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Edited Transcript of EOG earnings conference call or presentation 2-Aug-19 2:00pm GMT

Q2 2019 EOG Resources Inc Earnings Call

HOUSTON Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of EOG Resources Inc earnings conference call or presentation Friday, August 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Lance Terveen

EOG Resources, Inc. - SVP of Marketing

* Ezra Y. Yacob

EOG Resources, Inc. - EVP of Exploration & Production

* Kenneth W. Boedeker

EOG Resources, Inc. - EVP of Exploration & Production

* Lloyd W. Helms

EOG Resources, Inc. - COO

* Timothy K. Driggers

EOG Resources, Inc. - Executive VP & CFO

* William R. Thomas

EOG Resources, Inc. - Chairman & CEO

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Conference Call Participants

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* Arun Jayaram

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst

* Douglas George Blyth Leggate

BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research

* Jeffrey Leon Campbell

Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Paul Benedict Sankey

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Robert Alan Brackett

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to EOG Resources Second Quarter 2019 Earning Results Conference Call. As a reminder, this call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.

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Timothy K. Driggers, EOG Resources, Inc. - Executive VP & CFO [2]

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Good morning, and thanks for joining us. We hope everyone has seen the press release announcing second quarter 2019 earnings and operational results. This conference call includes forward-looking statements. The risk 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 and in the accompanying investor presentation slides may include estimated resource potential and other estimates of potential reserves 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; Ken Boedeker, EVP Exploration and Production, Ezra Yacob, EVP Exploration and Production; Lance Terveen, Senior VP Marketing; and David Streit, VP Investor and Public Relations. Here is Bill Thomas.

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [3]

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Thanks, Tim, and good morning, everyone. EOG does not need high oil prices to create significant value for our shareholders.

During the second quarter, despite a 12% decline in WTI oil prices, EOG generated more than $350 million of free cash flow, lowered our long-term debt by $900 million and paid a substantially larger dividend than last year, all while organically growing U.S. oil production by 20%. The EOG culture consistently, making improvements throughout the company year after year, has propelled EOG to compete financially with the very best in the S&P 500, all with oil prices averaging below $60 per barrel. We are now capable of delivering double-digit return on capital employed and double-digit growth on generating substantial free cash flow through the commodity price cycles.

Our commitment to strong free cash flow is enabling us to rapidly grow the dividend. We've increased the dividend 72% in the last 2 years. And our ambition is to target a yield that is competitive in the S&P 500, which stands around 2%.

EOG never stops improving. We are one of the lowest-cost producers in the global oil market, and we continue to lower the cost of our business. In fact, we have strong visibility and high confidence in our ability to lower our cost, so that by 2022, we can earn at least 10% return on capital employed at oil prices below $50 per barrel.

Our first half results confirm that EOG is stronger than ever, and we are delivering a banner year in operational performance. For 2 quarters in a row, we delivered more oil for less capital. With efficiency gains and new technology, we are achieving strong capital and operating cost reductions, while at the same time, delivering excellent well performance.

In addition, the company is leasing acreage and testing new geologic play concepts that, we believe, could lower our decline rate and continue to reduce our cost to produce oil. At EOG, we have always believed that being a good corporate citizen goes hand-in-hand with delivering long-term value for our shareholders. And the same spirit of innovation that drives our excellence in operations is aimed at ensuring the business is sustainable in the long run.

We are excited about several new environmental, social and governance initiatives that will both reduce our environmental footprint, while helping to lower costs and earn strong returns. We are a leader in water reuse in the Permian Basin, currently sourcing 90% of our water needs from recycled production water. We are busy transferring our reuse technology to other basins.

EOG is also a first mover and, we believe, the largest user of electric-powered frac fleets. Later this year, we will be testing the use of solar power to generate electricity for natural gas compression. Our expanding implementation of water reuse, electric frac fleets and solar power are just a few of the many things we're doing to reduce our environmental footprint.

Our goal is to be the leader in ESG performance, by delivering high returns with responsibly focused operations. We will have more details in our updated sustainability report to be published later this year.

EOG culture is more than 3 decades in the making and the foundation of our competitive advantage. Our ability to continuously improve the company is accelerating over time. It's not just a few items that we work on, it's every nut and bolt and every process in the company. Our culture of innovation, leverage through the application of real-time data analysis, with our advanced information technology systems enables everyone in the company to create value. EOG's business is better than ever, and our insatiable desire to improve has us excited about our future.

Next up is Billy to review our second quarter operational performance and outlook for the remainder of 2019.

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Lloyd W. Helms, EOG Resources, Inc. - COO [4]

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Thanks, Bill. For the second quarter -- for the second conservative quarter, oil production beat the high end of our forecasted range, while the capital expenditures were below the low end. The performance in the first half of the year demonstrates our focus on continuous improvements as evidenced by our higher capital efficiency, lower operating cost and ongoing integration of operating practices to minimize our environmental footprint.

There are several factors that drive these outstanding results. First, our production beat this quarter is due to improved well performance. Our new completion designs, including the use of diverters along with the continued focus on target selection are the main reasons for the improvement. Beyond the completion design itself, we are -- also developed proprietary technology that allows us to make real-time adjustments during the execution of the frac to minimize the impact on nearby producing wells, thus reducing shut-in volumes. Tim will expand on this technology in a moment.

Second, we continue to reduce capital costs and see line of sight to reach our goal of reducing total well cost by 5% this year. Through the first half, we have realized about a 4% reduction compared to 2018 as a result of improved operational execution.

Design enhancements and efficiency improvements, not service cost reductions, are delivering consistently better results across each of our active areas.

Third, our operating cost performance has been outstanding. As a result, we are lowering our full year unit cost forecast for LOE and transportation. Cash operating cost, which include LOE, transportation and G&A, are expected to be under $9 a barrel for the full year 2019 compared to nearly $13 a barrel as recently as 2014.

Fourth, as Bill mentioned in his opening remarks, we are committed to sustainability. Our decision to embrace electric frac fleets is an example of how we continue to find innovative solutions to both reduce our environmental footprint and improve the profitability of our business. We began piloting this new technology last year in the Eagle Ford and have since utilized them in the Delaware Basin. Electric frac fleets currently make up more than 1/4 of the EOG fleet. We believe EOG is using about 1/3 of the electric frac fleets available in the market. And we are looking to expand their use in our operations going forward.

Our experience with this new technology has been very positive. We estimate electric fleets save up to $200,000 per well and reduce combustion emissions from completion operations by 35% to 40%.

EOG continues to expand its use of -- in the water reuse program. In the Delaware Basin, nearly 90% of our water needs are currently sourced from recycle produced water. We are increasing our water reuse efforts in both the Eagle Ford and Woodford plays and are beginning to install reuse infrastructure in the emerging Powder River Basin.

In the second half of this year, we plan to initiate a pilot project that combines solar and natural gas to power compressor stations. While this first of its kind system is still in the design phase, early indications point to positive economics, reduced LOE and the potential to significantly reduce our combustion emissions.

Finally, looking ahead to the remainder of 2019, we modestly increased our full year U.S. oil production guidance as a result of better well performance. There is no change to our activity level in 2019. We will remain disciplined and still expect capital expenditures to be within the original range of $6.1 billion to $6.5 billion.

Capital is trending to the low side of expectations. So assuming the trend continues, any realized savings, if spent, will likely be directed to 2 areas: water, oil and gas infrastructure to lower our operating expenses and leasehold to support our ongoing exploration efforts.

For 2020, we are beginning to evaluate multiple scenarios. But suffice it to say, it is too early to provide any color or commentary on our plans at this time.

In summary, our operating teams are executing the 2019 program and generating excellent results. I could not be more proud of them.

Now I would like to provide some color on our Powder River Basin activity. In the first half of the year, we initiated a handful of delineation and completion technology test to better define our future program. As a reminder, we announced premium inventory of more than 1,500 locations, with reserve potential of 1.9 billion barrels of oil equivalent exactly 1 year ago. We are deliberately developing the play at a very modest pace to allow time to integrate both the build-out of infrastructure as well as incorporate the data and knowledge from our delineation wells.

In addition, our diverse portfolio of 11 different plays gives us the luxury of pacing the development of the Powder River Basin to maximize returns and net present value of the entire asset.

During the second quarter, we completed 5 gross Niobrara wells with average 30-day IPs of 1,000 barrels of oil per day, 100 barrels per day of NGLs and 2.1 million cubic feet of gas per day. The Tiburon 251 well had an IP-30 of 1,300 barrels of oil per day, 63 barrels per day of NGLs and 2 million cubic feet per day of natural gas. Also, our operating teams are making tremendous progress towards reaching our stated well cost goals.

In the Mowry, we completed 2 gross wells in the second quarter. The Flatbow 870 well had an IP-30 of 910 barrels of oil per day, 64 barrels per day of NGLs, with 6.3 million cubic feet per day of natural gas.

We also completed 6 gross Turner wells with an average IP-30 of 700 barrels of oil per day, 150 barrels per day of NGLs and 2.7 million cubic feet per day of natural gas.

Our program in the Powder River Basin continues to deliver strong results, and we will continue to develop at a modest pace as the infrastructure is installed.

In the Wyoming DJ Basin, it is continuing to deliver solid production results with improving operational execution. We completed 18 gross wells in the second quarter, with 6 wells having an average lateral length exceeding 14,000 feet. In all, the Codell wells delivered an average IP-30 of 800 barrels of oil per day.

Next up is Ken to review highlights from our Eagle Ford and Woodford plays.

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Kenneth W. Boedeker, EOG Resources, Inc. - EVP of Exploration & Production [5]

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Thanks, Billy. The Eagle Ford continues to deliver consistent performance quarter after quarter. This world-class oil asset is off to a great start in 2019 delivering low finding costs through ongoing cost reductions. Every measure of capital productivity is better in the first half of 2019 compared to full year 2018.

This quarter, I'll highlight recent operational efficiencies driven by rightsizing our completion design and refining its execution. The well-versed stimulation process is aided by software developed in-house. Using our proprietary software and data on the nearby wells geology, spacing, lateral placement and production history, a unique completion design is prepared for each well and a pattern. The software allows EOG engineers to monitor real-time completions data, not only on the well we are stimulating, but also on surrounding wells. This enables the engineers to make real-time adjustments to the stimulation on a stage-by-stage basis, the result of the customized stimulation that can reduce pump time by 10%.

The process also yields better well performance, both in the new well being completed and in the adjacent producing wells. For the new well, we can realize the same or better well performance with less sand. As a result, our completion costs were down 9% compared to last year, which is a significant contributor to our overall lower finding cost.

Second, for the nearby producing wells, reduced sand loadings translates to reduced instances of sand reaching these offset wells. LOE costs come down due to reduced work over expenses to clean out sand during production, and the associated downtime due to shut-ins is reduced, increasing volumes.

In addition to completion cost reductions, we improved drilling speed and efficiency in the Eagle Ford. Thus far, we've nearly realized our full year well cost reduction goal of 5%.

Now moving the discussion to Oklahoma, the Woodford oil play in the Anadarko basin continues to gain operational momentum as we increase our activity level. We've made tremendous improvements on total well costs. Drilling costs were down 10%, and completion costs were down 19%, with a total well cost reduction of 18% in the second quarter of 2019 compared to 2018. As a result, we reduced our Woodford well cost target by 14% to $6.5 million per well. Finding cost for this newer premium oil play are now less than $10 per barrel of oil equivalent, which is on par with our other more established premium assets.

We've completed 15 gross wells since the start of the year. A few notable recent wells includes the 3 Galaxy 2536 wells. They average more than 10,000 feet in lateral length and produced an average of 1,100 barrels of oil per day, each for the first 30 days. Oil equivalents averaged more than 1,400 barrels per day each. In addition, these wells are exhibiting the characteristic shallower declines we have seen in prior wells. We are pleased with our progress in this premium play and expect further operational gains in the second half of this year.

Now here is Ezra for an update on the Delaware Basin.

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Ezra Y. Yacob, EOG Resources, Inc. - EVP of Exploration & Production [6]

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Thanks, Ken. We play at 65 net wells to sales in the second quarter and continue to have an outstanding year in the Delaware Basin. Our drilling performance continues to benefit from improved downhole motor designs and increased quality assurance.

Year-to-date, drilling days were down over 20% compared to 2018, and we continue to utilize proprietary software to balance our drilling speed and steering to stay within our precision targets.

Completions costs are also down 10% compared to 2018 due to ongoing improvements to execution, application of our new completion techniques as well as lower sand and water costs.

Year-over-year, sand costs are down 35%, and our oil and water costs including reuse have decreased by 30%. The combined impact of improved drilling and completion efficiencies has resulted in a year-to-date total average well cost reduction of 5% compared to 2018.

Well productivity, similar to operating efficiencies, has also improved through the first half of 2019 across all 5 of our Delaware Basin targets. In our Delaware Basin Wolfcamp play, 30-, 60- and 90-day rates have improved.

Our 2019 Wolfcamp program is outperforming 2018 performance by 10% and continues to exceed our forecasts. Performance of our shallower reservoirs is also improving as we integrate geologic data collected as we develop the deeper targets along with our new completions technology.

Year-to-date, we've brought on 23 net wells in the Leonard and Bone Spring, with both formations performing stronger than 2018 results.

In addition to tremendous progress lowering our finding and development costs through well productivity and capital cost improvements, we are benefiting from our strategic infrastructure investment. Currently, 99% of our water and over 80% of our oil is transferred by pipe rather than trucking and contributes to a 5% reduction in operating costs compared to 2018. The impact of improved productivity and cost reductions have resulted in year-to-date all-in finding costs below $10 per barrel of oil equivalent and an average direct after-tax rate of return in excess of 100% at the current strip prices. Our progress throughout 2019 in the Delaware Basin highlights our focus on increasing capital efficiency through high return investment.

Here is Lance to provide a marketing update.

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D. Lance Terveen, EOG Resources, Inc. - SVP of Marketing [7]

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Thanks, Ezra. During the second quarter, our marketing strategy paid dividends. Our execution is a result of the portfolio sales approach. That is, we work to ensure each of our asset teams has flexible takeaway and multiple end markets available, which provides security of flow assurance and access to optimal netback prices. Our U.S. crude oil price realizations averaged $1.18 above WTI, which was on the high end of our guidance issued at the beginning of the quarter.

With respect to natural gas, despite significant volatility in Permian Basin prices and softness in the Rockies and out west in California, EOG's overall natural gas price realizations were only modestly affected. Anticipating infrastructure and transportation capacity well in advance of our development plans has have allowed us to have full flow assurance to: one, mitigate most of the effects of weak local Permian pricing; and two, avoid long term, high fixed cost transport contracts, as we expect the Waha basis will improve significantly as new pipelines enter service later this year and 2021.

Downstream markets, natural gas and oil bases differentials change very quickly. Our portfolio approach provides flexibility to quickly pivot to the highest net back market. For example, in the Permian, the Mid-Cush oil differential has strengthened considerably since the end of last year.

Additionally, looking ahead to the end of this year and end of 2020, the market is pricing in the crude oil pipeline takeaway coming in the service over the next several months as seen in the narrower Permian to Gulf Coast spreads. Our market arrangements provides flexibility to sell our oil production in the local Midland market to take advantage of strength in the Mid-Cush basis. Or we can elect to utilize our low cost long-haul capacity to the Gulf Coast to access domestic refiners and export markets.

Our forward-looking portfolio approach has established access to Midland, Cushing, Houston and Corpus Christi along with dock capacity to access export markets for our Permian basin oil production. In addition, access to all these markets via our diverse portfolio of transportation and sales markets options allows us to maintain direct control and keep our low-cost transportation edge.

I'll now turn it over to Tim Driggers, to discuss our financials and capital structure.

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Timothy K. Driggers, EOG Resources, Inc. - Executive VP & CFO [8]

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Thanks, Lance. EOG leveraged its outstanding operational execution in the second quarter into superb financial performance. During the quarter, the company generated discretionary cash flow of $2.1 billion, invested $1.6 billion in capital expenditures before acquisitions at the low end of our guidance and paid $127 million in dividend. This left $352 million in free cash flow. In line with our objective for further strengthening our financial position, we repaid a $900 million bond in June with cash on hand. This leaves $1.75 billion remaining in our $3 billion 4-year debt reduction plan, which we expect to complete in 2021.

Cash on the balance sheet at June 30 was $1.2 billion, and total debt was $5.2 billion, for a net debt-to-total capitalization ratio of 16%, significantly lower than 24% just 1 year ago.

In addition to the success of the debt reduction plan has had an improvement on leverage metrics, it is also meaningfully reducing our cash cost. Net interest expense has fallen about 1/3 to $185 million, the midpoint of our full year 2019 guidance, from $282 million in 2016. The financial model for EOG is straightforward. We can very efficiently generate double-digit organic growth and high rates of return, leverage our scale to reduce operating expenses and continue to lower the oil price required to earn a double-digit ROCE. We believe EOG can accomplish this while supporting a growing dividend competitive with the S&P 500 and generating a rising stream of free cash flow. The combination of EOG's financial strength, industry-leading cost structure and organic exploration edge can deliver a level of financial performance competitive not just with the best E&P companies but competitive with best companies in the industry and S&P 500. And we can deliver this performance at lower and lower commodity prices.

I'll now turn it back over to Bill for closing remarks.

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [9]

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Thanks, Tim. In conclusion, EOG is executing at the highest level in company history and improving every quarter. Our premium drilling strategy combined with our ability to achieve continuous efficiency gains and technology breakthroughs are producing record results. The company is delivering a strong return on capital employed, production growth, free cash flow, debt reduction and strong dividend growth with oil in the 50s. And we clearly are on a path to achieve strong performance with oil in the 40s. We are accomplishing our goal of achieving results that are competitive with the best companies across all sectors of the S&P 500 through the commodity price cycles. In addition to financial returns, EOG's mission to be a leader in ESG performance. Our unique culture has embraced ESG with the same enthusiasm as everything else we do. Innovation, technology and the pleased but not satisfied culture of EOG have a long history of producing outstanding results. And we believe that our best days are still ahead of us.

Thanks for listening, and now we'll go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Arun Jayaram of JPMorgan.

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Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

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I was wondering if we could maybe start with your thoughts on well spacing in the Delaware Basin, and how you guys are managing the process to, call it, maximize resource recovery while mitigating the impact from adverse communication?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [3]

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Yes. Thank you for the question. Just in general, because we've been in the shale business for 2 decades, we have a big, big learning curve in the history of the company. And we recognize the parent-child relationship and the importance of proper spacing to develop the assets correctly. And specifically in the Delaware Basin, we attacked that problem very aggressively back in 2017 and the early part of 2018. And we really got the learning curve on that well behind us, and we continually are still making progress going forward. But we really are well down the road on maximizing the value of our asset. And so I'd like to maybe let Ezra, he is really the expert on the Delaware basin, to give you a little bit more color on that.

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Ezra Y. Yacob, EOG Resources, Inc. - EVP of Exploration & Production [4]

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Yes, Arun. This is Ezra. As you know, our resource estimate is based on a 660-foot spacing in the Wolfcamp oil window and 880-foot spacing in the Combo side of that play. And we're very confident in those numbers still. As you know, as Bill mentioned, we've been drilling multiple targets within the Wolfcamp and actually a tighter spacing on average than what our resource estimate is based on. And so I think that you can see we've got a bit of upside, we feel like, not only really in our Delaware Basin plays but across the portfolio of our plays.

And one way that we approach then some of the testing that we did, as Bill mentioned, over a year ago is really to look at the number of targets and the quality of our high-precision targets that need to we codeveloped with one another. And we combined our high precision targeting with our completions technology, to really optimize that balance between a low finding cost and optimizing the -- really the NPV per drilling unit. And we think that, that's the best really to really deliver shareholder value in the long term through increasing our corporate level returns, while still capturing the NPV.

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Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [5]

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Great. And my follow-up is the updated guide does assume, call it, a deceleration in CapEx in 4Q versus 3Q. I was wondering if you could maybe discuss the cadence of overall tills in the second half? And just your general thoughts on 4Q oil growth and sustaining some of the operating momentum into 2020?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [6]

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Yes, Arun. Yes, we're on plan. Everything is going just almost perfectly this year. It's been a great year in performance, and capital is running according to plan. And we are going to be really well set up heading into 2020. And I'm going to ask Billy Helms to give a little bit more detail on that.

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Lloyd W. Helms, EOG Resources, Inc. - COO [7]

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Yes. This is Billy. So as Bill mentioned, we're exactly on plan where we wanted to be. Actually, our well performance is exceeding the type curves that we laid out beginning of the year. And our well cost is actually coming in lower.

So what's driving that really is just the continued efficiencies each of the operating teams continue to have. So we're actually able to, as we are going to our second half of the year, in both the Delaware Basin and the Eagle Ford, our 2 most active plays, we'll see a slight reduction in rig count and frac crews there, just because we don't need as many rigs and frac fleets to achieve our goals that we recently laid out at the beginning of the year -- of the year, excuse me.

Now also, on top of that, we have some seasonal programs like the Bakken, where you'll see activity there mainly happens in the summertime. And in the wintertime, we pretty much slow activity there, just because of the additional cost associated with winter operations. You'll see a slight reduction also in the Powder River Basin for the same reason.

So in general, it's -- we don't really see a dramatic change in the rig count, frac fleet count or the wells turned online, a slight drop in the fourth quarter. The big thing to take away is that for 2020, while it's really early to give you an indication of what we're going to do, we don't see that we'll have a dramatic drop off in the first quarter of 2020. We're well positioned and well set up to provide growth on a quarter-to-quarter basis as we enter 2020.

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Operator [8]

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And our next question today comes from Brian Singer of Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [9]

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Wanted to see on the dividend, how does your dividend goals that have shifted in terms of the focus to the 2% target yield, how does that, if at all, impact your volume growth targets? Do you still see growth in 2020 accelerating versus 2019. And then how long can that growth be sustained, while meeting your dividend targets until the Eagle Ford and Delaware Basin move into a more mature phase, as you call it, from the growth phase or until you depend more on the newer plays or organic exploration?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [10]

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Yes, Brian, we don't see that the-- our projection of being competitive with the S&P 500 on the yield as really slowing down our growth. We believe that our dividend, we've shown a very strong commitment to the dividend. We've increased it over 70% in the last 2 years. And certainly, our goal with reasonable oil prices like we've seen this year is to continue to grow the dividend at least 20% per year to bring the yield in line with the S&P 500.

And of course, the Board considers the macro outlook in our business plan every quarter concerning the dividend. And then, on growth with reasonable oil prices, like we've seen this year, we do not envision our growth to be lower than our 14% that we're experiencing this year. So we have a very, I think, robust business. As Tim pointed out, we are creating significant value to our disciplined reinvestment in the premium drilling. And we're generating strong free cash flow. We're having a substantial dividend growth. And we've got -- strengthening our balance sheet all at the same time. So we believe our core business is super strong and competitive with really any business in any sector of the market. So we've got a lot of confidence that we're creating a huge amount of value for our shareholders, and we're going to continue on that plan.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [11]

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Great. And then my follow-up is with regards to exploration. I realize that there was not a specific update here. On the last call, you talked about higher-quality reservoirs that could lower decline rates in your supply cost. And you referred in your opening comments to potentially lowering the decline rate and reducing the cost to produce oil. Can you just give us a general update on what you're seeing within that portfolio? And how aspirational that is versus how far you've progressed towards that in terms of reality of really of really having that confidence that the decline rate can come down and the supply cost can come down?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [12]

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Brian, we're -- yes, that's a -- we are very excited about our explorations efforts this year. It's the most robust, diverse explorations effort, I think we've ever had in the company. We're in multiple basins and multiple different plays, testing new ideas. And they are rock quality, a rock that would be able to deliver oil at lower cost and at lower decline rates than our current inventory, the average of our current inventory. So we're really focused on corporate returns. And we want to drive -- continue to drive down finding cost, that's a particularly strong focus. So you'll -- we're looking for plays that have low drilling cost, low operating cost. And we're working -- and we want to improve the decline rate of the company also. So low decline, high -- a low finding cost is the direction that we're handing -- going in. And that's what will help us continue to generate higher corporate returns going forward. So we're really excited, we're really encouraged. We're in the process of drilling and testing a lot of new ideas this year. We're also leasing very strong acreage positions, building very strong acreage positions at low cost. And we'll be giving updates on that as we get meaningful results. It takes a little while. We don't want to just drill 1 well and say, we've got all this. We need to have multiple tests done. Certainly, we want to -- before we want to start talking about specifically where these plays are, we want to have the acreage captured. And so it's going to take a little bit of time. So we ask the investors to the patient with us on the process, but we're very excited and very encouraged on where we're headed.

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Operator [13]

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And our next question today comes from Neal Dingmann of SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Question's, kind of, on the -- I guess to start around the Powder River. Seems like when it comes to incremental operational efficiencies and lower costs, it appears in, kind of, your conversations and prepared remarks on the Powder River is seen maybe the most in your portfolio. And I'm wondering if this is, in fact, the case, if the Powder has seen some the most improvement? And then just wanted for overall portfolio, can you continue to see just the remarkable efficiencies that you all talked about the last couple of quarters?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [15]

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Yes, Neil. Yes, we're super excited about the Powder. It's got a lot of, obviously, upside. And we're in the learning curve. And so we're testing, as Billy talked about, different parts of the play. But particularly, we're testing the targeting and the completion technology. And so the wells will vary a little bit as we go through that process, but we're learning. And that we're not really in a hurry there. We want to take advantage of the learning curve before we increase activity there significantly. We don't have a lot of acreage exploration issues there. So -- and we've got plenty of inventory in every -- in all the plays in the company. So we can bring that on at the proper speed to maximize the returns, to lower the cost and to build the inventory correctly.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Okay. And then just one separate one if I could. It appears to me your exploration program remains this year a bit more active than we've seen in the last year or 2. I'm just kind of curious if you all are focused here on more ramping 1 potential area or are you all looking at several potential plays when looking at the exploration area?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [17]

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I'm going to ask -- Neal, I am going to ask Ezra to comment on that.

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Ezra Y. Yacob, EOG Resources, Inc. - EVP of Exploration & Production [18]

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Yes, Neil. This is Ezra. We have multiple opportunities that -- that we have this year, that we're both leasing and testing this year. As Bill highlighted a few minutes ago, really the goal of the exploration program this year is to add quality to our inventory, not just quantity. And what we mean by that is, it all starts with the rock quality, and so we're looking at -- we basically, the advantage of having activity in 6 different basins this year, as we drill these wells, we collect a lot of data. And we're able to formulate that data, and that's really the basis for what has created our exploration effort this year on looking at this better rock quality. We think that this rock quality we're targeting will really benefit from our horizontal drilling and completions techniques. And as Bill said, it should provide us an opportunity to add lower finding cost and higher quality of inventory to our already robust portfolio.

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Operator [19]

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And our next question today comes from Bob Brackett of Bernstein.

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Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [20]

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I had a question on electrics frac spreads. You quoted the $200,000 per well savings. Part of that is the fuel arbitrage, diesel versus nat gas and part of it is the cost you're paying the service provider. Is there a way I can think about how those 2 offset each other?

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Lloyd W. Helms, EOG Resources, Inc. - COO [21]

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Yes, Bob. This is Billy Helms. Yes, the $200,000 savings, that's a -- a majority of that is simply in the fuel cost savings. And the reason it benefits us so much is we're using it in plays where we have readily available infrastructure to be able to access gas as the fuel source, relative to diesel as a traditional frac fleet might use. They also do provide us a great deal of a step-up in efficiency gains, too. So our efficiency gains there provide, I'd say, the balance of the savings, but the majority of it is based on the fuel savings alone. So I wouldn't want to mislead you there. The efficiency gains are really good, but the majority is fuel savings.

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Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [22]

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Great. Follow-on would be, if we think about the 740 net planned completions for 2019 and wanting to hit that activity level. How would you balance that against a macro selloff in the commodity where price fell and cash flow fell? Would you stick to the plan? Would you trim the plan in order to hit cash flow? Where does that balance play out?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [23]

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Yes, Bob. This is Bill. Certainly, we are going to run the business with a balanced cash flow. We are not going to outspend cash flow. So depending on our view of the length of that downturn in oil prices, we thought it was temporary. We might not make much adjustments, but we thought it was a super long term, we would certainly readjust the company. Our goal is not to grow specifically, our goal is returns. We're focused on increasing corporate returns going forward, generating strong free cash flow, certainly we're committed to the dividend very strongly as a company. So those all have super priority in the company. And we're here for the long term. We're going to run our business right. We're going to generate maximum value for our shareholders.

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Operator [24]

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And our next question today comes from Doug Leggate of Bank of America Merrill Lynch.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [25]

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Bill, I think you've kind of set the cat amongst the pigeons by talking about the uncertain outlook for 2020. I think we're all facing the same thing. But I wonder if I could speak to how you would see relative capital allocation in the event that we did have a downturn. It's really -- thinking more along the lines of sustaining capital and then beyond that, how you would allocate incremental dollars? If I could just elaborate a little bit as to what I'm trying to get at. The IRRs are very competitive across your entire your portfolio, but the productivity is, obviously, very different in different plays for the same return. So I'm just curious as to relocate and allocating capital to your highest-return plays would impact the relative productivity outlook in a downturn. I know it's a bit of complicated issue, but that's what I'm trying to get at.

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [26]

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Yes, Doug. Appreciate your question. Yes, we have got tremendous flexibility to allocate capital. We have such an enormously strong premium inventory and it's across multiple plays. So as we -- as I answered in the previous question, we're not interested in outspending cash flow, not -- certainly not on a long-term basis. We're going to stay super disciplined and make sure that we generate free cash flow year-over-year. So if we had -- we don't believe we are going to have an extended downturn, a low downturn, but if in extreme case that we did that, we would just tighten the belt all across the company. We would focus our capital on the highest-return plays. And we would allocate capital appropriately to the macro environment. So we're focused on returns, and we believe we can generate the highest returns of any company in the E&P business at the lowest oil price scenarios because we have the highest reinvestment hurdle of any E&P company we know. And so our premium inventory is good to go at $40 oil. And that allows EOG to be the low-cost provider of oil. And gives us a tremendous competitive advantage.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [27]

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I know it's not an easy question to answer so, I'm going to follow up with an even worse question, I apologize. You've also -- I don't know if the language was deliberate on your dividend comment in the -- on the press release, but targeting a -- setting a target yield kind of starts to bring in consideration of how the market thinks about valuations, so I'm think about dividend discount models, which then begs a couple of obvious question. As one, what do you see as the appropriate growth rate for the dividend? This is supported, basically, by what you said earlier about not less than 14% oil growth.

And then related to that, those implications for the payout ratio, how do you -- do you have parameters around that, that you could share with us when you've, kind of, laid out this objective of 2% yield? Because basically, the -- we can all come up with long-term projections of what that could look like, but some framework around that would be really helpful.

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [28]

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Yes, certainly. Doug, our goal is to continue to aggressively increase the dividend, certainly at the 20% rate or better every year. And that would be in consideration of reasonable oil prices like we've seen this year. We believe we can do that or better. And so our focus is just to have a sustainable strong dividend growth every year. And get the dividend up to the yield at the 2% level. We don't have a specific time line to give you because we need to manage the business according to our view of the business environment obviously going forward.

But directionally, we want to be competitive with the S&P 500 companies in the dividend yield, just like we're going to be competitive in growth and in return on capital deployed. And basically, the dividend yield for the S&P is about 5 -- about 2%. And so that's where we want to be long term in the company.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [29]

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Sorry, Bill, just to the clear. The 2%, does that also have an oil price parameter? Like a -- obviously, premier locations or premium inventories at $40 oil, 2% yield is at what commodity price?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [30]

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Well, no, it's not really based on that. The speed at which we can get the yield to that level, of course, would be -- have oil price considerations. But we're lowering the price at the company to be very successful, as we said in the opening remarks, where we can do it very well at $50 -- and with oil in the 50s right now. But we're really heading the company to where we can be successful with oil in the 40s. So over time, we believe we can be competitive on the dividend, returns and growth with oil in the 40s.

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Operator [31]

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And our next question today comes from Jeffrey Campbell of Tuohy Brothers Investment Research.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [32]

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I've been listening to the lower decline stuff with great interest, and I just I'd ask you, if we think of a typical first year, unconventional decline is, say, 60%. Can you roughly quantify how much the decline rates could be modified with these new exploration plays that you've been discussing? I don't mean the corporate decline, I mean the well decline in one of these new plays?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [33]

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Yes, Jeffrey, This is Bill. We're really in the early process of testing these plays, and so we just need to get some well results behind us to give you specific numbers on that. And some history, but these are plays that have better matrix permeability than a typical shale play. It's not -- we're not looking for rock that has nanodarcy firm. This is really more microdarcy maybe even millidarcy firm kind of rocks. And there are also rocks that would respond really well to the horizontal completion technology to where you can get a complex fracture pattern, where you can drill long laterals, et cetera. And you can contact a lot of this better permeability rock to the well bore. And so that combination just in general will give you a very -- high recovery for the [not only] oil in plays, but it also gives you lower decline rates than the current shale plays.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [34]

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Okay. That sounds really interesting. We look forward to hearing more about that in the future. I think my other question is that, I believe last quarter you said that the Eagle Ford EUR program was completed or more or less complete. I just wondered, do you have any other programs going on anywhere else in the portfolio that's experimenting? Where they are seeking to try to capture more resource -- total resource from the wells than what we typically expect in unconventional resource?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [35]

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

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Kenneth W. Boedeker, EOG Resources, Inc. - EVP of Exploration & Production [36]

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Yes. This is Ken. We have about 150 wells in our ancillary recovery process in the Eagle Ford. And we really are seeing premium results in line with our 30% to 70% add in our primary recovery. We're really watching that program and refining our process as we go. This is a process that you want to do after your primary drilling is complete. So we're going to evaluate expanding that EUR footprint in that area as we finish primary drilling in the surrounding units. As far as expanding that into other areas, we're constantly evaluating that. But we are not expanding that process into any of the other formations at this time.

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Operator [37]

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And our next question today comes from Leo Mariani of KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [38]

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Very impressive progress on the cost reduction initiatives. I guess basically, you're sort of at 80% of your targets here by midyear on the well cost. Just wanted to get a sense. I know it's probably a difficult question. Of course, no one can, kind of, predict the future here. But just based on efficiencies, do you guys think that it's realistic that you might be able to knock another, say, 5% off those costs again in 2020 or 2021?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [39]

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

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Lloyd W. Helms, EOG Resources, Inc. - COO [40]

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Yes, Leo. First of all, let me just say, we're extremely proud of the efforts that our operational teams have made to get to the 4% hurdle halfway through the year. And when we set our 5% goal out at the start of the year, I think we had no idea exactly how quickly they would get there but confidence that they would. And they've excelled just tremendously.

Being able to accomplish another 5% next year, it's a little early to say where that's going to come from, but I do have confidence that we'll be able to continue to lower cost. I mean there's no doubt in my mind that we can continue to push well cost down. And not just well cost but also our unit cost. We're making tremendous progress there. So I don't want to go without giving those guys a kudos as well because they've done a great job. And I guess we just have so much confidence in our teams that I know we can achieve continued cost reductions across the board.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [41]

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Okay. That's great. And I guess just wanted to -- quick question on some of the guidance here. So just looking at your third quarter U.S. oil production guidance versus the last few quarters. Just noticing that your kind of rate of growth in U.S. oil slows a little bit in the third quarter. Just wanted to get a sense if there's anything to read into that? Or is that just, kind of, timing, sort of, on well tie-ins here?

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Lloyd W. Helms, EOG Resources, Inc. - COO [42]

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Yes. Leo, this is Billy again. Yes, the rate of growth certainly slows a little bit in the third quarter. But really, it falls directly in line with what our plan was laid out at the start of the year. And as you know, most of our activity and capital expenditure was in the first half. So that's where you're going to see most of your production growth. So it will modestly decrease -- the rate of growth will modestly decrease a little bit in the third and fourth. But we're still on pace to really stay within our plan. And then we're not concerned at all about how that sets us up for the following year. We're still in great shape as we go into the next year as well.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [43]

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Okay. That's very helpful. And I guess just any follow-up thoughts on U.S. exports? Obviously, you guys unveiled incremental volumes that you'd be shipping out last quarter and certainly made a point to put it in your slides. As you kind of look at the marketing side over the next couple of years, do you guys think that U.S. oil exports going to become even more important for you? And is that an area you're going to be looking to expand going forward?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [44]

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Let me let Lance comment on that.

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D. Lance Terveen, EOG Resources, Inc. - SVP of Marketing [45]

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This is Lance. Yes, on exports, it's definitely exciting. As we've talked about in the past, we've got our -- today we've got our existing Houston capacity. We're taking advantage of that, but we get more excited about the next year with our capacity growing in Corpus. So I think one of the things that really -- to think about us from an EOG standpoint, what really differentiates us is, when you think about the Corpus capacity, we're going to have the capability to really show our segregated WTO that we're going to be able to show across the dock. And we're also going to be able to show our Eagle Ford as well. So I think when you look at a lot of the peers and you look at a lot of our -- the competition that's our there too, our capability with our transportation capacity, the storage tankage that we have, ability to deliver segregations into the market. We're going to be able to show multiple grades across the market. And yes, absolutely, I think you're seeing spreads tighten up, and I think we don't see any concerns as it relates to export capacity, at least, in the short term. But I think one of the more important points to make is, if you call export capacity right at 4.5 million barrels per day of export capacity, what we felt was very important is that we secured existing brownfield capacity. So that way if you do see price dislocations that do occur maybe at the dock, we're advantaged there because we're not waiting on permitting. We're waiting on dock expansions. So our capacity is going to ramp up as we move into next year. And I think that's going to key; because we can really take advantage of the values if there is a dislocation. And again, we've got the flexibility that we can pivot our barrels and we can supply our great customers, our domestic refiners. But then we can also supply to international markets as well. So we've got a full range in our portfolio there, Leo.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [46]

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Okay. Well, that's great color. And maybe just, on that point, do you think there's a decent chance there could be dislocations over the next couple of years? Just wanted to get a sense how you're think about that piece?

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D. Lance Terveen, EOG Resources, Inc. - SVP of Marketing [47]

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Yes, I'm not going to speculate. I think when you've definitely seen -- when you look at the forward curves, you can see kind of the Brent MEH spreads, and that's right around $3. So it definitely shows that the export arb is open. But I think for us, you've seen -- we talked about in the opening comments, too, about the Permian kind of the Gulf Coast spreads have definitely narrowed. So I think really where you could possibly see the price dislocation is that you got a lot of oil that's going to show up at Corpus and there's going to be some players that aren't going to have secured dock capacity. So there could be a dislocation that occur there. But as it relates to EOG and what we've done, we've went ahead and, kind of, take that -- we took that variable kind of out of play as we think about our growth and then our capacity ramping up and then how we're going to place barrels into the export market.

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Operator [48]

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And our next question today comes from Paul Sankey of Mizuho Securities.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [49]

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Just trying to bring together everything that you've talked about this morning. Bill, I was wondering just in terms of your competitive position against the oil industry as opposed to the whole market, where do you think you're furthest ahead of the industry? And where do you think is the furthest to go? And obviously, I'm talking about the various components of your business whether it's the acreage, the exploration, drilling, fracking, operating, transport and even decline rates?

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [50]

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Yes, Paul. Clearly, the competitive advantage that EOG has is our culture. Our culture is just amazing. It really drives all the success of the company. We have tremendous assets because the culture built out over the years through our exploration efforts. We have tremendous cost reduction -- continuous, sustainable cost reduction because our culture never is satisfied. It's just continually innovative and continues to figure out better ways to run our business. So our -- really the confidence that we have about the direction of the company to be able to be very successful even with oil prices in the 40s is really due to our culture. And of course, that's supported by a lot of different things. We have a core competency, obviously, in exploration. We've got a core competency in operations. We drilled wells the fastest in the U.S. at the lowest cost. We have a lead in completion technology. We have, by far, the most advanced information technology system where we can make real-time decisions continuously across the company. And the real value of the company is coming from every person of the company. The value of EOG is not top-down driven, it's really from every person in the company. So that's our -- that's where we have the lead. And that is not easily duplicated. It's taken us 3 decades to build the culture where it is right now. And we believe our culture is improving as we go forward. So we're super excited about where EOG is and where we're headed.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [51]

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Bill, if I could make it much more specific. Could you just talk a bit more about e fracking? That seems to be very interesting.

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William R. Thomas, EOG Resources, Inc. - Chairman & CEO [52]

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Yes, Paul. I'm going to let -- ask Billy to comment on that.

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Lloyd W. Helms, EOG Resources, Inc. - COO [53]

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Yes, Paul. As far as the e fracking goes, we got into the idea of utilizing the electric frac fleets mainly because we're attracted by the efficiency gains, as well as the cost reduction. The efficiency gains is what really we view as being sustainable to help lower our cost long term. And that has continued to get better with continued use. We've got 4 of those frac fleets operating today in the Eagle Ford and the Delaware Basin. And we're always looking for ways to continue to utilize our infrastructure to enable that to be spread into other plays. So I think as you look forward, we will look for opportunities to continue to put those in new plays. It's unique in that the fuel savings are mainly achieved through not only the cost of the gas, but really our ability -- the ability of our facility teams to get ahead of the completions and come up with innovative solutions to get the gas readily available to the frac fleets, and without that infrastructure and those teams enabled to do that, we wouldn't be able to take advantage of it to the extent that we are. So just super proud of that effort and where it's taken us.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [54]

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Yes. Just a quick follow-up. Could you talk about the capacity of that? And also, I think you mentioned how big you were in the market. Could you just repeat how much of it you're dominating?

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Lloyd W. Helms, EOG Resources, Inc. - COO [55]

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Yes. I think what we're hearing and certainly this number might move a little bit, but there's currently about 11 frac fleets available in the market today. We're using about 4 of those. And then our frac fleets count varies week to week, but it typically run at about 16 frac fleets -- 15 or 16. So it's about 1/4 of our frac fleets in the company.

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Operator [56]

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And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Thomas for any final remarks.

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Timothy K. Driggers, EOG Resources, Inc. - Executive VP & CFO [57]

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In closing, I first want to say thank you to everyone at EOG for their tremendous contribution to our performance in the first half of 2019. We're proud and honored to be on the same team. The company is performing at the highest level in history, and we continue to improve every quarter. We're excited about the second half of the year and the years beyond. We're focused on returns and creating significant long-term value. So thanks for listening, and thanks for your support.

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Operator [58]

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Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.