low 11% net debt to cap ratio.

We lowered funding and dissolved the cost, improved our capital efficiency and under a direct after-tax rate of return or more than 50% with an all-in after-tax rate of return of 25% based on our premium price deck of $40 oil and $250 natural gas. Such extraordinary results and a $39 oil price environment remain possible to our shift five years ago to our premium strategy, which established an investment overrate of 30% direct after-tax rate of return using flat $40 oil and $250 natural gas prices.

Using such a stringent hurdle rate shields the company from cyclic oil and gas prices. 2020 was a true test of that shield and is a testament to the power of our premium strategy. Beyond delivering stellar financial results last year, we continue to invest in long-term value of the company. There are low-cost organic efforts we had a 1500 net premium locations to our inventory including 1250 from the newest addition to our portfolio. Dorado a South Texas natural gas play with 21 TCF of net resource potential that have breakeven price of less than a $1.25 per MCF. We believe Dorado is one of the lowest cost and lowest emissions natural gas fields in the US and expands EOGs portfolio of assets that we believe will play a significant role in the long term global energy solution.

We also completed two pilots of infield technology to reduce emissions, a hybrid solar and natural gas powered compressor station that reduces combustion emissions and close gas capture system to reduce force flaring as a result of downstream market interruptions. Reducing flaring is an industry-wide priority and we plan to publish our closed-loop gas capture technology for others to replicate.

We entered the next phase of the cycle a much improved company, with the countless creative and innovative ideas we implemented in 2020 were in the process of making significant improvements to EOGs future performance. Looking forward, the following six steps summarize the foundation for our 2021 plan an outlook for the next three years. Number one, maintain fourth quarter 2020 production. There's no reason to consider growth until the market rebalances. Signs of an earlier recovery will not change our $3.9 billion 2021 capital plan.

Number two, shift to a double premium drilling program. Our focus on increasing returns never wavers and this year is no exception. We're raising the investment standard again. Double premium wells are on 60% direct after-tax rate of return at $40 oil and $250 natural gas and make up the top half of our 23-year drilling inventory. Shifting to double premium will make another step change in our future performance of delivering higher returns, lower decline rates and more free cash flow potential. We have more than 10 years of double premium inventory and are optimistic we will replace double premium locations faster than we drill them.

Number three, accelerate new exploration projects. Last year, our exploration program focused on technical evaluations across numerous new prospects, we're excited to resume a more robust leasing and testing effort this year. We're evaluating a large number of double premium oil plays in the US and internationally, with the potential to deliver low funding cost and development cost and low production decline rates. The focus of our expiration program is to continue to improve the quality of our inventory and EOGs total shareholder value.

Number four; raise the bar again on our ESG performance and ambitions. After achieving significant improvements in safety, emissions and water performance in 2020, we have announced our ambition to reach net zero scope one and scope two GHG emissions by 2040. It's one of the steps along the way, we expect to eliminate routine flaring by 2025. We believe this is possible using creative applications of current and future technology. We're currently implementing internally developed technology with a goal of measuring granular real-time emissions data for all facilities in the company. This will encourage innovation and development of unique solutions to achieve our net zero ambition.

Number five, resume market production growth only when the market is balanced. Assuming a balanced market by year end, we're positioned to grow oil 8% to 10% in 2022 and 2023. We forecast that our shifting well mix towards double premium will lower our base decline rate to less than 25% within five years from 34% last year. This optimal growth rate delivers the most long-term total value by delivering higher returns, lower decline rates and more free cash flow over the long-term.

Number six, generate significant free cash flow. All cash allocation decisions are focused on enhancing total long-term shareholder value. Our top priorities for free cash flow are to sustainably grow the dividend and reduce debt. Beyond these priorities, when the excess cash materializes, we will evaluate other options opportunistically such as supplemental dividends, share repurchases and low-cost property additions. With our deep inventory of double premium locations, moderating decline rates and sustainable cost reductions, EOG's free cash flow potential is improving significantly.

Before I turn it over the Billy I want to address our thoughts on several acreage. From statements made by the current administration, we believe that our current existing federal leases and corresponding federal drilling inventory can be fully developed. EOG is well prepared to manage through any regulatory changes that could impact the pace of development on federal acreage. The combination of our large number of federal permits in hand, our flexibility to pivot within our deep inventory of double premium locations and our ability to add new inventory to organic exploration gives us the confidence that the future performance of the company will not be affected.

Now here's Billy.

[Billy Helms, Chief Operating Officer]

Thanks Bill. Let me start by expressing my warmest appreciation to all of our employees. I am truly amazed by their talent, commitment and resiliency as demonstrated by the dramatic improvements achieved in 2020. Within weeks of publishing our initial 2020 capital plan, we quickly cut capital by scaling back activity by nearly half. To protect the company's financial strength, our employees responded with urgency and purpose, finding new ways to sustainably reduce our well cost structure further. What stands out the most to me is how the EOG culture of innovation and multidisciplinary collaboration and teamwork increased at a time when everyone was working remotely to protect themselves, their families and their communities.

The results of that innovation and teamwork can be seen clearly in our 2020 operational performance. We significantly improved our capital efficiency by reducing total well cost 15% and per-unit cash operating costs 4%. With respect to our yearend reserves and excluding the low impact of low commodity prices, we reduced funding and development cost 15% to a low of $6.98 per barrel of oil equivalent and replaced nearly 160% of our 2020 production. The speed with which we spread technical innovations directed at lowering cost and improving well performance throughout the company has increased. We believe the communication challenge presented by remote work and the teamwork required between individual operational areas to execute our significantly revised plan last year, inspired what we believe will be a permanent improvement in how we integrate new learnings and innovations companywide.

Our operational execution fired on all cylinders during 2020, reaching our stretch goal to reduce well costs 15% last year, with about three quarters of that coming from sustainable efficiency improvements. We expect to maintain this momentum and reduced well cost another 5% this year. We also expect to carry sustainable operating cost reductions into 2021. Our reductions to LOE during 2020 remarkably outpaced the volume reductions in shutting production as a result of exceptional low commodity pricing. We reduced LOE 22% on a total dollar basis versus 8% decline in production volumes.

Shutting in volumes afforded us the opportunity to take a closer look at our maintenance and work-over programs and streamline our lease-up key practices resulting in sustainable cost reductions. We finished the year with fourth quarter oil production at a little over 440,000 barrels of oil per day and having spent $3.5 million of capital, exactly what we forecasted back in May when we revised our plan in response to the downturn in oil prices. We increased our rig count from a low of five rigs last summer and are now running about 24 rigs to support the 2021 program that will maintain essentially flat oil volumes. The rig count is currently at the high point and it will drift down throughout the year to an average of about 22 rigs.

Looking back to when we introduced the premium strategy in 2016, our per-unit cash operating costs have declined by 18% and our per foot well cost are down about 40%. This operational excellence has enabled EOG to raise the bar further and target double premium as our new investment standard. With such significant the past five years and the momentum we are carrying, I'm convinced we are only just getting started it being one of the lowest cost energy suppliers.

We also made significant strides in our ESG performance in 2020. First on the safety side, our total recordable incident rate, the primary safety metric improved more than 25%. Safety is always our first priority and we continue to focus on ways to enhance our safety culture even further. On the environmental side, we increased the percent of reused water used in our operation to about 45% of our supply and significantly reduced total barrels of freshwater used and we increased our already strong wellhead gas capture rate from 98.8% in 2019 to an astounding 99.6% in 2020. Our ambitions for the future are a reflection of that performance. We have set a goal to raise the wellhead gas capture rate to 99.8% in 2021 and achieve zero routine flaring by 2025. We're literally fighting for the last remaining tenths of a percentage points now.

Longer-term, we've set an ambition to being net zero in scope one and scope two GHG emissions by 2040. Ultimately, it is our highly creative and passionate employees that gives me confidence in this aspiration. In the past five years, we have achieved a number of technical innovations and operational advancements that have enabled us to generate significant reductions in methane and overall GHG intensity rates to date. Our oppose to emissions reductions remains operationally focused investing, with returns in mind in seeking achievable and scalable results.

Our investments in projects such as closed-loop gas capture and solar power compression pay off in two ways. They lower emissions and function as learning mechanisms for future innovation. We know that to be part of the long-term energy solution, we not only have to be low-cost, we have to do it with one of the lowest environmental footprints. Our new lease form, sustainable power group is working to identify low emissions power generation solutions and accelerate innovations to support our emission's goals and ambitions. I'm excited about all the innovation occurring in the company and that gives me confidence we can achieve our goals and ambitions.

Finally, I want to take a minute to express my sincere gratitude for the tireless efforts of our production and marketing teams in the wake of the severe winter weather event last week. The teams work in difficult conditions without any safety incidents to manage the production interruptions caused by extensive freezing weather and deliver as much critical production to our downstream customers as possible. All of our production is now back online and we expect our average daily production in the first quarter to be reduced by about 4%.

Beginning with the onset of the storm, the production staff also worked in close coordination with our marketing team, who communicating with our downstream customers to redirect natural gas production in Texas to local distribution companies that deliver natural gas to heat homes and to utilities for electric power generation. These efforts supported by critical -- these efforts supported critical human needs throughout the Dallas, Fort, San Antonio, Austin, Houston and other Central and East Texas communities.

Further in line with our core values at EOG, we sold these redirected gas shipments at process consistent with those received prior to the winter weather event rather than high and volatile daily spot prices. Through it all, the EOG culture of disciplinary teamwork and non-bureaucratic decision-making, technology leadership and commitment to do the right thing shown through and I couldn't be more proud of everyone involved.

Here is Ezra for an update on our exploration efforts.

[Ezra Yacob]

Thanks Billy. Our organic exploration focus has always been the driver behind successfully replacing what we drill every year with better inventory. Our current effort is built around adding plays with shallower decline rates that also meet our double premium hurdle rate, ultimately offering higher capital efficiency than our existing inventory. Dorado, the South Texas natural gas play we announced late last year, is the most recent example of EOGs creating shareholder value through low-cost organic exploration.

Early entering capture of high-quality reservoir across the contiguous acreage position with access to low-cost services and proximity to multiple markets is the recipe for high return investment opportunity and is exactly the type of prospect we're looking for. Our strong financial position combined with our proprietary database of unconventional plays has positioned us to capitalize counter-cyclically and capture exploration opportunities with little to no competition. We are focused on oil and we are in the process of drilling and testing high potential prospects. We are optimistic we can prove up a number of them and capture additional acreage at competitive pricing that will further improve the quality of what we believe is already one of the best portfolios of assets in the industry.

Our vision is to develop double premium oil plays in each operating area including international. This is highly efficient and allows us to allocate capital across a wide array of plays to optimize returns and capital efficiency. This decentralized multi-based approach is the hallmark of EOG, one that leverages our competitive advantages and exploration, technology and low-cost operations, all benefiting from knowledge transfer between the basins. The results if we're successful will flow through our financials with high return on capital employed, lower operating costs, higher capital efficiency, salary declines and even more free cash flow. When we look back at this time several years from now, I'm confident we will recognize 2021 as the step change in EOGs performance and financial profile, much likely look back on our shift to premium drilling in 2016.

Here's Tim to review our financial position.

[Tim Driggers, Chief Financial Officer]

Thanks Ezra, EOGs financial performance in 2020 demonstrates the resiliency of our business model and portfolio of high return asset. In response to the lower oil prices caused by the price for and pandemic, we're likely to utilize our operational flexibility to quickly cut activity. Levered by the sustainable cost reductions that Billy discussed, we reduced CapEx in 2020 by 44% to $3.5 billion. The results was $1.6 billion of free cash flow, a great performance in what we certainly hope will prove to be the bottom of the cycle year.

The Board of Directors voted to increase the dividend by 10% to an annual rate of $1.65 per share. EOG's dividend has grown at a compounded annual rate of 20% over the last 21 years. This reflects the continued improvement in the probability and cost structure of the company and our confidence in EOG's long-term resiliency. I'm pleased to say we have never cut the dividend and never issued equity to support it. We analyze numerous stress down cycle scenarios to evaluate the size of the dividend and to ensure it can be sustained over the long run.

The regular dividend represents our first priority for returning cash -- free cash flow to shareholders. Beyond that, we have set a target to reduce debt outstanding by $2 billion in the level of the end of last year. We've made a down payment on that goal paying off with cash on hand of $750 million bond that matures February 1. There are no additional debt maturities until 2023 and a $1.25 billion bond is scheduled to mature. Beyond that we have no plans to further reduce debt.

Our goal is to maintain about $2 billion of cash on the balance sheet on average through cycles. This is not a hard and fast rule. The actual amount of cash on the balance sheet at the end of each quarter will vary depending on business conditions at the time, but this should give you some rough idea of what to expect going forward. EOG is firmly committed to generating significant free cash flow. Our top priorities for free cash flow remains sustainable dividend growth and debt reduction. As cash materializes and we have more visibility into the future, we will opportunistically consider other options such as the supplemental dividend during the up cycles or share repurchases during market lows along with low-cost, property additions with potential to improve EOG's performance.

Now let me turn the call back to Bill.

[Bill Thomas, Chairman & Chief Executive Officer]

Thanks Tim. In conclusion, I would like to note the following important takeaways. First due to market conditions, EOG will not accelerate production in 2021. Second, after this year, once the market rebalances, developing our current drilling inventory at a moderate growth rate of 8% to 10% optimizes returns and free cash flow potential over time. Third, our shift to double premium investment metrics paves the way for another step change in EOG's returns and future performance.

Fourth, our domestic and international exploration portfolio is stronger in both quality and quantity than has ever been. This year we are accelerating the testing and leasing efforts on many of those prospects that have the potential to significantly enhance total shareholder value of the company. Our exploration projects have the potential for higher returns, lower cost and lower decline rates than our current inventory.

And finally, we are passionate and excited about the innovation and technology that continues to manifest itself in EOG. It gives us confidence that we will continue to lower well costs and operating costs and reduce our environmental footprint. Our goal for EOG is to be one of the lowest cost, highest return and lowest emissions producers playing a significant role in the long-term future of energy.

Thanks for listening. Now will go to Q&A.

[Operator]

[Operator instructions] And our first question today will come from Arun Jayaram with JPMorgan. Please go ahead.

[Arun Jayaram, JPMorgan]

Bill, my first one is for you, in 2021 you're going to hold -- call the maintenance program and based on your '22 and '23 outlook, you could have some growth call it 8% to 10%. I guess my question is given typical sales cycle times, would you have to spend any incremental capital in 2021 to prepare you to meet that 8% to 10% growth in '22?

[Bill Thomas, Chairman & Chief Executive Officer]

Hi Arun. I'm going to ask Billy to comment on that.

[Billy Helms, Chief Operating Officer]

Yeah Arun, no we don’t anticipate that we would have to spend any additional capital this year to be able to accommodate growth in the future and beyond this year, I would add that would only add activity once we see a more balanced market as Bill described.

[Arun Jayaram, JPMorgan]

Tim, I get one for you, in the guide we did note a step change of lower in the tax deferral with the company's current tax mix now above 90%. Can you talk about the drivers of the higher cash tax mix in 2021 and as we would've thought some your IDCs would have lead to a lower cash tax rate and could you talk about if this is a one your phenomena or indicative of the go forward tax rate?

[Tim Driggers, Chief Financial Officer]

Yeah, so as we become more and more profitable, obviously it was lowered the price that we have to make a taxable income. So that's the first thing. We are extremely profitable company now and if you go back and look to 2020 for sure in the $39 oil, there wasn't much tax profit there. So in the $50 environment, we have significant taxable income and we have no net operating losses left to offset that with. So it's a simple math of being a very profitable company and paying taxes. So beyond that I could clarify more offline if you'd like, but that's the general answer.

[Operator]

Your next question will come from Jeanine Wai with Barclays.

[Jeanine Wai, Barclays]

So sorry to not to keep pushing you on the Arun's question right now, but in terms of '22 and '23 on the deferred tax, how that might trend, is it possible that the deferred guidance might improve a little bit next year as you get back to growth to 8% to 10% because you'll be spending more money, distributive data which I guess is lower cash flow, good news, bad news for this as well as you’ve got a lot of gains on the net gas side for this year that may not materialize next year. So maybe just furthering on Arun's question, is it possible that 0% to 15% could be something different in '22 and '23 as you get back to growth?

[Tim Driggers, Chief Financial Officer]

That's exactly right. As we spend more capital in the growth mode obviously we'll have more IDCs to deduct to lower our cash taxes. So it a backward dated environment where we got lower oil prices then yes, it would lower that deferred ratio.

[Jeanine Wai, Barclays]

My second question is just on cash returns, so given the high class problem of your forecasted free cash flow and your formally said that total debt target to $3.7 billion with no plans to further reduce debt, what's the minimum operating cash balance that you're comfortable and I guess it's a factor we're asking like does your new formalized debt target, does that imply that you plan on paying out a 100% of excess free cash flow in a year after dividend and after whatever you may allocate towards low cost property acquisitions or am I just getting ahead of myself here?

[Billy Helms, Chief Operating Officer]

Yeah Jeanine, I'll let Tim talk about the cash need to operate the company.

[Tim Driggers, Chief Financial Officer]

So what we've said is that around $2 billion is a number we feel comfortable with through the cycles. That doesn’t mean it's a hard and fast rule that we will have $2 billion on the balance sheet. Some quarters, it will be more, some quarters it'll be less, especially during the quarter based on how money comes in and out of the company. So that's the level that we we're comfortable with for now.

[Billy Helms, Chief Operating Officer]

Yeah Jeanine, the second part of the question is I think it's important to know that our board is very, very committed to returning cash to shareholders and I think we've demonstrated that certainly over the last 20 years of 20% compounded annual increase in the dividend in the last four years 146% increase and then last year even in a down year, we increased the dividend and sustained it by 30%. So we're very committed to giving cash back.

At the same time, we think it's important to be flexible and opportunistic, which means we want to be able to give the cash back in the way that it creates the most return, the most total shareholder return and so that will be different in different situations. In an up cycle, it certainly could be -- we want to continue to work on the regular dividend. That's the primary way we want to give cash back and so we want to continue to work that really, really hard.

And then on top of that, we'll consider other things opportunistically, as the company continues to improve and get better and improve our free cash flow potential, which we think we're going to be able to do very consistently over time. We'll consider other options as Tim mentioned potentially a supplemental dividend, potentially in certain situations spot buybacks.

And then we're always looking at opportunistic low-cost high return of bolt on property acquisitions and we did a number of those last year. Some of those were in our exploration plays, some of those really in the Delaware Basin where we're actually drilling bolt-on acquisitions. So we're always looking to improve the drilling potential of the company through those kinds of things. So we got a lot of right options. We're very excited about having a lot of free cash flow and continuing to build on that, that's not a problem. That's a great opportunity and we're just looking for the right way to redistributive that and generate the highest return for the shareholders.

[Operator]

And our next question will come from Bob Brackett. Please go ahead.

[Bob Brackett, Bernstein Research]

I was comparing the net expected well completions for this year by play versus last year and in my over interpreting?

[Bill Thomas, Chairman & Chief Executive Officer]

I am going to ask Billy to answer that one.

[Billy Helms, Chief Operating Officer]

I'd say in the past 10 years a lot of our growth previously came from the Eagle Ford and that is a more mature play at this point and going forward, they still have quite a bit of inventory and a lot of that is still double premium., but we see a lot of the growth coming from the Delaware basin and the Powder River Basin as you mentioned. Part of that is that in the last couple years even last year, we built out some infrastructure on federal land and just as a natural progression of our development program, we start moving activity into those areas.

That's true both in the Delaware and the Powder River Basin, but that's kind of where we see activity moving in and that will also help in the decline rate that Bill and Ezra talked about earlier in the call.

[Operator]

Our next question will come from Scott Gruber with Citigroup. Please go ahead.

[Scott Gruber]

I wanted to continue on Jeanine's line of questioning you're thinking more about this year, you have about $2.5 billion of cash in the balance sheet post bond repayment and you mentioned retaining $2 billion over the long term. We also have the '23 maturity and then you'll generate $1.5 of free cash flow this year and even more $1 billion or 60. How do you think about use of cash this year especially with CapEx is going to flex, how do you think about building cash with the '23 maturities that above and beyond the $2 billion, how do you balance out against returning cash this year if the strip is right?

[Tim Driggers, Chief Financial Officer]

Sure. So we've already committed to spending $1.7 billion of the free cash flow through the payment of the bond that matured and then our regular dividend. So that's the first thing and then at the end of each quarter, we will review with the board what our cash position is and we will look at site into the future and see what the condition is in the industry look like and make decisions based on where we are at that point in time. So there's no hard and fast rule what that answer will be. There is a long-term outlook, not a short-term outlook. So that's the way we're building this model.

[Scott Gruber]

Is the $2 billion kind of how you're thinking about the right cash balance for this year or does it, this is a little bit higher given the '23 maturity? How does that come into consideration?

[Tim Driggers, Chief Financial Officer]

The $2 billion is two pieces to the $2 billion. One is normal operating conditions and one is a surplus for abnormal operating conditions. So they're both build into that number and that's a number that Tim Driggers feel comfortable with. So that's how that number was derived. Having lived through a lot of the cycles and knowing the size of our company, I know what I feel comfortable with to not be stressed in a stressful situation on the cash side. So that's how we drive that number.

[Operator]

And our next question will come from Leo Mariani with KeyBanc. Please go ahead.

[Leo Mariani, KeyBanc]

Just wanted to delve a little bit into the CapEx here in 2021, assuming now we're seeing from the slides that you guys are spending an extra $500 million kind of above maintenance. I wanted to get a sense of how much of that is devoted to some of these exploration plays that you guys were discussing here? And then ultimately it sounds like there is quite a bit of testing happening into the drill bit in '21 versus last year because this year is really having potential as a breakout year for exploration success for EOG given the highest spend.

[Bill Thomas, Chairman & Chief Executive Officer]

Yeah Leo, let me start that and then I'll ask Ezra to give some color on it, but the important thing to consider on our expiration program is that we're investing in plays that we believe will make a significant step change in the performance of the company. When I talk about that, that's in addition to the double premium change we're making this year is above and beyond that. We're really looking for plays that are really the new technology we see for the future of horizontal drilling for the most part. These are much, much better rock and have the potential to be much better than and deliver results like lower decline rates to help us to generate even more free cash flow and higher returns than ever before. So we're investing in very significant potential -- future potential for the company.

The breakdown on the half of the $500 million is $300 million in exploration and $100 million in international and $100 million in ESG projects. And I am going to ask Ezra comment just in general on our exploration efforts and give a little bit more color.

[Ezra Yacob]

So as Bill highlighted, we pulled back in 2020 a little bit on our exploration budget commensurate with reducing the capital spend across the board and so we're excited this year to be able to return 2020 levels to kind of a pre-pandemic level or more of a more historic balanced level for the expiration side. While I can't promise specifics on timing or anything like that, I can give you a little bit of color on how the process goes and obviously we like to capture leasehold, we prefer not to talk into too greater detail about our expiration plays until we get that leasehold captured and especially what we think is not only the tier 1 areas, the sweet spot of these plays but also in a contiguous position.

And then as you can see from the last few announcements, Dorado the Powder River basin and the Wolfcamp and Third Bone Spring we like to have a handful of well tested not only testing the geologic concepts and the producibility of the play, but also just testing the repeatability on it and so those things are different from each of these plays, each of the rock types given us the confidence and the transparency to start talking about those publicly.

As Bill said and you highlighted, we are leasing and testing across multiple plays this year. We're very excited about the potential that will dramatically increase the quality of the already robust inventory that we have. And as we shifted from premium in 2016 to focus on double premium that year, we really think these exploration plays have the potential to deliver another significant step change for EOG's performance in the future and we're -- the last thing I'd highlight is we're doing this at a time when much of the industry is really pulled back on, on any new exploration at all. That leaves us in, countercyclically opportunity here where we're excited that we've been able to put together these prospects and get them drilled and tested and provide a little additional color for you guys when we have the information.

[Leo Mariani, KeyBanc]

Just for my follow-up question, just wanted to ask you about kind of the production cadence here on the oil side in 2021. Obviously the goal is to kind of keep things roughly flat with the 4Q '20 levels of 442, you obviously starting at a lower point in 1Q because of a lot of the storm downtime. Does that imply that we're going to see a bit of a gradual ramp on those volumes to kind to the average as we work our way into midyear and second half '21 for the US oil mines?

[Billy Helms, Chief Operating Officer]

Sure Leo, no, the production in each quarter will be about the same target around that 440,000 barrels a day, which really was our target here in the first quarter. Obviously, the storm affected basically a one week of production and that came largely in the Delaware basin and Eagle Ford areas. All that production is back on now and that downtown is going to result in about a 4% decrease in the first quarter production and we say we're not going to grow production in an oversupplied market. So basically once we kind of get this production, now that the production is back on, we'll maintain this rate at around the 440,000 barrels a day in each of the remaining three quarters.

[Operator]

And our next question will come from Neal Dingmann with Truist Securities.

[Neal Dingmann, Truist securities]

Bill just a quick or easy question for you or Tim just wondering about hedging these days, your thoughts, you did pretty well in '20 when you had some on you took off realized the gains on that. So I am just wondering with the improvement we've see in oil prices here although we're kind of obviously backward how you all think about that?

[Bill Thomas, Chairman & Chief Executive Officer]

Yeah Neal, we remain opportunistic on our hedging. Obviously, the price has moved up very dramatically here in the first quarter of the year faster than really we had thought. We added a few hedges there at the beginning of year just to lock in above 50 and 55, but we're currently watching the market and watching it move up and we'll be opportunistic in hedges as we feel that they will be beneficial and we have no -- we have no hedges in natural gas at this time.

[Neal Dingmann, Truist securities]

Okay. And then just you guys have been successful on your organic exploration you talked about, I am just trying to curious with the plan this year as you have, I guess my question is do you have a set plan on regardless what happens to either pricing or the success of these plays throughout this year and then '22 what you would do activity and suspending wise on that? Is a pretty set or is that because that's still ebb and flow.

[Bill Thomas, Chairman & Chief Executive Officer]

We'll let Ezra talk about this.

[Ezra Yacob]

Yeah Neal, thanks for the question. We have kind of a base plan set up for our exploration, but what I would say is much of it's going to be dependent on what we see, how we get these leases put together and what we see on the earlier results of these plays. So we remain fairly flexible on how quickly we think we could start to allocate capital to these. What I would say just a little more color is all of our domestic exploration plays as we've highlighted in the past are in areas of pre-existing oil and gas operations. So they're not frontier basins or anything like that. There is some form of infrastructure albeit may be legacy and so we would be able to get these things produced and up and moving once we have the results on the repeatability of the plays and have the acreage tied up.

[Operator]

And our next question will come from Brian Singer with Goldman Sachs. Please go ahead.

[Brian Singer, Goldman Sachs]

My first question is two-part question with regards to the decline rate impact from the shift to double premium locations. What characterizes either the underlying geology or what you're doing in your completion technique to achieve these lower decline rates or is it just a shift away from the Eagle Ford? And then if this represents a new capital efficiency for the company, why would it not push down maintenance capital below the $3.4 million?

[Billy Helms, Chief Operating Officer]

Sure Brian. Good morning. So as far as the decline rate shift, that's coming mostly from focusing our areas on better rock to be honest that as we've matured the Eagle Ford play as we mentioned earlier and more of our capital is going towards the Delaware Basin and even the Powder River basin in general those are plays that have essentially better rock and capability of a lower decline. So that's a large part of that and then on the new -- with the shift in the capital efficiency and the maintenance capital, I'll remind you the $3.4 million when we set that I guess a year or so ago, that was at a production rate of about 420,000 barrels a day and that was also pre Dorado.

So we're maintain the $3.4 million at a higher oil production rate of 440,000 barrels a day and we've also added in the capital on Dorado because that is part of our announced plays going forward.

[Brian Singer, Goldman Sachs]

Thanks. And my follow-up actually does involve Dorado you mentioned that a couple times in your prepared remarks as a potential global energy solution and I wonder how you monetize that? Is there an L&G contract or partnership with the global player or are you taking a more bullish view on medium or longer-term US natural gas prices?

[Billy Helms, Chief Operating Officer]

Brian I am going to ask Lance to talk about the L&G potential for Dorado?

[Lance Terveen, Senior VP of Marketing]

Hey Brian good morning. Its Lance, yeah I think as we've talked about in the past, that's what makes it so exciting about the Dorado play is just when you think about the proximity to market we're so close. You noted to the proximity to the both all our domestic customers but then also the L&G markets as well. So I think the biggest thing again is just the proximity is the location at all is very complementary with what we've done in the past in a lot of our plays moving gas downstream to obviously try to capture the highest prices. So we'll just continue to stay very opportunistic there but the big thing I want to focus on is just the proximity and what's in place today.

[Operator]

And our next question will come from Doug Leggate with Bank of America. Please go ahead.

[UnidentifiedAnalyst]

Thank you for taking my question. I'm afraid that I am just going to focus on one issue, forgive me it's on the drill plan post 2021 and I am going to stress this up a little bit and then my question really is why the 10% number and how you define a balanced market? Now I know going through some of this before, but I just want to set up you a little bit, basically just about everybody is off to a breakeven price and I think EBITDA be able to move production rate is a lot higher than where it is today. So when talk about an optimal plan, you talk about a $53 average oil price in the last four years but in order you're subsidizing that.

So I am back to the same question I had number of years ago which is why -- when you represent 0.5% of global supply it's okay to grew 10% or even 5% of global demand because that puts you back to being part of the problem. Hopefully you'll see that I am growing with this because everyone else did the same thing. The US is $5 million a day and the price my last comment, I want to just drill for a little bit from the perspective. So if you put $2 million in the market in April, could ownership incentive in the US, how does the price look? I don’t know what the Russia price was and you have subsidized growth price war. So my question to you is why is 10% okay? How do you define the balanced market and will you revisit this at some point in the future because that puts us back in the same place you were a few years ago?

[Billy Helms, Chief Operating Officer]

Yeah Doug. Thank you for the question, first of all we've been really clear, we're not going to push oil in an oversupplied market. We're very, very cognizant of the fragile recovery that we're in and it's important that we don't put any more pressure on that and allow the market to recover and we're going to watch that the rest of this year. Obviously we're not going to -- we made a commitment we're not going to be increasing production this year and we'll watch it next year before we set our plan.

So we're not in -- we are not interested in growing oil in an oversupplied market, period. And when the market is right and we begin growth again, the reason that 8% to 10% is a right number because it really optimizes all the metrics and the company returns and free cash flow potential over time. We got a great chart that we put together in Slide number 10 and it really shows that the operating efficiency, the operating cost, the earnings and cash flow per share growth, the return on capital employed, the three-year committee free cash flow and the long-term free cash flow, all at an optimal level at an 8% to 10% growth rate.

If we go slower, some of those are not optimal, they're worse. If we grow faster than that, the same thing. So those are not optimal, they're worst. So the 8% to 10% really optimizes the balanced growth rate, the moderate growth rate, whether the company can continue to get better very fast and optimize our returns, our earnings potential, our cash flow potential and our long-term free cash flow.

[UnidentifiedAnalyst]

Maybe just a quick follow-up on the same topic. So I understand the point of optimal, but optimal is because of what the strategy you decide. So for example you spend $0.5 million or $1 million on exploration, if you do, you could high grade. You never rightsize the company's growth rate and you still beside taking 5% in global demand as moderate. So I guess my question is between 2017 and 2019, they had $2 million they held in the market before COVID. Is your definition of a balanced market that the lowest cost producers still subsidizing the business by providing back any production because that by definition is subsidizing your business? So optimal I am just having a tough time to understand why not learning any lessons from growing nine time in 10 years with very little cumulative free cash flow and your share prices obviously was terrible. So why is 5% a global demand growth for the company that 0.5% global supply okay?

[Billy Helms, Chief Operating Officer]

Yeah I think there's two elements that we look at really closely obviously to determine whether the market is relatively balanced or not. One of them is he inventory. We want to see them get down to the five-year average or lower and keep heading lower. Then the other is spare capacity or capacity. So we're watching spare capacity in assets if the moment is still 10 million barrel a day we need to have some work. So we want to get spare capacity down in the world to a kind of a historic normal level and so we'll be watching both of those and we're very definitely committed to not over pressuring the market and working with the market we have to work with and staying disciplined and not trying to push oil or grow oil into an oversupplied market.

We're making that commitment. We've always done that. We did it in 2015 and 2016 within row [ph]. We obviously shut in production last year and in we're staying or maintaining that exit rate this year. So we're very disciplined and we're very cognizant of that. Beyond that, when the market is available, we want to run the company to generate the highest total return for the shareholder value. That is our job. We want to generate value business value, really core business value and that's what -- that's what we're about and that's what we're going to stay focused on.

[Operator]

And our next question will come from Charles Meade with Johnson Rice. Please go ahead.

[Charles Meade, Johnson Rice]

I want to ask a question about your double premium inventory really the rate of change there. If you took that definition of double premium and applied that to your '19 program and your '20 program, what percentage of that '19 program, the '20 program would have fit -- would have qualified for that double premium bucket and what's it going to be in '21?

[Bill Helms]

Yeah Charles, the double premium we've been building more double premium every year as we get our cost out and improve our well productivity. Last year it was about 50%, in 2019 it was less than that. So last year it was about 50% and this year our goal is to get it up to 75% maybe even higher percentage of that and then next year it will even be higher than that. So we're focused on improving the wells not only with the cost, but there's a slide, Slide number seven I think it is, it shows that these double premium wells are much, much more productive. In fact over the first two years they came 39% more oil than the wells we've been drilling in the last several years. So they're better wells.

Obviously, we're lowering our costs at the same time and I think that's really a differentiator for EOG. as the industry data shows, most of the industry well productivity is flattening out or at EOG, the well productivity is continuing to increase. So we're not true. We're going to get better every year. We figure out how to target better rock, our completion technology continues to increase. Obviously our well costs are going down significantly and all that is sustainable and that's really the EOG culture in our methodology of not really getting into a maintenance mode and just doing routine every well the same.

We are in the learning process, we get a tremendous amount of data and technology. We're learning the geologies. We drill the wells. We're learning the pay quality and we're figuring out just continuously on a real-time basis how to get better in every aspect of the company and so we're excited about our future and continue to increase returns and capital efficiency and free cash flow potential as we go forward.

[Charles Meade, Johnson Rice]

Thank you, Bill. That's helpful insight into your thinking process and perhaps picking up that one thread on better rock, am I interpreting that the right way is that is essentially the shift from these the resource share plays and more towards these combo plastic kind of plays and is that just kind of a coincidence or is that more of the fundamental arrow for you guys?

[Bill Helms]

Well it's not a coincidence. I am going to let Ezra talk about that.

[Ezra Yacob]

Charles thanks. That's perfectly. You hit the nail on the head as you move away from these, the actual true shale plays themselves or some of the tightest rock and so as we've moved into not only different basins and different formations, but especially targeting the specific landing zones as we've developed some of our petrophysical, some of our geologic models to really understand the specific landing zones and rocks like the Austin Chalk per se, you fundamentally have higher porosity and permeability just better all-around rock quality that adds to not only the returns but also as Bill was highlighting for the shower decline profile.

[Operator]

And our next question will come from Paul Cheng with Scotiabank. Please go ahead.

[Paul Cheng, Scotiabank]

Two questions please, first year you signed a gas supply agreement, that seems to be well kind or given the shop rights in the JKM prices, can you tell us that what is that volume for this year and how quickly you we ramp to a 440 million cubic feet per day, how many you would forecast there? And also the link to both JKM and Henry Hub can be tell us that what the stand is on JKM and what the spend is in on Henry Hub. That's the first question.

Second question, I think this is probably for Bill, some of your competitors have decided to formalize the excess cash return framework that ones that they have excess free cash off the CapEx and base dividend, they will pay that out. Just curious why from EOG standpoint you don't think that will be a maybe what the program for you because I think the market would love cash return but that they also love transparency and some understanding that under what circumstances they can get what? So just curious that why that we do not believe that we'll fit into the EOG model? Thank you.

[Bill Helms]

Yeah Paul, I am going to ask Lance to talk about the JKM.

[Lance Terveen, Senior VP of Marketing]

Thanks for your question especially related to L&G I'd say it was fairly bearish last year right related to JKM and just global L&G pricing with the warm weather and obviously the oversupply and things have changed, haven’t they quite drastically to where you don’t want to go for it looks very constructive definitely as you look at global prices. So yeah just as a reminder there Paul, we've got 140 million a day that goes into that agreement that we have with [indiscernible]. Like you said, we're excited for the benefit there that we've seen especially in a go forward. We kind of had that view going into before and finalizing our agreement. We're definitely constructive long-term related to global prices and obviously have an exposure to JKM and being very correlated with well two and having upside that's where we kind of wanted to be positioned from an L&G pricing standpoint.

So yeah, we've been very pleased here in the first quarter with our pricing and constructive from a long-term standpoint as well. And your second question was there was just kind of how it ramps up and you're right, it's the 140 is the JKM and there's an additional 300 that will be tied to Henry Hub.

[Paul Cheng, Scotiabank]

And for the JKM, is that the one to one or that is a factor?

[Bill Thomas, Chairman & Chief Executive Officer]

Paul, could you ask that one more time please sir.

[Paul Cheng, Scotiabank]

For the main JKM yesterday, price you get the JKM or you say factors, is there a S curve or anything like that?

[Bill Thomas, Chairman & Chief Executive Officer]

I am not going to go under the specifics contractually, but it's very -- it's very familiar from what you've heard from Cheniere as well in their IPM model and so that's how we structure that.

[Operator]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Bill Thomas for any closing remarks.

[Bill Thomas, Chairman & Chief Executive Officer]

2020 was a year with many challenges and I'm so very proud of the employees of EOG. They responded with an exceptional performance in an exceptional year. We enter 2021 and this next up cycle with lower cost and more potential than ever in the history of the company. Our organization and culture are focused on improving returns, playing a significant role in the future of energy and delivering substantial long-term shareholder value. So thanks for listening and thanks for your support.

[Operator]

The conference has now concluded. Thank you for attending today's presentation and at this time, you may now disconnect your lines.