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Text: 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.
EOG is focused on improving returns.
Results from the first half of the year are already reflecting the power of EOG shift to our double-premium investment standard.
Once again, we posted outstanding results in the second quarter.
We delivered adjusted earnings of $1.73 per share and nearly $1.1 billion of free cash flow, repeating the record level of free cash flow we generated last quarter.
Our outstanding operational performance included another beat of the high end of our oil production guidance, while capital expenditures and total per-unit operating costs were below expectations.
We are delivering exceptional well productivity that continues to improve.
In addition, even though the industry is in an inflationary environment, EOG continues to demonstrate the company's unique ability to sustainably lower cost.
Our performance clearly proves the power of doubling our reinvestment hurdle rate, double premium requires investments to earn a minimum of 60% direct after-tax rate of return using flat commodity prices of $40 oil and $2.50 natural gas.
I'm confident our reinvestment hurdle is one of the most stringent in the industry and a powerful catalyst to drive future outperformance across key financial metrics, including a return on capital employed and free cash flow.
As double premium improves our potential to generate free cash flow, we remain committed to using that cash to maximize shareholder value.
The regular dividend, debt reduction, special dividends, opportunistic buybacks and small high-return bolt-on acquisitions are our priorities.
In the first half of this year, we reduced our long-term debt by $750 million and demonstrated our priority to returning cash, significant cash to shareholders with a commitment of $1.5 billion in regular and special dividends.
We also closed on several low-cost, high potential bolt-on acquisitions in the Delaware Basin over the last 12 months.
Year-to-date, we have committed $2.3 billion to debt reduction in dividends, which is slightly more than the $2.1 billion of free cash flow we've generated.
Looking ahead to the second half of the year and beyond, our free cash flow priorities and framework have not changed.
As we generate additional free cash, we remain committed to returning cash to shareholders in a meaningful way.
We are focused on doing the right thing at the right time in order to maximize shareholder returns.
Over the last four years, we've made huge progress reducing our GHG and methane intensity rates, nearly eliminating routine flaring and increasing the use of recycled water in our operations.
We are focused on continued progress toward reducing our GHG emissions in line with our targets and ambitions.
This quarter, we announced a carbon capture and storage pilot project, which we believe will be our next step forward in the process of reaching our net-zero ambition.
Ken will provide more color on this and other emission reduction projects in a few moments.
Driven by EOG's innovative culture, our goal is to be one of the lowest costs, highest return and lowest emission producers playing a significant role in the long-term future of energy.
Now, here's Ezra to talk more about how our returns continue to improve.
While we announced our shift to the double-premium investment standard at the start of this year, the shift has been underway since 2016 when we first established our premium investment standard of 30% minimum direct after-tax rate of return using a conservative price deck of $40 oil and $2.50 natural gas for the life of the well.
In the three years that followed, our premium drilling program drove a 45% increase in earnings per share, a 40% increase in ROCE in an oil price environment nearly 40% lower compared to the three-year period prior to premium.
In addition, premium enabled this remarkable step change in our financial performance, while reinvesting just 78% of our discretionary cash flow on average, resulting in $4.6 billion of cumulative free cash flow.
The impact from doubling our investment hurdle rate from 30% to 60% using the same conservative premium price deck is now positioning EOG for a similar step change to our well productivity and costs, boosting returns, capital efficiency, and cash flow.
Double premium wells offer shallower production declines and significantly lower finding and development costs, resulting in well payouts of approximately six months at current strip prices.
The increase in capital efficiency resulting from reinvesting in these high-return projects is increasing our potential to generate significant free cash flow.
This year, we are averaging less than $7 per barrel of oil equivalent finding cost.
Adding these lower-cost reserves is continuing to drive down the cost basis of the company, and when combined with EOG's operating cost reductions is driving higher full-cycle returns.
Looking back over the last four quarters, EOG has earned a 12% return on capital employed with oil averaging $52.
We are well on our way to earning double-digit ROCE at less than $50 oil, and it begins with disciplined reinvestment in high-return double-premium drilling.
While EOG has 11,500 premium locations, approximately 5,700 are double-premium wells located across each of our core assets.
We are confident we can continue to grow our double-premium inventory through organic exploration, improving well cost and well productivity and small bolt-on acquisitions, just like we did with the premium over the last five years.
In the past 12 months, through eight deals, we have added over 25,000 acres in the Delaware Basin through opportunistic bolt-on acquisitions at an approximate cost of $2,500 per acre.
These are low-cost opportunities within our core asset positions, which, in some cases, receive immediate benefit from our existing infrastructure.
Premium and now double premium established a new higher threshold for adding inventory.
Exploration and bolt-on acquisitions are focused on improving the quality of the inventory by targeting returns in excess of the 60% after-tax rate of return hurdle.
EOG's record for adding high-quality, low-cost inventory predominantly through organic exploration is why we do not need to pursue expensive large M&A deals.
2021 is turning into an outstanding year for EOG.
Our exceptional well level returns are translating into double-digit corporate returns and our employees continue to position EOG for long-term shareholder value creation.
Here's Billy with an update on our operational performance.
Our operating teams continue to deliver strong results.
Once again, we exceeded our oil production target, producing slightly more than the high end of our guidance, driven by strong well results.
In addition, capital came in below the low end of our guidance as a result of sustainable well cost reductions.
We have already exceeded our targeted 5% well cost reduction in the first half of 2021.
We now expect that our average well cost will be more than 7% lower than last year.
As a reminder, this is in addition to the 15% well cost savings achieved in 2020.
We continue to see operational improvements outpace the inflationary pressure in the service sector.
Average drilling days are down 11%, and the feet of lateral completed in a single day increased more than 15%.
We are utilizing our recently discussed super-zipper completions on about one third our well packages this year and expect that percentage to increase next year.
In addition, our sand costs are flat to slightly down year-to-date.
We have line of sight to reduce the cost of sand sourcing and processing and expect to start realizing savings in the second half of 2021 and into 2022.
Water reuse is another source of significant savings, and we continue to expand reuse infrastructure throughout our development areas.
Finally, we have renegotiated several of the expiring higher-priced contracts for drilling rigs and expect to see additional savings the remainder of this year and next.
We also use the strength of our balance sheet to take advantage of opportunities to reduce future costs in several areas.
As an example, last summer, we prepurchased the tubulars needed for our 2021 drilling program when prices were at their lowest point.
EOG is not immune to the inflationary pressures we're seeing across our industry.
As a reminder, 65% of our well costs are locked in for the year, and the remaining costs we are actively working down through operational efficiencies.
As usual, we have begun to secure services and products ahead of next year's activity, with the goal of keeping well cost at least flat in 2022.
But as you can rest assured that with our talented and focused operational teams, our ultimate goal is to always push well cost down each year.
The same amount of air freight is being placed on reducing our per-unit operating cost, with the results showing up in reduced LOE, driven mainly by lower workover expense, reduced water handling expense and lower maintenance expenses.
Savings are also being realized from our new technology being developed internally to optimize our artificial lift.
We have several new tools that help us reduce the amount of gas lift volumes required to produce wells without reducing the overall production rate.
These optimizing tools not only reduce costs, but also help reduce the amount of compression horsepower needed, which ultimately reduces our greenhouse gas footprint as well.
These and other continual improvements are a great testament to our pleased but not satisfied culture.
This quarter, we can also update you on our final ESG performance results from last year.
We reduced our greenhouse gas intensity rate 8% in 2020, driven by sustainable reductions to our flaring intensity.
Operational performance in the first half of this year indicates promise for future -- further improvements to our emissions performance in 2021, putting us comfortably ahead of pace to meet our 2025 intensity targets for GHG and methane and our goal to eliminate routine flaring.
Achieving these targets is the first step on the path toward our ambition of net-zero emissions by 2040.
Water infrastructure investments also continue to pay off.
Nearly all water used in our Powder River Basin operations last year was sourced from reuse.
For companywide operations in the U.S., water supplied by reuse sources last year increased to 46%, reducing freshwater to less than one-fifth of the total water used.
These achievements and other, along with the insight into ongoing efforts to improve future performance will be detailed in our sustainability report to be published in October.
We are starting to fill in the pieces on the road map to get to net-zero by 2040.
Here's Ken with the details.
Earlier this year, we announced our net-zero ambition for our Scope 1 and Scope 2 GHG emissions by 2040.
Our ambition is aggressive but achievable and we expect it will be an iterative process requiring trial and error.
This approach mirrors how we develop an oil and gas asset.
We pilot creative applications of existing and new technologies to determine the most effective solutions to optimize efficiencies by minimizing costs and maximizing recoveries of oil and natural gas.
Here, we are aiming to maximize emissions reductions.
We then apply the successful technologies and solutions across our operations where feasible.
Our net-zero strategy generally falls into three categories: reduce, capture or offset.
That is, we are focused on directly reducing emissions from our operations, capturing emissions from sources that can be concentrated for storage and offsetting any remaining emissions.
Reducing emissions intensity from our operations is a direct and immediate path to reducing our carbon footprint.
Our approach is to invest with returns in mind and seek achievable and scalable results.
We made excellent progress in the last four years through initiatives to upgrade equipment in the field, invest in pilots using existing and new technologies and leverage our extensive big data platform to automate and redesign processes to improve emissions efficiencies.
As a result, since 2017, we have reduced our GHG intensity rate 20%, our methane emissions percentage by 80% and our flaring intensity rate by more than 50%.
We recently obtained permits to expand the successful pilot of our closed-loop gas capture project, which prevents flaring in the event of a downstream interruption.
We designed an automated system that redirects natural gas back into our infrastructure system and injects the gas temporarily back into existing wells.
The project requires a modest investment to capture a resource that would have otherwise been flared and stores it for further -- for future production and beneficial use.
The result is a double-premium return investment that reduces flaring emissions.
Our wellhead gas capture rate was 99.6% in 2020 and roll-out of additional closed-loop gas capture systems will help capture more of the remaining 0.4%.
Turning to our efforts to capture CO2.
We are launching a project that will capture carbon emissions from our operations for long-term storage.
This project is designed to capture and store a concentrated source of EOG's direct CO2 emissions.
We believe we can design solutions to generate returns from carbon capture and storage by leveraging our competitive advantages in geology, well and facility design and field operations.
Our CCS efforts are directed at emissions from our operations, and we are not currently looking to expand those efforts into another line of business.
We will provide updates on our pilot CCS project as it progresses.
EOG is also exploring other innovative solutions for GHG emissions reductions.
Over the past 18 months, we have deployed capital into several fuel substitution projects to power compressors used for natural gas pipeline operations and natural gas artificial lift.
Compressors are the largest source of EOG's stationary combustion emissions.
By replacing NGL-rich field gas with lean residue gas, EOG can reduce the carbon intensity of the fuel which lowers CO2 emissions and improves engine efficiency.
Using lean residue gas also earns a very favorable financial return by recovering the full value of the natural gas liquids versus using those components as fuel.
Another fuel substitution test we conducted recently was blending hydrogen with natural gas.
While it is still in the early stages, we are analyzing the test data to evaluate the emissions reductions that would be possible from this blended fuel at an operational and economic scale.
We're very excited about this part of the business, just like cost reductions, well improvements or exploration success.
This is a bottom-up-driven initiative.
EOG employees thrive on this type of challenge.
We create innovative solutions and apply technology to solve problems, improve processes and optimize efficiencies while generating industry-leading returns.
The EOG culture has embraced our 2040 net zero ambition, and we are focusing our efforts to minimize our carbon footprint as quickly as possible.
Now, here is Bill to wrap up.
In conclusion, I'd like to note the following important takeaways.
First, by doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they've ever been.
Results from the first half of this year demonstrate the power of double premium and the beginning of another step change in performance.
Second, EOG is not satisfied.
We are committed to getting better.
Sustainable cost reduction and improving well performance are driving returns and free cash flow potential to another level.
At the same time, the same innovative culture that is driving higher returns is also improving our environmental performance.
Third, our commitment to returning cash to shareholders has not changed.
As we have already demonstrated, returning meaningful cash to shareholders remains a priority.
And finally, as Ezra transitions into the CEO role, I could not be more excited about the future of the company.
The quality of our assets and the quality of this leadership team are the best in company history, all supported by EOG's talented employees and unique culture that continues to fire on all cylinders.
The company is incredibly strong and our ability to get stronger has never been better.
The future of EOG is in great hands.
Now, we'll go to Q&A.

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q2 adjusted earnings per share $1.73.
increased full-year well cost reduction target to 7% from 5%.
overall crude oil equivalent prices increased slightly in q2 versus q1.

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