EOG Resources, Inc.
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

[Operator:]

Good morning and welcome to the EOG Resources' Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Tim Driggers, CFO. Please go ahead.

[Tim Driggers:]

Good morning and thanks for joining us. We hope everyone has seen the press release announcing third 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.

[Bill Thomas:]

Thanks Tim and good morning everyone. Our third quarter results underscore EOG's unique ability to organically create sustainable shareholder value through the commodity cycle. Along with substantial cost reductions and solid earnings results, we announced Dorado our new premium South Texas natural gas play. We also introduced a three-year reinvestment and production outlook. First, I want to highlight our stellar execution this year then provide some context on our capital allocation and three-year outlook. We continue to make rapid and sustainable improvements to our cost structure and capital efficiency through innovation while also improving the quality and size of our premium portfolio through exploration. Our results show we can invest in both innovation and exploration to improve the company, while also generating significant free cash flow improving the balance sheet and protecting the dividend. Capital spend for the third quarter was $2.7 billion over $300 million less than our revised plan had forecasted. In the third quarter, we substantially beat our cash unit cost targets as well as each of our oil, NGL, and natural gas production targets. As a result we have generated more than $930 million of free cash flow year-to-date already more than enough to cover the full year dividend. Our 21 Tcf Dorado natural gas play announced yesterday is a great example of EOG's ability to identify and capture high-quality rock and add substantial premium inventory to our organic exploration efforts. We believe Dorado will be one of the lowest cost and lowest emission natural gas plays in the U.S. with advantaged access to both domestic market hubs and international market via LNG.

[Tim Driggers:]

Thanks, Bill. Our goal is to maximize shareholder value through the cycles. We measure our progress against a number of metrics, return on capital, free cash flow, sustainable dividend growth, operating cost and finding cost and financial leverage. We create business value through a balanced approach that maximizes returns as well as both current and future free cash flow generation. It's an integrated optimization exercise, not a simple formula. Reinvestment ratios and growth rates are outputs of this exercise. Our three-year outlook provided this quarter addresses the currently oversupplied market and assumes gradual improvement over the next three years. Our plan each year is based on conservative price assumptions. The pace of activity is optimized to generate high returns on incremental capital, increased return on capital employed, support improvements in operating efficiencies and technical advances and fund our free cash flow priorities. That said, our outlook is just that an outlook. We have operational flexibility to adapt quickly to changing supply demand conditions.

[Billy Helms:]

Thanks Tim. During the third quarter, we exceeded our volume expectations across the board while spending well below our forecasted capital. The capital savings were largely attributed to achieving our 12% well cost reduction target for the year. Our expectation for full year capital expenditures remains $3.4 billion to $3.6 billion. The savings provided by our well cost reductions allows us to increase activity and exit the year near the level required to maintain production through 2021. Savings will also be used this year to invest in future value drivers for the company. Our organic exploration program is as active as ever and we are optimistic we can 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. Finally, we are excited to initiate a number of infield innovations to improve our environmental performance. These projects have the potential to both reduce future emissions and improve efficiencies to generate a healthy return on capital. In the third quarter cash operating costs which includes LOE, transportation and gathering and processing expenses were 13% below target. LOE savings were generated across the board as we have streamlined our lease-up key practices and other facets of our production operations. We track about 100 different categories of LOE spending and 94 of these were flat to down in the third quarter compared to the second quarter on a per unit basis. We are excited about the steady improvements we continue to make. I am confident that most of the capital efficiency gains and operating cost reductions we are making this year will sustain into 2021. With current oil market fundamentals we plan to maintain flat oil production in 2021 at about 440,000 barrels per day which is where we expect to exit the fourth quarter this year. Capital required to maintain fourth quarter production throughout the year is about $3.4 billion. Due to sustainable cost reductions achieved this year, maintenance capital and the current dividend can now be funded with oil in the mid-30s. If oil prices allow additional funds will be allocated to

[Ken Boedeker:]

Thanks, Billy. We're excited to announce a major new natural gas discovery in the Western Gulf Coast Basin. Located in South Texas, Webb County we've named this discovery Dorado. With a breakeven cost of less than $1.25 per Mcf, we believe this play represents the lowest cost supply of natural gas in the United States. We have identified an initial resource potential of 21 Tcf net to EOG in the Austin Chalk and Lower and Upper Eagle Ford formations. Both targets display premium level economics. At Henry Hub prices of $2.50 per Mcf Dorado competes directly with our premium oil plays. This play is a textbook example of how our exploration program is focused on adding to the top of our premium well inventory elevating the overall quality of our assets. We first identified the potential of the Austin Chalk formation as an oil play on top of our Eagle Ford footprint back in 2016. We have since completed about 100 gross Austin Chalk oil wells in that area capturing 59 million barrels of oil equivalent of reserve potential net to EOG. Shortly following that discovery, we began evaluating the Austin Chalk formation in the Gulf Coast Basin and identified its potential as a dry natural gas play in Webb County. Our current 163,000 net acre position is a combination of legacy acreage and new acreage captured through low-cost, organic leasing, trades and a bolt-on property acquisition. We believe our position covers the majority of the sweet spot of the play. We completed our first two wells in Dorado in January of 2019 targeting the Austin Chalk in the Eagle Ford. To further delineate the play and collect more data, we completed 15 more wells over the remainder of 2019. We paused our drilling activity during 2020 to evaluate both the production results and the significant amount of technical data we collected from cores, petrophysical logs and 3D seismic surveys. This data including a year's worth of production history from our drilled wells has generated a robust reservoir model giving us confidence in our resource estimates and projections for well performance. We are leveraging our proprietary knowledge built from prior plays to move quickly down the cost curve with our initial development. We currently estimate a finding cost of $0.39 per Mcf in the Austin Chalk and $0.41 in the Eagle Ford. Combined with EOG's low operating costs an advantaged market position located close to a number of major sales hubs in South Texas, access to pipelines to Mexico and several LNG export terminals, Dorado is in an ideal position to supply low-cost natural gas into markets with long-term growth potential. Dorado is dry gas with close proximity to multiple markets. Therefore, we expect Dorado's gas will have a lower carbon footprint than most other onshore gas plays in the U.S. In addition, the recently formed Sustainable Power Group, we introduced last quarter is leveraging company-wide expertise to build out an operationally efficient and low emissions field. As we expand development of Dorado into a core asset, we expect it will help lower EOG's company-wide emissions intensity rate. In 2021, our preliminary plan is to turn about 15 net wells to sales with initial development targeting the Austin Chalk. Eagle Ford development where we are expecting lower drilling and completion costs will follow. The Eagle Ford utilizes a lower cost wellbore design optimized to a more forgiving drilling environment compared to the Austin Chalk. In addition, we can leverage water and gas gathering infrastructure put in place for the Austin Chalk. We will evaluate the capital allocation to the South Texas gas play each year based on market conditions. Dorado adds 1,250 net locations on fee acreage to our premium inventory with 530 of those from the Austin Chalk and 720 from the Eagle Ford. These new premium Dorado locations along with approximately 150 new locations from other premium plays make up the 1,400 new net premium locations added in 2020 replacing three times what we drilled and more importantly, improving the overall quality of our portfolio. The number of wells in our premium inventory that have returns of 30% or more at $30 oil and $2.50 natural gas has now increased from 4,500 to 6,000 wells. We also divested the remainder of our Marcellus Shale position during the third quarter for proceeds of about $130 million. The sale of this non-core sub-premium asset will fund much of Dorado's development capital next year and upgrades the quality of our gas portfolio. This is a great example of how EOG's organic exploration strategy and disciplined capital management creates significant shareholder value. Now I'll turn it over to Bill for concluding remarks.

[Bill Thomas:]

Thanks, Ken. In conclusion, I'd like to note the following important takeaways. Number one, EOG continues to significantly lower cost operating costs and well costs with sustainable technology and efficiency gains. The company will emerge from the downturn a much lower-cost company. Number two, our organic exploration effort delivers another significant industry-leading play. We believe EOG's Dorado and natural gas play will be one of the highest margin and lowest emission gas plays in the U.S. Dorado is an example of how our robust exploration portfolio will continue to lower the cost structure and improve the future capital efficiency of the company. Number three, our multiple year outlook is designed to deliver industry-leading financial performance and free cash flow. It's a balanced strategy that maximizes total shareholder value through the cycle. EOG represents a full-cycle investment opportunity with significant leverage to higher oil prices. Number four, EOG is a leader in innovative initiatives to lower GHG and methane emissions. Every aspect of ESG is embedded in and driven by EOG's talented and return-focused culture. New ideas are coming from every corner of the company driven by passionate employees who are excited about making our environment and communities a better place to live. EOG is committed to being a leader in the future of energy. And finally, EOG's third quarter results demonstrate our unique and sustainable organic business model, whether it's exploration, operations, information technology or ESG performance. Our culture-driven value creation throughout the company has never been better. EOG's ability to maximize long-term shareholder value through the cycles has never been stronger. Thanks for listening. Now we'll go to Q&A.

[Operator:]

Our first question comes from an Arun Jayaram, pardon me, with JPMorgan. Please…

[Arun Jayaram:]

on your 2021 outlook and how you're thinking about the incremental investments that you highlighted on the slide beyond the $3.4 billion sustaining number. And any preliminary thoughts on mix, as it does sound like you'll be shifting some activity amongst the premium plays to the PRB and Dorado?

[Bill Thomas:]

Yes. Thanks, Arun. I'm going to ask Billy to comment on that.

[Billy Helms:]

Yeah. Good morning Arun. Just to make sure, I understood your question. I guess for the 2021 outlook, our maintenance capital as we've stated was about $3.4 billion. We are likely to evaluate. It's early yet to say what our capital might look like next year, but we'll certainly do the same as we always have. We'll allocate it based on our outlook at oil prices at the beginning of the year of course. And as we move into that year, we have certainly a lot of flexibility to allocate between our different plays. So as we mentioned in the prepared remarks, we can fund our maintenance capital and our dividend down to oil prices in the mid-30s. So as we see oil prices moderate either above that level or wherever they might be, we'll have flexibility to allocate capital to our new play Dorado and the Powder River Basin as we explained in our prepared remarks.

[Arun Jayaram:]

Okay. Fair enough. But you did say Billy at $40 oil, you could reinvest 80% of -- or have an 80% reinvestment rate and cover the dividend and some of these incremental investments. Is that...

[Billy Helms:]

Yes, that's true.

[Arun Jayaram:]

Is that fair?

[Billy Helms:]

Yes. Well I'm sorry we missed the first part of your question, so I apologize.

[Arun Jayaram:]

No problem, no problem. And just my follow-up maybe for Tim. EOG has historically been pretty conservative on the oil and gas prices that underpin your outlook. So some question from investors on just the rationale for using $50 per barrel. I know it is a bit longer term, but which is quite a bit above the strip. And maybe if you could help sensitize those future growth outlooks if we assumed call it a $40 to $45 WTI type number?

[Bill Thomas:]

Yes, Arun, this is Bill. Yes, the outlook $50 is how we ran the model to determine how to optimize the company and what the most important parameters are. But I wouldn't get too hung up on $50. Whether it's $45 or $50 or $55, the fundamentals of the outlook stay the same. We're focused on returns. The first thing that we have to determine each year are the market fundamentals. Is the market still in an overbalanced situation? If it still is, we don't want to force oil into that situation. But if it's a balanced market and it turns out at $45 oil, certainly we believe the 8% to 10% growth rate, the reinvestment rate of 70% to 80%, the focus on optimizing returns and compounding the growth with operational improvements and margin improvements, and maximizing current and future free cash flow, and doing all that to maximize the total shareholder value of the company. And so the guidelines really apply to almost any price that would be in a balanced market.

[Arun Jayaram:]

Great. Thanks, Bill.

[Operator:]

The next question comes from Leo Mariani with KeyBanc. Please go ahead.

[Leo Mariani:]

Hey, guys. Just wanted to kind of ask a couple of things just surrounding Dorado. If memory serves me correctly this seems to be kind of EOG's first kind of major foray into a gas play, probably harkening back to sort of the 2003, 2004 time frame where I think you guys made a concerted effort to kind of move more to oil plays based on the macro, which was certainly the right decision over that period of time. Just wanted to get a sense, are you guys sensing that there may be some shifting macro dynamics on the gas side, which can make the Dorado play something that becomes a lot more meaningful in the years to come? You guys did outline 15 wells for 2021, which in the grand scheme of things given EOG's size doesn't seem like a big number. I just wanted to kind of get your sense on how that can play out over the next few years.

[Bill Thomas:]

Yeah, Leo. I think the first thing is, we've had a premium price deck. It's based on $40 flat oil and $2.50 flat gas prices. And so any kind of play that would have premium economics 30% rate of return at those flat prices, that's okay with us. We're not particular on the commodity, whether it's gas or oil or even a combo play. So that's the first thing. And then the second thing is, yes, we do believe that gas has got a prominent future in the future energy supply. There's no doubt about that. And this play just happens to be, we believe the best -- one of the best play, the best play probably dry gas play onshore U.S. It is a fantastic play and it's really driven primarily through the extremely high rock quality of the Austin Chalk. And so it fits everything we're looking for in the company. It upgrades our portfolio. It gives us more exposure to gas going forward. It gives us a lot of optionality in the future to switch capital between types of plays as commodities prices might vary a little bit. But all of it is based on our premium price deck $40 flat and $2.50 flat gas and this one certainly generates super high returns at $2.50 flat gas.

[Leo Mariani:]

Okay. That's great color. And just focusing on third quarter for a second. It certainly looks like EOG beat production guidance pretty handily, but it did also look like that the shut-ins that you had were actually slightly higher than you projected for the quarter. So just wanted to get a sense of what kind of drove the better than expected third quarter production performance?

[Bill Thomas:]

Billy?

[Billy Helms:]

Yeah Leo. This is Billy. So yes, we -- the outperformance is really driven by -- and you touched on it there the shut-in wells bringing those back on production. As we brought the wells back on production that had been shut in for some time, we exhibited some amount of flush production from those wells, as we've talked about before. And then the second part of that is, we did start bringing on a few newly completed wells and those outperformed our type curves. So that's really kind of what drove the two parts of our beat on the volumes.

[Leo Mariani:]

Okay. Thanks for the color.

[Operator:]

The next question is from Brian Singer with Goldman Sachs. Please go ahead.

[Brian Singer:]

Thank you. Good morning. Wanted to ask on the maintenance capital of $3.4 billion. This is the number you've been talking about for the last couple of quarters, and I think you were a bit more upfront. And I think it was slide 8 of talking about in an ideal world some of the potential other additional investments, you want to fund. And I wondered if you could kind of quantify what that -- what those would represent the ESG exploration, cost structure improvements and balancing activity, how much is a normal level of spending there? And then potentially to offset that, I think you've talked in the past that cost savings and efficiencies and cost reductions for the last couple of quarters are not included in the $3.4 billion. What would that represent in -- based on today's cost structure?

[Billy Helms:]

Yes. Good morning, Brian. This is Billy. So our $3.4 billion maintenance capital, you're right. You are correct. It did not -- it does not anticipate any improvements in our cost structure on a go-forward basis. It's based on our current existing cost. So that's the first thing. And then as far as the amount of capital over and above that, we'll -- as we go into the year, I think, we're trying to provide a little bit of a framework on how we would think about allocating capital. As we look into next year based on the outlook for oil prices, we're just looking at merely maintaining our exit rate into the next -- in the fourth quarter into next year. So if oil prices moderate above or below where they are today, we'll look at how much money we can spend on these types of other projects, the infrastructure or exploration-related activities, or ESG-focused projects in relation to what that oil price indicates and stay within our guidance of spending certainly within a 70% to 80% of our discretionary cash flow. So that's kind of the outline, the framework. So it really -- it's a little bit early to speculate on what that magnitude of that dollar might be.

[Brian Singer:]

Got it. Thanks. And then, my follow-up is, with regards to the exploration portfolio. And if we look at the plays you've announced in recent quarters, Trinidad and the Dorado play, they've been more natural gas focused. And I wondered if you could characterize the exploration optimism from here, or at least the exploration portfolio from here, on oily versus wet gas versus dry gas plays and how you see that playing out over the next year or two.

[Ezra Yacob:]

Yes. Brian, this is Ezra. Good morning. Thanks for the question. I think, as Bill highlighted, really what we start with that exploration program, our focus right now is to find plays where we can capture the sweet spot acreage positions in those plays. And we're looking for plays that are really going to be additive to the front end of our inventory. So as we've talked about, we've got multiple exploration plays we're currently evaluating. And we just don't want to build a deeper inventory, but really strengthen that inventory. And if we look at what we've done this year, our -- the minimum rate of return on our 11,500 premium well inventory generates a 30% direct after-tax return at $40 oil and $2.50 flat natural gas price. But in this year's program, we've illustrated the significant value of focusing on the top end of our inventory. And we've delivered lower well costs and production outperformance and high-grading our investment criteria, to focus on the upper half of that inventory. And so, said another way, our 60% premium rate of return median well inventory will pay out approximately twice as fast as a 30% rate of return well. And so, our emphasis on organic exploration has always been a key to our success and it continues to be how we sustainably replace what we drill every year in our inventory. The Austin Chalk announcement today, I think, provides a very good example of what a higher rock quality can do in this exploration effort. The Austin Chalk is really more of a hybrid play, so it shares characteristics of unconventional and conventional reservoirs. And when we apply our technology, our data collection on core and log, to really identify the sweet spot landing zones that will react very well to our horizontal completions technology, that's when we really have -- that's when we really get excited and see the power that these hybrid plays can add. As we translate that into oil plays, we expect a very good outperformance with these hybrid zones. And we should be able to see a shallowing decline profile and lower finding and development costs, as we move forward into those.

[Brian Singer:]

Great. Thank you.

[Operator:]

The next question is from Jeanine Wai with Barclays. Please go ahead.

[Jeanine Wai:]

Hi. Good morning everyone. Thanks for taking my questions. My first question is on the base decline. I think in the 2022, 2023 outlook you now anticipate that BOE growth will outpace oil growth. And I think some of that is related to Trinidad and Dorado. But how does the oil base decline trend in your 8% to 10% per year growth rate scenario? And is that level of growth enough to kind of allow the base to moderate?

[Bill Thomas:]

Yes. Hi, Jeanine. I'll ask Billy to comment on that.

[Billy Helms:]

Yes. Good morning, Jeanine. Yes, I think you're correct. The base decline from the oil properties is moderating over time. That's a function of really the activity levels this year and -- but also the quality of the inventory that we're bringing to production. The better quality rocks just simply have a lower decline over time. So it's really those two things that are helping to moderate the oil base decline. And, certainly, the outlook that we have with our maintenance capital is sufficient to maintain that on a go-forward basis.

[Jeanine Wai:]

Okay. Great. That's very helpful. Thank you. My follow-up question is, maybe dovetailing on a few of the other ones about the other CapEx that is going to be included in the 2021 outlook. So on the potential investments on slide eight that you list, we know that the amount of CapEx will depend on the headroom that you have in oil prices. I think I heard you say that previously. But can you comment on how that 2021 amount might compare to prior years? But I guess more specifically, how much of that other CapEx is really embedded in that $50 2022-2023 outlook? Thank you.

[Billy Helms:]

Yes. Jeanine this is Billy, again. You're right. The level of how much we spend on those different categories will certainly depend on the oil price. And I'd say, there is some amount of that baked into the $50 estimate in the outer years, but it's not a major portion of our capital spend. So it's -- I'd say, it's in keeping with what we've done in the years past.

[Jeanine Wai:]

Great. Thank you very much.

[Operator:]

The next question is from Bob Brackett with Bernstein Research. Please go ahead.

[Bob Brackett:]

Hi. Good morning. You've gone quite down dip in Dorado. And those 9,000-foot laterals imply some of these wells are approaching four miles measured depth. And so it seems cost control is absolutely critical. Is there some innovation there to share with us?

[Bill Thomas:]

Yeah. Bob I'm going to ask Ken to comment on that.

[Ken Boedeker:]

Yeah Bob, this is Ken. We have a significant history of developing the Austin Chalk in addition to the Eagle Ford, up dip in the oil window. So we've also had 17 wells that we've drilled in that area, that have provided excellent results. And we haven't had many drilling issues or completion issues to deal with. So, keeping the costs in those areas are anticipated to be, what we've shown right now in our 2021 program. So it looks like the -- we have a very, very good confidence that we'll be able to generate those returns. We've shown that are competitive with our other premium oil plays at $2.50.

[Bob Brackett:]

So I'll do a combo follow-up. So it's not sort of managed pressure drilling say like the Powder River? And then my follow-up would be, you mentioned domestic and international exploration activities in that seriatim, that people keep referring to. Could you remind us of what is included in the international bucket?

[Ezra Yacob:]

Yes. Bob this is Ezra. On the international front, I'd highlight we did just recently wrap up our recent drilling campaign in Trinidad with some additional outstanding results. We highlighted some of the discoveries, on the last call. But I'd follow-up and say, our most recent completion the Oilbird -- a well off the Oilbird platform came on in the third quarter at over 60 million cubic feet a day of natural gas with an additional 2,500 barrels of condensate per day. We brought on a well off of our Kitscoty platform, that's cleaning up right now, its flow back rates of approximately 30 million cubic feet, per day of gas. And so we continue to be excited about the discoveries that we made during this campaign and look forward to sharing future results, from this high-return asset. And then also during the third quarter, we entered into the country of Oman, with the acquisition of about 4.6 million net acres in Block 36. Block 36 is in the southwest portion of the country. It's located in the Rub Al Khali basin, which is a well-known hydrocarbon-bearing basin. And as -- we've been looking really outside the U.S. for the right opportunity to apply, our expertise in tight oil development, and we view Oman is really offering that. They offer a very low geopolitical risk, and they offer access to competitively priced oilfield services and equipment, that we think is going to be required to make tight oil successful. And so as part of the agreement, we plan to drill two test wells in the next two years to evaluate the potential of the acreage. And we're very excited about the low-cost of entry in Oman and the option to evaluate a basin with significant potential upside. And I think, maybe Ken could add some color in addition to that.

[Ken Boedeker:]

Yeah. I just -- I wanted to clarify something Bob. When you talked about managed pressure drilling like the Powder River Basin, we are doing managed pressure drilling like the Powder River Basin, in Dorado. But we have a significant amount of experience doing that across several plays in the company.

[Bob Brackett:]

Great. Thanks for all that.

[Operator:]

The next question comes from Subash Chandra with Northland Securities. Please go ahead.

[Subash Chandra:]

Yeah. Hi, everybody. Just doing some, I guess, bar napkin math, using your decline rates and the dollar for flowing capital efficiency calculation. I'm coming up with, I don't know maybe around $5 billion for what CapEx requirements are, for 10% type oil growth. Do you think I'm in the right ballpark there?

[Billy Helms:]

Yeah Subash, this is Billy Helms. It's a little premature to maybe give out a directional number, but I think you can approximate. With the data we've given you, I think you can derive some pretty close estimates. I'd say you're probably not too far off the right numbers.

[Subash Chandra:]

Okay. Great. Thanks. And then secondly just on, dividend decision. I guess the next one comes up, early part of the New Year. I'm just curious the $3 billion in cash, you talked about having the right balance sheet cushion to ride out the cycles. From a, cash perspective, is there a right number that we should be assuming? And is it and should we also assume that the cash does not go into the dividend decision, that the dividend decision is just derived from operating cash flows or free cash flows?

[Tim Driggers:]

This is Tim. And you're exactly right. It is the operating cash flows, that determines the -- a sustained dividend. As far as the $3 billion in cash, we do have a bond coming due in February. And currently we are anticipating being able to pay that bond off with that cash. But we have significant flexibility if the market changes to do whatever we need to do. So, we're in a good position to manage that situation.

[Subash Chandra:]

Okay. And to ask it a different way, should we assume some sort of minimum cash that you'd want to keep on the balance sheet?

[Tim Driggers:]

There -- again, we evaluate it depending on the conditions at the time. So, to give you a number there's not a number I can give you. It all depends on what the stock -- I mean, the price of the commodities are at the time, as to how much cash we need to have on the balance sheet. And also what our budget is, our capital budget and how much capital we'll be spending.

[Subash Chandra:]

Okay. Great. Thank you.

[Operator:]

The next question is from Paul Cheng with Scotiabank. Please go ahead.

[Paul Cheng:]

Hi. Thank you. Good morning. Just curious that when you look at the three-year outlook for your capital allocation and the growth target or that the maximum growth ceiling, should we assume that that's also applied for the longer term? And if notm is there any reason that the same will not be applied?

[Bill Thomas:]

Yes, Paul I think three years with those parameters are a good guide. We did include - we did not include any additional well cost, operational cost advancements in those projections. So certainly, we expect to continue to do that. We have a very sustainable model of being able to do that. So as time goes on and certainly in three years we expect we'll be a lot better company. So I wouldn't just apply those numbers to what we could do four years from now. I think we're hopeful we'll – through these exploration efforts getting better rock and continuing to reduce our costs we should be a much better company.

[Paul Cheng:]

Well I'm sure that the company will be operationally much stronger. I'm more referring to that is the ceiling of 10% growth is a variable over the longer term or that is only applied for the next two or three years?

[Bill Thomas:]

Yes I think right now it's just for the next two or three years. We'll just have to evaluate where the company is in the four or five years from now and see where we are.

[Paul Cheng:]

And then my second question is that on – whether it's the Dorado or that your overall CapEx spending certainly that the price signal is important. But with the future strip moving quite substantially from one day to another so that's probably not a very good indicator or at least let's say a forecast vehicle. So what are the factors that you guys are using maybe that's more determinating how you decide on your program for a particular year if the price signal from the future market are unreliable there as we can see?

[Bill Thomas:]

Yes, Paul I think the first thing is what's the price based on and that's whether we're in an overbalanced market situation or a balanced market. And we believe there's significant structural changes obviously have been going on in the business particularly in the U.S. with a lot more capital discipline, a lot more return of cash to shareholders. They need to work on balance sheet consolidation, et cetera. In the international arena, there's been folks that have basically changed their business philosophy and they're certainly not going to be investing as much in oil in the future. So there's a lot of things that go on in there. And all that leads to – in the future, certainly we believe OPEC will be the swing producer the – really totally in control of oil prices. So we want to take that in consideration and make sure that the market is balanced. And we've taken all that in consideration as we formulate our plans.

[Paul Cheng:]

Thanks.

[Operator:]

The next question is from Doug Leggate with Bank of America. Please go ahead.

[Doug Leggate:]

Thank you. Good morning, everyone. Bill I'm really just looking for a little clarification on a couple of the things you've announced today. First of all, the beginning of the year you talked about your cash breakeven being around $40. Second quarter you said it was a little less than $40. Now it's dropped to the mid-30s. Can you tell us what's changed there given that the sustaining capital is still $3.4 billion?

[Bill Thomas:]

I'll ask Billy to comment on that.

[Billy Helms:]

Yes. Good morning, Doug it's really the cost structure of the company continues to improve. We continue to drive down our well cost. As I mentioned earlier we've already achieved our 12% cost reduction that we expected throughout the year. And then our unit costs, we've driven down our unit operating costs quite substantially this year. So those combination of things is allowing us to continue to reduce that breakeven cost.

[Doug Leggate:]

Is the gas price a factor Billy?

[Billy Helms:]

No sir, it's really not. It's really driven mainly by the cost reductions, the structural changes we've made and the cost reductions of the company.

[Doug Leggate:]

Okay. My follow-up is really, Bill I hate to do it but go back to the 10% growth number. I know you've been asked a lot about it today. But I want to put a hypothetical to you. So let's assume oil is $50 but it's only there because Saudi is still – or OPEC+ has still got seven million barrels off the market. That's not exactly a balanced market. So what does EOG do in that scenario?

[Bill Thomas:]

Yes, Doug, that's exactly right. We would not want to force oil into that kind of situation. We don't want to put OPEC in a situation where they feel threatened like we're taking market share, while they're propping up oil prices. So that much commitment by them that's not a time we would force oil.

[Doug Leggate:]

That's the clarity I was looking for. Thanks so much, guys. I appreciate it.

[Operator:]

The next question is from Paul Sankey with Sankey Research. Please go ahead.

[Paul Sankey:]

Thank you. Good morning, everyone. Guys, could you -- on the Dorado, could you give us an activity and volume outlook to help us with valuation? And given it's an organic success, could you just talk a bit about your perspective on the consolidation that we've seen in the sector from EOG's point of view? Thanks.

[Ken Boedeker:]

Yeah. Paul, this is Ken. On Dorado's volume and activity outlook, it's a little early to give any volume outlook for 2021 or the future years. We have talked about a 15-well program in 2021 that we should be bringing on some gas early in the year and then towards the second half of the year from there. As far as M&A...

[Billy Helms:]

Yeah. Paul, this is Billy. I'll touch maybe on the M&A question. I think -- certainly, I think the industry needed to go through some M&A some consolidation in the space. And I think we're certainly supportive of what we've seen so far. For EOG, we've looked at just about every possible combination that's out there. And we certainly understand the financial uplift or the accretion that you might get from a corporate M&A, but we look at that more as a one-time event. And we're really looking -- for us to be entering that market, we would look at the longer-term impact that a possible M&A would have on our current inventory. And so we look at the inventory that a company might have in comparison to the inventory, we already have or what we're seeing in our exploration program, and we just don't see anything that we're -- we need to allocate any funds to at this point in time. There nothing that really meets our objectives. And I guess it just stems from the fact we have such a high level of confidence in our current exploration program, which is mainly aimed at improving the quality of our premium inventory.

[Paul Sankey:]

Thought you might say that Billy. The follow-up is you've adjusted your framework somewhat here. Could you just talk about your philosophy on hedging the latest -- if anything's changed regarding how you think about hedging? And I'll leave it there. Thank you.

[Bill Thomas:]

Yeah. Paul thanks. Yeah, we haven't changed our philosophy there. We're always opportunistic. We have a very robust, rigorous commodity analysis macro view. We're working all the time. It's quite a rigorous process. So we believe we're not always right, but we believe we've got a pretty good idea where oil prices are headed. So we'll just stay opportunistic on that, and same thing with gas prices.

[Paul Sankey:]

Which is -- so you're less hedged right now?

[Bill Thomas:]

Sorry. What was the question? I'm sorry I missed it.

[Paul Sankey:]

Which is to, say, that you're less hedged right now?

[Bill Thomas:]

Yeah. That's right. We're not hedged on oil.

[Paul Sankey:]

Okay. Thank you.

[Operator:]

The next question is from Charles Meade with Johnson Rice. Please go ahead.

[Charles Meade:]

Good morning, Bill, to you and your whole team there. I just wanted to ask a question kind of pull on the thread about this Dorado -- the Dorado play you have. The Austin Chalk, the D&C cost you put for the Austin Chalk is a little higher, I believe for -- than the Eagle Ford did. And I'm just kind of wondering, what's the driver of that? Is the Austin Chalk in a -- is it perspective in a deeper session, or is the lateral a little slower to drill, or what -- is that a relevant piece of the puzzle? And what does it point to?

[Ken Boedeker:]

Yeah. Charles, this is Ken. We just see a little bit harder drilling conditions when we're drilling the Austin Chalk compared to the Eagle Ford, so we've added in additional cost for that at this point. We always work on lowering our cost basis, and you can see that on every one of our plays. So we anticipate that we'll be able to lower the cost in Dorado as well as we drill some additional wells in that play.

[Charles Meade:]

Got it. Thank you. And then as a follow-up, I wanted to touch on the Delaware Basin. It's still a big driver for you guys obviously. Are you guys seeing anything different, or do you expect to see anything different either in the operating environment out there or the opportunity set to continue to add out there?

[Billy Helms:]

Yeah. Charles, this is Billy. Really nothing's changed, except our continuous improvement we're seeing in the well performance and the cost structure of our Delaware Basin plays. We're extremely proud of the team we have there and the improvements they continue to make. We haven't really changed a lot as far as the well spacing or anything like that, that a lot of other companies talk about. I think we continue to make improvements in the way we drill and complete the wells. And I think we're delivering a lot more consistent results as a result of that. So, we're extremely confident in our ability to continue to execute that program and deliver superior results. We are continuing to have success in blocking up acreage through trades and we've been doing that really for many years. So I don't expect that's going to continue to change. But outside of that that's kind of what we see.

[Charles Meade:]

Great, thanks a lot.

[Operator:]

At this time, the question-and-answer session is concluded. I will turn the conference over now to Bill Thomas, Chairman and CEO for concluding remarks.

[Bill Thomas:]

Yeah. In closing, I'd just like to say, we cannot be more proud of our EOG employees. Our third quarter results were outstanding, thanks to everyone in the company. The culture of EOG is performing better than ever, and our ability and commitment to creating long-term shareholder value has never been stronger. Thanks for listening, and thanks for your support.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.