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Text: This conference call also contains certain non-GAAP financial measures.
Definitions and reconciliations schedules for those non-GAAP measures can be found on the EOG's website.
Some of the reserve estimates on this conference call may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines.
2021 was a record-setting year for EOG.
We earned record net income of $4.7 billion, generated a record $5.5 billion of free cash flow, which funded record cash return of $2.7 billion to shareholders.
We doubled our regular dividend rate and paid two special dividends, paying out about 30% of cash from operations.
And we are continuing to deliver on our free cash flow priorities this year with an additional special dividend announced yesterday of $1 per share.
The last time we set an earnings record was in 2014.
We earned $5.32 per share while oil averaged $93.
Last year, we shattered that record earning $7.09 per share with $68 oil.
That's 50% higher earnings with a 27% lower oil price.
The catalyst for that improvement was our shift to premium six years ago.
Premium is our internal investment hurdle rate that uses low fixed commodity prices to calculate the returns that drive our capital allocation decisions, $40 and $2.50 natural gas for the life of the well.
While our premium strategy ensures high well-level returns and quick payouts in any given year, the more significant and durable impact is to our full-cycle development cost.
The benefit of making investment decisions using fixed low commodity prices has the enduring impact of steadily improving corporate level operating and cash margins over time.
That impact is now directly observable on the face of our financial statements.
And last year, we raised the bar again to double premium.
Our hurdle rate increased from 30% to a minimum of 60% direct after-tax rate of return using the same low fixed prices of $40 oil and $2.50 natural gas.
The switch promises to further improve financial performance in the years ahead and is what gives us great confidence in our ability to continue delivering shareholder value through commodity price cycles.
We expect to look back on 2021 like we do on 2016 as the year we made a permanent increase to our return hurdle that drove another step change in the financial performance of EOG.
We also delivered as we promised operationally in 2021 with production volumes, capex and operating costs in line or better than target set at the beginning of the year.
We were able to successfully offset emerging inflationary pressures during the year to lower well costs by 7%.
2021 was also a big year for ESG performance.
We reduced our methane emissions percentage and injury rates and increased water reuse.
We announced our 2040 net-zero ambition and added our goal to eliminate routine flaring by 2025 to our existing near-term targets for greenhouse gas and methane emissions rates.
We continue to develop creative solutions, leveraging existing technology to make progress on our path toward our net-zero ambition.
There's growing recognition that oil and gas will have a role to play in the long-term energy solution.
We know that to be part of that solution, we not only have to produce low-cost, high-return barrels, we also have to do it with one of the lowest environmental footprints.
As we look into 2022, the global oil market is in a position to rebalance during the year.
Our disciplined capital plan aims to increase long-term shareholder value through high-return reinvestment that optimizes both near-term and long-term free cash flow.
The plan also funds exploration and infrastructure projects to improve the future cost structure of the business.
With the improvements we made in the business last year, combined with a higher commodity price environment, EOG is positioned to once again generate significant free cash flow.
We continue to follow through on our free cash flow priorities.
Our stellar fourth quarter performance allowed us to further strengthen the balance sheet, and we are returning cash to shareholders with the $1 per share special dividend declared yesterday.
Combined with our $3 per share regular dividend, we have already committed to return $2.3 billion of cash to shareholders in 2022.
We remain firmly committed to our long-standing free cash flow and cash return priorities, and you can expect EOG to continue to deliver on them as the year unfolds.
EOG has exited the downturn a much better company than when we entered it.
Higher returns with the shift to double premium, a lower cost structure, more free cash flow, a smaller environmental footprint and a culture strengthened by the challenges we have overcome together.
Our culture is the No.
1 value driver of EOG's success.
By remaining humble and intellectually honest, we sustained the cycle of constant improvement that drives our technology leadership.
Of all the fundamentals that consistently create long-term value, none of them matter without the commitment, resiliency and execution from our employees.
Now, here's Tim to review our financial position.
EOG generated record financial results in the fourth quarter with adjusted earnings of $1.8 billion and free cash flow of $2 billion.
Capital expenditures of $1.1 billion were right in line with our forecast while production volumes finished above target.
For the full year, adjusted earnings were a record $5 billion or $8.61 per share.
This yielded return on capital employed of 23%, while oil prices for the year averaged $68 per barrel.
Perhaps most important than setting records is what drove our outperformance.
2021 illustrated EOG's success at driving down our cost structure.
ROCE would have been 10% or better at oil prices as low as $44.
Keep in mind that back in 2016, when the premium investment standard was introduced, the oil price required for 10% ROCE was in excess of $80 per barrel.
The dramatic improvements we have made to the profitability of our business reflect the benefits of using the highest investment threshold in the industry.
The bottom line financial impact of double premium is just beginning to show up.
But like our original switch to premium, it will grow over the coming years.
Our goal is to position the company to earn economic returns at the bottom of the cycle, less than $40 oil and generate returns that are better than the broader market on a full cycle basis.
Free cash flow in 2021 was a record $5.5 billion, and we deployed this cash consistent with our long-standing free cash flow priorities.
We doubled the regular dividend rate, which now stands at an annual $3 per share and represents a 2.7% yield at the current share price.
We are confident in the sustainability of our high-return low-cost business model to support a dividend that has never been cut or suspended in its more than 20-year history.
We solidified our financial position, finishing the year with effectively zero net debt.
We were also able to address additional cash return priorities.
We paid two special dividends for a combined $3 per share.
We also refreshed our buyback authorization, which now stands at $5 billion.
We will look to utilize this on an opportunistic basis.
In total, EOG returned $2.7 billion of cash to shareholders in 2021.
This represents 28% of discretionary cash flow and 49% of free cash flow, putting EOG among E&P industry leaders for cash returned in 2021.
Looking ahead to 2022, our disciplined capital plan and regular dividend can be funded at $44 oil.
At $80 oil, we expect to generate about $11 billion of cash flow from operations before working capital.
The $4.5 billion capital plan represents about a 40% reinvestment ratio, resulting in more than $6 billion in free cash flow.
This, of course, is on an after-tax basis, as we expect to be a nearly full cash taxpayer in 2022 as we were last year.
We are in an excellent position to continue to deliver on our free cash flow priorities in 2022.
EOG declared a $0.75 regular dividend yesterday, which is our highest priority for returning cash to shareholders.
The size of the regular dividend is evaluated every quarter.
As the financial performance and cost structure of EOG continues to improve, we expect that will be reflected in continued growth of the dividend.
Turning to our second priority.
This period of high oil prices allows us to further bolster the balance sheet.
To support our renewed $5 billion buyback authorization and prepare to take advantage of other countercyclical opportunities, we plan to build and carry a higher cash balance going forward.
We expect there will be opportunities in the future to create significant shareholder value by deploying a strong balance sheet and ample liquidity at the right time.
Finally, we also announced an additional cash return to shareholders yesterday with a $1 per share special dividend to be paid in March.
Along with the regular dividend, EOG has already committed to return $2.3 billion of cash to shareholders in 2022.
We are fully committed to continuing to deliver on all of our free cash flow priorities.
I'm especially proud of their safety performance.
In addition to outstanding operations and financial improvements, we achieved a record low injury rate.
2021 was another year of execution.
Throughout the year, we consistently exceeded our oil production targets, primarily due to strong well results.
Our operations teams continue to innovate and find opportunities to increase efficiencies and lowered the average well cost by 7%, beating the 5% target we set at the start of the year.
Our drilling teams are achieving targeted depths faster with lower cost by focusing on reliability of the tools and technical procedures that drive daily performance.
For example, in our Delaware Basin Wolfcamp play, our teams have improved days to drill by 42% since 2018.
In our Eagle Ford oil play, after drilling several thousand wells, our teams continue to refine the drilling operation to drive consistent performance from our rig fleet, resulting in a 21% reduction in the drilling costs since 2018.
And with our decentralized organization and collaborative teamwork across operational areas, we continue to generate ideas for improvement through our innovative approach to areas such as improved bit design and drilling motor performance and share them throughout the company.
On the completion side, we made great starts to expand the use of our super zipper or simo-frac technique to about one-third of our wells completed last year.
Completion costs also benefited from reduced sand and water cost through our integrated self-sourcing efforts and water reuse infrastructure.
Utilizing local sand and water pipelines includes the added benefit of removing trucks from the row of contributing to a safer oilfield with lower emissions.
Cash operating costs were in line with forecast.
And while delivering a higher level of total production, they were nearly equivalent to our cash operating cost pre-pandemic in 2019.
The savings are a result of a focus on reducing workover expenses and improvements in produced water management.
These efforts will expand in 2022 to help offset additional inflationary pressure.
We also had another great year improving our ESG performance metrics.
Preliminary calculations indicate that we reduced our methane emissions percentage by about 25% and our total recordable incident rate by 10%.
We also achieved a 99.8% target for wellhead gas capture and increased water resource from reuse to 55%.
Again, these are preliminary results as our final metrics will be published in our sustainability report later this year.
As we enter 2022, EOG is not immune to the inflation that we're seeing across our industry.
But we have line of sight to offset these inflationary pressures through innovation and technical advances, contracting for services, supply chain management and self-sourcing and materials.
Over 90% of our drilling fleet and over 50% of our frac fleets needed to execute this year's program are covered under existing term agreements with multiple providers.
Our vendor partnerships provide EOG the ability to secure longer-term high-performing teams at favorable prices while providing the vendors a predictable and reliable source of activity to run their business.
EOG's technical teams take ownership of various aspects of the drilling and completion operations to drive performance, improvements and eliminate downtime.
As a result, we will -- we still see opportunities to sustainably improve our performance.
Some of the largest efficiency gains will be in our completion operations this year.
For example, we expect to utilize our Super Zipper technique on about 60% of our wells, increasing the amount of treated lateral per day.
We're also enhancing our self-sourced local sand efforts, which we expect to not only secure the material needed for the year, but also offset the effects of inflation.
We continue to expand our water reuse capabilities that will assist in offsetting inflation in both our capital program and lease operating expense.
We remain confident that we'll be able to keep well cost at least flat in 2022.
EOG's capital efficiency continues to improve as a result of EOG's culture of continuous improvement.
2022 looks to be a year of challenges and inflationary headwinds.
And I'm excited about the opportunity to bring our talented employees to further improve our business through innovation and improved operational execution.
Here's Ken to review the year-end reserves and provide an inventory update.
Last year, we replaced more than two times what we produced and reduced our finding and development costs by 17%.
Our permanent shift to premium drilling and focus on efficiencies driven by innovation and our unique culture keys as to why our capital efficiency continues to improve, and our corporate finding costs and DD&A rate continue to decline.
Our 2021 reserve replacement was 208% for a finding and development cost of just $5.81 per barrel of oil equivalent, excluding revisions due to commodity price changes.
Since 2014, prior to the last downturn and the implementation of our premium strategy, we have reduced finding and development cost by more than 55%.
With our double premium standard and the high grading of our future development schedule, we grew our reserve base in 2021 by over 500 million barrels of oil equivalent for total booked reserves of over 3.7 billion barrels of oil equivalent.
This represents a 16% increase in reserves year over year.
In terms of future well locations, we added over 700 net double premium locations across multiple basins to our inventory in 2021, replacing the 410 drilled last year by 170%.
Our double premium inventory is growing faster than we drill it and the quality of the locations we are adding to the inventory is improving.
Innovation continues to drive sustainable cost improvements and operational efficiencies.
And when you combine that with our focus on developing higher quality rock, we further improve the median return of the portfolio.
We don't need more inventory.
We are focused on improving our inventory quality.
With this in mind, our double premium inventory now accounts for 6,000 of the 11,500 total premium locations in our inventory, representing more than 11 years of drilling at the current pace.
In conclusion, I'd like to note the following important takeaways.
First, investment decisions based on a low commodity price puts the emphasis on full cycle cost of development and demands efficient use of capital.
While the benefits of such discipline are realized immediately, the larger impact builds over time.
The seed to our stellar results in 2021 was the premium strategy established six years ago, and we have set the stage for the next step change in financial performance by instituting double premium last year.
Second, we are confident EOG's innovative and technology-driven culture can offset inflationary pressures this year.
Our disciplined capital plan is focused on high return reinvestment to continue improving our margins in not only 2022 but in future years as well.
Third, we are committed to returning cash to shareholders.
We demonstrated this through the return of nearly 50% of free cash flow last year, and this quarter's special dividend, our third in less than a year, doubling our regular dividend rate indicates our confidence in the durability of our future performance.
The regular dividend is our preferred method to return cash to shareholders and as we continue to increase the capital efficiency of EOG through low-cost operations and improved well performance, growth of the regular dividend will remain a priority.
We truly believe the best is yet to come.
Going forward as a company and an industry with a financial profile more competitive than ever with the broader market and a growing recognition of the value we bring to society, EOG has never been better positioned to generate significant long-term shareholder value.
Now, we'll go to Q&A.

user
sees 2022 capital plan of $4.3 to $4.7 billion.

assistant