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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.
Here is Bill Thomas.
EOG is delivering on our free cash flow priorities and our strategy to maximize long-term shareholder value.
Yesterday, we declared a $1 per share special dividend to demonstrate our commitment to returning cash to shareholders.
Combined with a regular dividend, we expect to return $1.5 billion to our shareholders through dividends in 2021.
Double premium, well productivity, and cost reductions are substantially improving our returns and increasing our ability to generate significant free cash flow.
In order to maximize long-term shareholder value, we will remain flexible as we carry out our free cash flow priorities in the future.
By doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they've ever been.
This quarter, we generated a quarterly record $1.1 billion of free cash flow and earned $1.62 per share of adjusted net income, the second-highest quarterly earnings in company history.
In addition, our balance sheet is in superior shape with a peer-leading low-net-debt-to-cap ratio.
Next, Ezra will review our capital allocation strategy in more detail, Billy will go over our operational performance, and Tim will cover our financial performance before I make a few closing remarks.
Yesterday's dividend announcement is just the latest in a long line of achievements that demonstrate the value of EOG's fundamental strategy of returns-driven capital allocation, including the impact of permanently raising our investment return hurdle rate for the second time in five years.
In 2016, during the last downturn, we established our premium investment strategy which requires a 30% direct after-tax rate of return at $40 oil and $2.50 natural gas.
The premium investment strategy drove a step-change in our capital efficiency and resulting financial performance.
It is the reason we entered 2020 in a position of operational and financial strength, which enabled us to generate positive adjusted net income and free cash flow in a year of unprecedented oil volatility and prices that averaged just $39.
This year, we increased the return hurdle once again, doubling it to 60% at $40 oil and $2.50 natural gas.
Sustainable improvements in our inventory of drilling locations and continued progress in exploration have paved the transition of double premium.
Half our current inventory earns at least two times the premium return hurdle rate we established back in 2016.
5,700 double-premium locations is more than 10 years' worth of inventory at our current pace of drilling and is more than we had when we made the transition of premium five years ago.
Just like we did with our premium inventory, we are confident we can replace our double-premium locations faster than we drill them through line of sight and through additional cost reductions that will increase the returns of existing inventory, and through exploration.
A number of innovations which Billy will discuss in a moment are being piloted across our operating areas and will sustainably drive down both well costs and operating costs as we implement them throughout the company.
Our exploration program is focused exclusively on prospects that will improve on that 60% median return.
In fact, our anticipated return on the current slate of new exploration plays is more than 80%.
To see the impact of our premium returns-focused capital allocation strategy, a closer look at our corporate financial performance is required.
As we replace our production base by drilling locations with higher well level returns, the price required to earn 10% return on capital employed continues to fall.
Prior to establishing premium, EOG required oil prices upwards of $80 to earn a 10% ROCE.
As the premium strategy matured, the oil price needed to earn 10% ROCE came down and averaged just $58 the last four years.
For 2021, that price is just $50 and we're not stopping there.
We expect it will continue to fall as our well level returns improve.
The impact of reinvesting at higher returns is also showing up in our free cash flow performance.
We more than doubled the dividend over the last four years and improved our balance sheet, reducing net debt by nearly $3.
As a result, net debt to total capital at the end of last year was just 11%.
But our future financial performance potential is the real prize.
Our first-quarter results are a preview of what we are aiming for.
Over the coming years, we expect reinvesting in our current inventory of high-return wells will continue to lower the corporate decline rate and compound the value of our low-cost operating structure.
The result leads to higher margins and generates even more free cash flow, providing us tremendous opportunity to create long-term shareholder value.
We believe when we look back in a few years, it will be viewed as the catalyst for another step-change improvement in EOG's financial performance.
Our fundamental strategy of returns-driven capital allocation remains consistent, and consistency is key.
Prioritizing reinvestment in high-return projects is the driver behind the steady improvements we've made year after year.
As a result, we are now in a position to follow through on our commitment to return additional free cash flow to shareholders.
Looking ahead, you can expect our priorities to remain consistent.
Investing in high returns, generating significant free cash flow to support a sustainable and growing dividend while maintaining a strong balance sheet, followed by opportunistic return of additional free cash flow to investors, and bolt-on acquisitions.
The first quarter of the year was about execution.
We exceeded our oil target, producing more than the high end of our guidance range because wells that were offline due to the winter storm Uri recovered a bit faster than expected.
As a result, our first-quarter daily production declined just 3% compared to the fourth quarter last year.
Our capital for the quarter came in under our forecasted target by 6%, mainly due to improvements in well costs across the company.
The savings realized during the first quarter are in addition to the tremendous 15% reduction last year.
EOG is on track to reduce well costs another 5% this year despite some potential inflationary pressure as industry activity resumes.
Similar to previous quarters, these results are driven through innovation and efficiency gains in each phase of our operation.
A closer look at our operations will help explain why we are confident we can once again lower well costs.
Our drilling teams are consistently achieving targeted depths faster with lower cost.
The constant focus on daily performance and reliability of the tools and technical procedures is creating this continual drive toward lower cost.
Some of the benefits this year stem from larger groups of wells per pad simply requiring less rig move cost per well and increasing efficiencies like offline cementing.
The larger well pads also complement our completion operations through the increased ability to utilize the technique we call super zipper.
We began our initial experiments with this technique back in 2019 and it has since advanced to consistently deliver the expected well results at lower cost.
We have also learned that super zipper is particularly well-suited to optimize the efficiencies of our five electric frac fleets.
However, conventional spreads gain efficiencies as well.
This practice involves using a single spread of pressure pumping equipment to complete four more wells on a single pad.
We split the equipment's capacity in half, simultaneously pumping on two wells while conducting wireline operations on the remaining wells.
We piloted and perfected as zip-a-zipper logistics in our Eagle Ford play, and the collaboration between operating areas has accelerated its adoption throughout the company.
And in cases where a minimum of four wells cannot be physically be located on a single pad, the engineering teams are working to develop new techniques where we can still utilize this improved completion practice.
Completion costs are also benefiting from reduced sand and water costs through our integrated self-sourcing efforts.
The savings we realized by installing water-reuse pipelines and facilities saves about 7% of well costs compared to third-party sourcing and disposal.
Longer term, we expect water reuse and disposal infrastructure will continue to lower lease operating expense in each area as well.
Lease operating expenses also benefited from lessons learned through the pandemic this last year.
The number of wells one lease operator can maintain has increased by as much as 80% by optimizing the use of innovative software designed and built by EOG.
The software prioritized lease operator activity throughout the day using our mobile and real-time software infrastructure.
Our experience last year inspired a number of new ideas to further high-grade the lease operator's work activity throughout the day, which we believe may continue to expand productivity in a -- in day-to-day field operations.
Each of our operating -- active operating areas functions as an individual incubator to test out new ideas, many of which have -- are a homegrown innovation from EOG employees and rolled out companywide if successful.
That's one of the primary reasons our well-cost improvements every year are never one silver bullet, but a list of small to medium-sized individual improvements across all elements of total well costs that result in sustainable cost reduction.
As a result of the innovation spreading throughout the company to reduce capital and operating costs, I have strong confidence that the cost structure and capital efficiency of the company will continue to improve.
Here's Tim to review our financial position.
Yesterday's special dividend announcement marks another milestone in the growth of EOG's profitability and cash flow.
We achieved this milestone through the disciplined execution of a consistent, long-term, return-focused strategy for capital allocation, supported by a strong balance sheet.
Over time, this strategy has produced increasing amounts of free cash flow.
The top priorities for the allocation of that free cash flow remain sustainable dividend growth and debt reduction.
The shift to premium in 2016 drove a significant improvement in returns, profit margins, and cost, enabling the significant increase in dividend over the last four years.
Since 2017, the dividend has grown from $0.67 per share to a $1.65 per share.
Now, an annual commitment of almost $1 billion.
Going forward, our goal is to continue growing the regular dividend.
We have never called for suspending the dividend and we remain committed to its sustainability.
With the shift to double premium, we're now focused on making another step-change improvement, and the results of those efforts will guide future common dividend increases and the potential for special dividends.
Since the shift to premium, we have also retired bond maturities totaling about $2 billion with plans to retire another $1.25 billion in 2023 when the bond matures.
Net debt to total capitalization was 8% at the end of the first quarter.
A strong balance sheet with low debt has been at the heart of EOG's strategy throughout our existence.
It's not just conservatism, it's about creating a strategic advantage.
Our superior balance sheet enables us to acquire high-return assets at bottom-of-cycle prices where their exploration acreage like the Eagle Ford or for the new plays we're working on today, bolt-on acquisitions, our companies like the -- like Yates acquisition five years ago.
A strong balance sheet also gives us the financial strength to be a partner of choice in our operations, whether it is with marketing or export agreements, service providers, or even other companies in other countries unlocking new plays.
Strong balance sheet extends to ensuring ample liquidity, which we have also secured with no near-term debt maturities, $3.4 billion of cash on hand, and a $2 billion unsecured line of credit.
Now, EOG is positioned to address other free cash flow priorities by returning additional cash to shareholders.
The $1 per share special dividend falls through -- these consistent long-tailed priorities.
At $600 million, the special dividend is a meaningful amount while also aligning with our other priorities.
After paying the special dividend, we will have $2.8 billion of cash on hand, a full $800 million above our minimum cash target.
This is a healthy down payment on the $1.25 billion bond maturing in two years.
Going forward, our free cash flow priorities remain unchanged.
We'll continue to monitor the cash position of the company, oil and gas prices, and of course, our own financial performance.
As excess cash becomes available in the future, we will evaluate further special dividends, or at the right time, opportunistic share repurchases or low-cost bolt-on property acquisitions.
I think it goes without saying you should expect us to avoid expensive corporate M&A.
You can count on EOG to continue following our consistent strategy to maximize long-term shareholder value.
Now, here is Bill to wrap up.
In conclusion, I would like to note the following important takeaways.
First, true to the EOG culture, our employees have fully embraced doubling our investment hurdle rate.
As we drill more double premium wells, we expect our performance will continue to improve.
Our decline rate will flatten, our break-even oil price will decline, our margins will expand, and the potential for free cash flow will increase substantially.
Second, while our new double premium hurdle rate alone will drive significant improvement, it represents just one source: we never quit coming up with new ways to increase productivity and lower cost.
Innovative new ideas and improved technology are developing throughout the company at a rapid pace and will continue to result in even higher returns in the future.
And finally, our special dividend this quarter, we are demonstrating our commitment to generating significant free cash flow and using that free cash to improve total shareholder returns.
We are more excited than ever about the future of EOG and our ability to deliver and maximize long-term shareholder value.
And now, we'll go to Q&A.

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q1 adjusted earnings per share $1.62.
qtrly adjusted net income per share $1.62.

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