EOG Resources, Inc. (NYSE:EOG ) Bernstein 38th Annual Strategic Decisions Conference June 1, 2022 11:00 AM ET

Good morning. Welcome to the fourth session of the 38th Annual Strategic Decisions Conference of Bernstein. I am Bob Brackett, Bernstein's oil and gas E&P analyst, as well as the global metals and mining analyst. I'll be super quick on the logistics.

We are not expecting a fire drill. So if the fire alarm rings, take it seriously. The primary exit path is straight out the back of the room, to the right, down to the lobby where the escalators are, down the escalators if they're operating or not, and then out on the Sixth Avenue is a muster point. If that path is blocked, you will proceed directly back, all the way back to the room where breakfast was served and then go out to the right and follow a similar path down.

The logistics for this actual conversation, I remind you, this is your fireside chat, not mine. The mechanism, we'll be using Pigeonhole. After, Ezra has presented a few slides, you'll see that QR code appear. You can use that QR code to access the Pigeonhole app. You can ask a question, you can vote up questions, and that will drive the conversation.

As the questions come in, the conversation, I will start as a sort of a pyramid principle, start with big sort of macro questions, then strategic and then move on to the assets. And if you don't ask enough questions, we're going to spend 45 minutes talking about exploration. So that's your threat.

With that, it's my pleasure to invite Ezra Yacob to the stage.

All right. Thank you, Bob.

I just want to say, first of all, thanks for everybody attending. Thank you for Bob and Bernstein for hosting the conference. It's great to be back. I'm sure I speak for everybody out there that it's good to be back in person handling these meetings and seeing such a good turnout.

So with that, I want to jump right into the slides. And one reason it's great to be back is coming back out of the downturn. And EOG has got a great story. We spent the downturn really benefiting from the investment in our premium well strategy over the past six years. We have enough of those lower-cost reserves actually showing up in our financial performance.

And just to -- recall, our premium investment hurdle rate is -- in 2016, we shifted to drilling wells that could clear a 30% direct after-tax rate of return at a flat $40 and $2.50 natural gas price -- $40 oil, $2.50 natural gas price. And as I said, after six years of focusing on that, we've really seen the impact on what it means to the underlying base of the company. And that's what you see on this slide is some of the themes of our company, some of the things that we like to talk about.

And the first starts off with that low-cost, long-duration asset base. During the pandemic, we actually increased that investment hurdle rate to what we creatively call double-premium, which is simply a 60% direct after-tax rate of return. We also continue to have a multi-basin asset portfolio. We're not only in the Delaware Basin and the Eagle Ford, but also in the Powder River Basin, South Texas and different parts in the Mid-Continent. It also gives us a fantastic option, not only on oil, but on natural gas as well.

The second characteristic here is our operations. We feel that we're a world-class operator. We have sustainable low-cost operations. We continue to drive down the well cost through technology and innovation. We grab different parts of the supply chain when it makes sense. And we use technology really to be a leader within the industry.

Third there, the third check mark, is our demonstrated financial discipline. Discipline means different things to different people, different companies these days. It's not just about generating free cash flow. We've done that since 2016 when we introduced that premium metric. To us, financial capital discipline really means investing at a rate where you're able to get better year after year. Each asset can continue to improve year after year. You're not outrunning your ability to increase the well productivity or lower well costs in any given asset. And as you roll that up to the corporate level, your corporation is getting better every year.

So not just growing to grow volumes, not just growing to grow free cash flow, but really investing at a point where you're driving down the cost base of the company. That's what we think is disciplined. That's what we think makes us better every year, not just bigger.

And then lastly, I'd like to highlight our strong track record on improving ESG metrics. We came out with some near-term GHG methane emissions percentage reduction goals by 2025, which we're well on track to achieve. We also, last year, committed to the World Bank initiative on Zero Routine Flaring. While that initiative is at 2030, we've committed to a 2025. And then last year, we also announced our net-zero ambition for Scope 1 and 2 by 2040.

So I'd take -- like to take just a moment and go through a little bit more of these in detail. As you see here, this is our inventory. We think we've got one of the deepest and highest-quality inventories across industry. As I said, we have 11,500 wells that we've publicly discussed. They cover the premium hurdle rate, that 30% direct after-tax rate of return. And we increased that last year during the pandemic to 60% direct after-tax rate of return. These double-premium wells offer a lower finding and development cost, so lower reserves. They oftentimes have a shallower decline. Obviously, they have greater payout, faster payout. But you can see that we're doing a fantastic job. And the reason we increased that hurdle rate is because we've grown that inventory since we first came out with premium in 2016.

And even last year, we replaced 170% of the double-premium wells that we had drilled. Our exploration focus is on adding double-premium wells, increasing the quality of the inventory. And then obviously, we work hard, like I said, to maintain sustainable well cost reductions that also increases the quality of the wells.

Transitioning to that next part on our well cost reduction. This is a big year for everyone in the industry. We have a $4.5 billion capital budget. That will return our production levels, our oil production levels back to kind of pre-COVID levels. It's about a 5% year-over-year growth rate, about 9% on the equivalent basis year-over-year. We committed to that $4.5 billion at the beginning of the year, and we reiterated that guidance at the end of the first quarter, in spite of some additional inflationary pressures associated with the Ukrainian-Russian war that's going on.

Obviously, we anticipated inflationary pressure entering this year, but that has added an extra layer. It's things that we've seen in the broad market, but we're working hard to offset those basically through operational efficiency gains. We're spending less time on location-completing wells by utilizing what we call a Super Zipper technology or simul-frac operations.

We've also modified our completion designs that allow us to get on and off the wells a little bit quicker. We have sustainable gains on the drilling side. Drilling efficiencies have gone up again with increased motor reliability, things of that nature. And then as I mentioned before, we also grab different parts of the supply chain that allow us to keep our costs down, whether that's local sand, utilizing water reuse or bringing things like drilling mud or chemicals in-house.

And this is how it shows up over time. When you work this, when you have a culture where you do this every single year, you continue to work on sustainable cost reductions, not necessarily relying on contracts to make your well cost savings, but you really work the problem from a technical spot. Here's what you see going all the way back to 2014, a continuous lowering of operating costs, finding costs, and that basically rolls up into your DD&A rate.

Last thing I'd like to kind of comment on here is our cash return strategy. Now this is a strategy that's been consistent through the cycle, right? We came out with this cash flow priority scenario in 2018. That's when we really started to formulize our strategy. And the number one thing is our regular dividend. We're committed. Everything we do, everything I talked about, about lowering the cost base of the company is to be able to grow sustainably that base dividend. That's our number one priority.

We also support that with a strong balance sheet, a pristine balance sheet. In a commodity-priced industry like ours, I think, is a critical advantage, it's a competitive advantage. We have talked about additional cash return options being special dividends, which we've paid out in four of the last five quarters. And then we also have a stock repurchase authorization in place that we prefer to use opportunistically rather than a programmatic buyback.

And last, you see on there is that we do also do low-cost property bolt-ons, is what we would call them. Just to distinguish it, typically, we're not interested in expensive M&A. They just don't seem to work for us. We can't make the returns justifiable because of the production that you need to buy and the fact that it needs to be of a higher quality than our inventory that we have. Whenever we're exploring or adding inventory, we're always trying to increase the quality, not just add more. With 11,500 locations to make the premium metric, we have a long, long inventory life.

This year, on the last quarter, we clarified some of our additional cash return guidance. We committed to returning a minimum of 60% free cash flow. And you can see how it adds up our commitment to that over the last -- since we switched to premium drilling, we're focused on the potential and guiding towards returning at least $10 billion since we shifted to premium drilling in 2016.

As I mentioned, our regular dividend is the number one thing. Since we shifted to premium, we have a 28% compound annual growth rate. In 24 years of paying that dividend, we've never cut it, nor suspended it. And that's because, again, we raised that dividend when it's a sustainable raise. We can do it based off of the company being better, the company's capital efficiency growing and us having line of sight to that going forward. We can backstop it also with the strength of that balance sheet.

And then just one last slide here on our ESG ambitions. As I mentioned, 13.5% is the GHG intensity rate, 0.06 on the methane emissions percentage and our goal to be Zero Routine Flaring here by 2025. The net-zero ambitions are founded in that strategy down below. The first step is to reduce. That means reducing at the operational level, the emissions that we know the most about, things in the field that we can either electrify or capture or just reduce through different technologies.

The second part is carbon capture will need to be a piece of that strategy. And we're piloting a small project this year to learn more about carbon capture and storage. And then the last one is offsets. That will need to be a part of it also, high-quality offsets to really be able to offset those emissions that are too scattered, too small to be economically captured or reduced.

And this is what brings it all together. It's the culture of EOG. That's our competitive advantage. It's a 30-year company. The culture really started under Forrest Hoglund, when he encouraged everyone to focus on rate of return, be a businessperson first, multi-basin, multidiscipline collaboration, to be innovative and entrepreneurial. That carried through to Mark Papa, as our CEO, who obviously helped transition us into the unconventional gas and then unconventional oil. And really, Bill Thomas more recently, really took us to really be a better version of ourselves, and that's what being premium is all about. It's setting a higher standard, something that we can really commit to, to really take this company in a direction where even though we're a commodity-based industry, we can take our company and get as close as we can to decoupling ourselves from those inevitable price cycles. And that's what premium and now double-premium has started to do for the company.

So we're in a great spot. It's great to see everybody here. And with that, we can go ahead and turn it over to Bob for some Q&A.

Fantastic. Please join me over here. And I said I was going to start with macro and I will, but I got asked two questions. One came in on the Pigeonhole. Are you still the technology leader in shale? Which is a pretty bold question.

Yes. I think one of our advantages in shale is that we're in multiple basins. So right off the bat, that gives us a unique perspective and, in some cases, an advantage over some other operators because we can combine data sets from different rock types, different operating environments, different pressures and with that, allows us to combine that data and innovate and utilize technology to move forward.

Would I say that we're a technology leader, I would definitely say we're a Tier 1 operator. I think we're a leader in the North American E&P space, and I think technology is a big piece of that. And part of our advantage is, again, we've drilled more horizontal wells, unconventional horizontal wells, than any other company. We've been involved in the unconventional space for close to two decades now in just about every North American unconventional play that's been drilled during that time frame.

And so just the sheer amount of data that we have, our ability to analyze that data rapidly and put that data in the hands of the front-end employees and the front-end users I think goes a long ways towards increasing our ability on technology.

And then the other question, as you walk through the history of EOG and you mentioned some of the previous CEOs, which CEO are you going to resemble the most?

The company has matured over those 30 years, just like any company has. And I'm not sure -- one thing that you see with our company is it always evolves and always strives to get better. We went from unconventional gas to unconventional oil. We went from premium to now double-premium. And I think that's what the culture of the company needs, and the company needs is a leader that evolves and changes with the times.

So I would hate to think -- I can learn something from each of the former CEOs, obviously. They've left their fingerprint on the company. But I would not want to focus on trying to take the company backwards and rebuild a different phase of what we've already been to. Hopefully, I can continue to work with the senior leadership team and push the company into the next level, if you will, of where we need to be.

Great. I'll remind the audience, you can use the QR codes that are projected to ask your own questions. And I'll start with a macro question around the cycle. Where are we in the cycle? Where are your thoughts? Where is oil going? And then I'll hitch up with natural gas as well.

Yes. It's going to be difficult to hear or hard to say with the oil prices where they are natural gas prices are today, but I think we're very early in the cycle. I think it's going to be a different cycle because we are coming out of a nearly 2-year pandemic, an event that basically had two-thirds of the global population locked in for a couple of months back then in 2020, an event that caused an enormous amount of stimulus money to be pumped into the economy. And so what you're seeing right now is kind of an unwinding of that effect. You're seeing demand has snapped back quite a bit faster than I think anyone really anticipated. And you're seeing supply coming back quite a bit slower, really on the backs of supply chain issues that are causing ripple effects throughout the broader market and the broader economy.

On top of that, obviously, we have the situation in Europe, the war with Russia, that has added near-term volatility onto it, onto the tops of everything. But even besides that, as we entered this year, I think you're seeing inventories headed towards a balanced market, spare capacity headed towards a balanced market, but supply responding in a slower manner due to these supply chain issues.

It sort of suggests that once we fix supply chain issues, we should watch out. Do you see any signs of exuberance relative to previous high oil prices there in your peers, in your service providers, in your employees or is it.

Yes. I think you're asking about discipline. Is the discipline going to stick. And I think in the North American E&P space, it is here. I think companies went through a rapid growth when the industry was a little bit younger on the oil shale side. I think there is a lot of plays and a lot of excitement that were getting drilled up. A lot of different basins were getting drilled up to see how they would compete and what their place we're going to be. And what you can see has happened is throughout this pandemic, the downturn, all the companies have essentially kind of consolidated into their Tier 1 acreage positions. And they've slowed down and they've started to invest at a pace where -- as we talked about, discipline for -- discipline for us is investing at a pace where you can get better. For others, it's just investing at a pace where you can generate free cash flow. It provides a lot more options.

And I think that's -- outside of just the supply chain issues, that's going to be a big governor for the public companies. For the private markets, it's a little bit different also than pre-pandemic. What we're seeing in the private markets is not a lot of greenfield exploration going on. Privates used to play a role in discovering new plays and leasing up new opportunities. And really what you're seeing with privates now are places where they can play on the margins and kind of be on the fringe and maybe not even be fast followers, but really run the economics on stranded acreage position, marginalized acreage positions and see if they can bring something to the table. And so you don't have that as much momentum as you did coming out of the downturn, say, in '15 and '16.

Yes. In some ways, through most of my career, the private E&Ps were the incubators of interesting exploration ideas. The farm-in was the tool by which a normal public E&P got into a new basin, new opportunity. And those were gone, whether it's onshore or international. So we've lost that level of exuberant. Talking about the natural gas as well, optimism.

Yes. Gas is a little more complicated to look at the macro, right? The first thing you need to work up is your oil model and figure out what your associated gas is going to do. The second thing you need to pay attention to, obviously, is infrastructure and takeaway, pipeline constraints because oil, if worse comes to worse, you can put it on a truck and move it around, but not necessarily with gas.

Once you figure that out, you need to look at weather patterns, see where the inventory levels you're going to shake out. And then as recently, you need to start paying attention to fuel switching and demand because I think coal switching is a big thing that kind of caught most people off guard this summer. And so gas is a little bit different. I do think there is an underlying just the rebound from the pandemic. I think underlying gas, you're seeing a bit of a structural change here, and it has to do with the coal switching. And obviously, kind of an awakening, let's say, in Europe right now of realizing that policy maybe was pushing the transition just a little bit faster than technology could really deliver and the need to go ahead and reengage and partake in fossil fuels for at least the near term.

It's interesting because I would concur on that idea that coal is the corner of the market to look at. It's the least valuable molecule you're competing with, and price is set by the least valuable molecule. We've got two questions about the most valuable molecule. With LNG now 20% of U.S. nat gas production exports, please discuss the implications for natural gas prices becoming priced as a global commodity as opposed to the historic geographic pricing.

Yes. So there will still be some geographic dislocations and arbitrage associated with the pipe, right, because again, you can truck oil down to the Gulf Coast, if you're willing to pay for it, but gas still needs incremental pipelines there. And that introduces a different regulatory question on FERC approvals and things like that. It's one reason we are very excited about Dorado.

Dorado is located -- Dorado is a natural gas field we've captured and identified. We think we've captured a potential resource of about 20 Tcf. It's located in South Texas, right along the Gulf Coast. So very geographically very well positioned, not just for LNG, but for international markets, for multiple markets really. It's in a great location.

So longer term, I do believe that the gas does become more similar to a globally priced market. In the short term, however, though, there -- we still need to get some additional LNG online. We have some projects that have FID-ed for the '25, '26 time frame, some of those that we're participating in. We have a Cheniere agreement that's going to be expanding. But the country will continue to need to get those approved and cross the finish line so that we can get those opened up.

And there's a follow-on that's just exactly what you started. You recently inked an offtake deal with Cheniere. Can you characterize the LNG opportunity set and how you're positioned to take advantage of it?

Yes. So for us, the first thing starts with, as we said, low cost. Low cost and high returns is what we're focused on. And so we've captured a very low-cost opportunity there in South Texas, and that's dry gas. We have a tremendous amount of associated gas as well, but Dorado is a very big player. And the question is dominantly focused on LNG and the position there with Dorado.

So I'd say the first thing is competing with your netback pricing. So that includes transportation and fees and getting it close to the Gulf Coast. The second part of that is being able to secure or commit to enough that you can capture a good spot on that LNG. And that's part of what we did. It was a few years ago now that we originally inked a deal with Cheniere to provide 140 million a day linked to JKM price. And so what we've done this year is we've expanded that, and it helped FID stage 3 of Cheniere there at Corpus, where we'll expand that to about 420 million in '25, '26 when that starts up. And that, again, gives us a JKM option -- JKM-linked pricing option or Henry Hub.

So we're encouraged by that. The part of our strategy, I would say, is we don't ever want to tie a single asset to a single sales point. Having a multi-basin portfolio is very similar to how we consider our marketing strategy, which is to have diverse sales point such that if there is any disruption, we can move around; if there is an arbitrage at any point, we can go ahead and capture that.

Outside of LNG, I would say, in general, what we've seen is the market is very efficient in a lot of ways. And I think LNG will get there at some point. We just need to, again, get some more of this export constructed and online.

The beauty of Dorado into Corpus Christi is it's basically South Texas molecules flowing to a South Texas customer, talk to the regulatory risk you see in other basins crossing state lines. Talk about the balance between private land or -- versus federal lands.

It's kind of funny. We spent a lot of paper and a lot of noise pre the election cycle around Biden administration, what that might mean for federal lands and permitting. A lot of that just sort of evaporated, but probably hasn't gone away completely. So.

Yes. So let's start -- back up just on to Dorado. Again, that's not just an LNG. What we like about it is that's a demand center all across the Gulf Coast. And so again, we've got optionality to sell into multiple markets from there, which is really what makes it exciting. Going to the regulatory side. Again, Texas is a pretty proactive place when it comes to all things energy, not just on fossil fuels, but I think as everyone knows, Texas also has a very robust renewable sector as well.

So they're very proactive in trying to get all things energy up and going. At the federal level, it just creates more challenges. Trying to get FERC or interstate pipelines approved we've seen has been a bit of a difficulty lately for a number of different reasons. And it's just because there are a lot more stakeholders that you need to align. And so that has been a challenge.

On the -- to take a step back on the 50,000-foot view with regards to permitting and things like that, when it's all said and done, I'm not sure if we saw hurdles with permitting outside of the normal change of administrations. And that's one reason we had captured some extra permits going into the change of administrations is that you can typically expect disturbances and slowdowns as executive positions and offices are changed over.

And what we've seen is, especially in recent weeks, people are trying to figure out how do we get gas prices down, how do we get oil prices pumped down, how do we get more exports to places like Europe that are in needs of it. And so again, with Dorado, we're in a state that's proven to be very thoughtful with their regulations towards all things energy. It's in a great position with multiple pipes and multiple demand centers, including LNG.

How much gas will be in the portfolio in 2025?

Well, that's a good question. When we think about -- we haven't given out long-range growth forecasts, obviously, because we're coming out of this pandemic. The things that we look for when we talk about investment in our base business, the first starts with the macro environment, which we covered just a minute ago. And the same applies for gas as it does for oil. What does the world need? Where is the supply and demand? Is there takeaway to get the products to the right spot?

But then the second, almost more important, thing that we find ourselves in right now is internally the capital discipline. And again, for us, that's defined as not just generating free cash flow. It's defined as what is the pace at which we can invest in any given asset that we have where each asset is getting better. And that means driving down costs and increasing to the best of our ability the well productivity.

Ultimately, getting better every year means adding lower and lower cost reserves, so a lower F&D. Do we have the infrastructure to take away, things of that nature. So when you think about gas as a mix of EOG, we don't have a specific target. When we went exploring for Dorado, we didn't say, hey, let's find a dry gas play in South Texas for the impending LNG need of Europe. What we looked for was the best rock quality that we could. We looked for an asset that would be additive to our inventory.

And what we found was Dorado. It was an outgrowth of our Austin Chalk drilling in our Eagle Ford oil window. And what we did is we were able to find and determine some specific pay criteria, some specific characteristics of Austin Chalk that, for the most part, had been unidentified before. And we mapped that up. We mapped it up all across the Austin Chalk deposition, and we leased areas that had these favorable rock qualities. And what we found was Dorado. It was in the dry gas window. But most importantly, it competed on the returns basis. At $2.50 natural gas price that we use for premium and now double-premium, Dorado competed with that very favorably. And that's really the outgrowth of.

So when we look forward, it depends on how our assets on the oil side grow with the associated gas, and then it also depends on the performance that we see in our ability to continue to invest in Dorado.

So your production mix is going to depend on which district office cracks the code the fastest basically?

We don't want to push any of those assets to exceed their ability to get better just because we see a higher commodity price. We've been at a time before as a company, it was probably 15 years ago now, where we were investing and we were chasing high commodity prices. And what happens is -- it is a commodity-based business. So as bullish as we are sitting right here, you heard me say that I think we're at the beginning of the cycle. But at some point, it's a commodity-based business. That price will pull back. And if you drilled a number of wells that are economic at $115 oil, but uneconomic at $100 oil, you're not going to be in a very good spot.

For us, we invest on this lower threshold because we do have line of sight. And it begins with our assets. We're fortunate. We're very blessed to be able to capture the assets that we have. But we think that it puts us in an area where we can really compete with the broad market. And what that means is we can create value through the cycles. Not totally agnostic to price, but we have a broad range of prices. We have a slide in our current slide deck that shows currently the oil price required for us to generate a 10% ROCE has been lowered to $43.

So everyone today at $115 oil, ROCE is kind of easy to come by right now. But when that thing turns around, you can start to see the spread on the base business of what we've built. And that in turn is what provides our ability to grow a sustainable base dividend and really, like I said, try to deliver value for the shareholders through the cycles.

No is always the challenge with a cyclical industry and a high-decline asset like shale, not only do you have the price cycle, you have the decline cycle and then they compounded into this crazy rollercoaster we've been on. It sounds like you're not going to get on that rollercoaster. We do have a question, does U.S. shale capital discipline break for others? Said another way, do investors ever allow a growth mandate again for a shale company?

Yes. It's a good question. The question is asking me to speculate across operators and shareholders across the entire industry as we sit here at $115 oil and $9 gas. I think there are investors out there that probably are questioning why isn't there more growth. But I do think, in general, the shareholders and operators are seeing that the struggles right now are kind of -- they're fundamental. They're operational. They are on the supply chain side.

EOG could invest more right now, and we could grow a little bit more, but it would erode our capital efficiency. There is just simply some supply chain issues out there that, like I said, we're seeing across the broad market. And I think many of the other operators are like that. I do think, in general, what we're seeing, and we talked about this during the pandemic, is coming through the downturn, there are less companies than there used to be on the public side and definitely on the private side. And it takes a certain amount of scale, a certain amount of depth of inventory so you can have repeatability you can have line of sight, to be willing to put in infrastructure.

And that's really what it takes to be able to have an economic business in the unconventional space because of the things that you highlighted. So for the most part, I do think that the discipline is going to stick and that companies will remain disciplined in, however, they actually define it for themselves.

We've got two somewhat related questions around regulatory risk. What's the risk of a windfall profit type tax getting passed in the U.S.?

Yes. That's another topic of conversation right now. I think we saw one being proposed and I think being approved in the EU just this week or late last week.

U.K., I'm sorry. In the U.S., that's been talked about. There have been multiple proposals over -- throughout the years, and it never seems to really get pushed across the finish line. So I'm not sure if the stakeholders are totally aligned to be able to make that happen.

There's one, how do you see the EU insurance ban affecting the supply of oil?

Okay. These are good questions.

I actually don't have a great answer for that, so I'll listen.

So it's a great question. There was an article I was reading just this morning that tried to outline the ship-to-ship transfers and things like that, that are going on. What I would say is, as long as Russia is willing to sell at a steep discount, there's a good chance that the barrels will find their way into the market one way or another, whether it be dislocated.

I think more importantly is to maybe look and see when does Russia decide that they don't want to sell their barrels into the market at a steep discount. I think that will be the sign. So the band will definitely have an impact, and we hope it does because we need to do our best to get this conflict at some sort of solution. But I'm not sure if Russia will be -- if there aren't going to be ways that they can continue to work around it.

Related regulatory, are there states in the U.S. which are geologically very interesting for unconventional exploration, but which you won't pursue due to local policies and rules around oil and gas?

No. I would say nothing is off the limits for us. Different states have different regulatory bodies, but we have a history of working very well on aligning the stakeholders at a local level. Honestly, even in New Mexico, during the last election cycle, there was some -- a lot of discussion, a lot of concern over what the policies of the new administration in New Mexico might be. And what we've found is they've been fantastic to work with. They've helped us on some permitting sides. They've helped us push through some water reuse ideas and some of our first-of-its-kind technology on the emissions reduction side.

And so no, at the local level, we do a very good job of coordinating and establishing the relationships with all the regulatory and policymakers. And part of that is that we are decentralized. We're a very decentralized organization. We have eight operating offices, seven satellite offices that are close to the field. We staff them with a full complement of engineers and geologists and landmen. And they establish those relationships, and it's recognized that these are members of the community.

They work and they live in the same communities. And so it gives us, I think, a reputation of really doing what we say we're going to do and makes us very approachable and easy to work with. Ultimately, capturing assets is the most important thing. Quality assets is the most important thing for any oil and gas company. And so we're not going to let any concerns over that prevent where the good rock is.

Given the depth of your inventory, should we assume you'll never grow inorganically?

When we look at M&A or purchasing production, it's just very difficult to make it compete. You guys have sat here and listened to me talk about how we try to make the company better, not necessarily bigger, but better every year. And we talked about we have 11,500 locations that clear a 30% direct after-tax rate of return at $40 oil. 6,500 of those locations can generate a 60% direct after-tax rate of return at that same oil price.

So typically, when you're buying production, it's at a much lower hurdle rate. The rate of return at the bid ask is going to be significantly less than that. And so right off the bat, as shareholders, you should be asking, well, why would we be buying production and investing in a low return if we already have this opportunity set there. Just at face value, that's fundamentally the first challenge that we have with doing inorganic growth.

How resilient has your culture been given the pandemic and changes to management?

I like to think we've been very resilient...

You're the back half of the question, so yes.

Yes. I think -- so we'll leave the back half for everybody else to debate. But during the pandemic, I think the strength of our culture is really -- it was highlighted, especially during the early days of the pandemic. The amount of engagement, the way that we swiftly went from being face-to-face and in person to being in a virtual world was quite an impressive sight to see. We carried a lot of our projects out there.

Now I will admit the longer we were gone, you could start to see some of that erode. Not that innovation stopped by any means, not that people's engagement stopped, but there is no -- we can see it here today, there is no replacement for being face-to-face with people. That's where problems really get solved. That's where you come up with solutions to unique challenges. It's when you overhear an issue in a conversation and you say, hey, I have an idea of that.

That's a big piece of our culture. As I described earlier, we're very multidiscipline-oriented. Our goal is, if you attend a meeting at EOG is you walk out of that meeting and you can't tell who the engineer was, who the geologist was, who the accountant was, we want people to be on a level where they're contributing. Every person is a businessperson first.

And coming out of the pandemic, returning to the office, I think everyone fell right back into the role with -- there's this idea of a work-life balance. And I think what it brought to light was that much of work is life, much of being at the office, especially when you're engaged in these unique challenges, much of work ends up being a big part of your social life.

I was going to tell an anecdote. I won't, but I'll tell it offline. Given the tightness and to a certain degree, the inflation we saw at the start of the year and then suddenly, Ukraine goes down, steel, like they're -- the marginal provider of oil country tubular goods, there was a good opportunity where you could have taken a bogey and said, actually, we plan to keep well costs flat this year, but unforeseen circumstances. You didn't. And so the question is, how are you keeping costs flat? And on the -- are you having to pay premium pricing for any of your services yet?

Yes. There are some pass-through. I'll start with that last part. There are some pass-through costs, right? Fuel is getting passed through. Labor, I would say, is getting passed through on some instances. We don't mind paying premium costs if we're getting premium service. We should keep that in mind. And something we did during the pandemic is we tried very, very hard to keep our best-performing crews together.

In fact, instead of trying to reduce people, we reduced kind of hours across the board so that we can keep some of these crews together and reduce everyone a little bit just to keep that crew intact and keep those -- that team kind of performing at a high level. So we are seeing inflationary pressure. That's for sure. That goes on without saying.

But you're right, we entered this year anticipating 10% to 15% inflationary pressure on the well cost side. And with the events of Ukraine and Russia, there is an extra amount on top of that, somewhere -- another 5%, maybe another 10%, depending on what piece of the well costs you're discussing.

Working in a multiple -- in multiple basins, we've always highlighted our ability to be flexible and adjust. And quite frankly, what I would say is this happened early in the year, and we've been able to make some adjustments. We've seen better savings than what we had thought we'd anticipated on some things like drilling mud. We've seen some increased efficiency gains, some outperformance on the efficiency side more so than what we really thought. And so early in the year, we've been able to move and adjust, and we can stay committed to that $4.5 billion CapEx plan.

When you think about it, when something like this happens, if it's early in the year, you should be able to -- you have a whole year in front of you. So you would think -- you'd like to think that you have the ability to change directions, change some different variables and be able to stay on plan. If it happens late in the year, well, it's late in the year and the majority of your CapEx is already gone. And so we've seen that. This isn't the first downturn that we've been through. It's not the first downturn that we've come out of, and it's just the way that we manage the business through the cycles.

You mentioned the $4.5 billion budget. 10% of that arguably is going to exploration. Somebody in the audience asked, which of your exploration prospects this year excites you the most?

Well, we publicly don't speak to them. So I won't point in any one direction other than to say, this year, we're drilling about 20 of these exploration wells, and that's up from about 12 wells last year. And I would say the -- we have multiple exploration plays, and they've started to diverge at what pace they're at or where they're at in the evaluation curve. So some of these wells are really appraisal wells, where we're establishing, trying to establish what's the repeatability, what's the size.

Each of these plays does need a minimum size to be able to get the leverages of infrastructure and things like that. And what we've talked about before is that they need to be additive to the inventory quality. So we're not just looking for more. So none of these wells should you be expecting us to do backflips because we discovered gas and oil. That is a kind of a low bar. What we're trying to do is add to the double-premium inventory that we have with something that's got scale, low-cost reserves, and hopefully, has a shallower decline than what we have in the inventory.

If you think about scale, there's a minimum scale, there's a maximum scale. I would pause it there are no million-acre unconventionals to be found in North America. What's the minimum scale that you can keep, I guess it's a frac spread busy for 10 years? And what defines the lower end of that?

Yes. That's a great question. There are two different ways to think about it. I think the first is, yes, can you keep a frac spread running full time, but that's one way to think about it. The other is just your infrastructure to keep the OpEx. So once you actually get the production there and the rigs leave, arguably, you're going to produce this for 20 or 30 years.

So you want to make sure that you've got the infrastructure there to keep your operating costs reasonable. So from that regard, what we found is 50,000 acres, something like that, is usually of a size and scale on the reserve side, maybe a couple of hundred million barrels of equivalents. Something like that is going to be sizable enough where we can keep the operating costs down, but it's also sizable enough to make an impact to our bottom line.

Yes. Arguably, it's almost keeping two frac spread. I mean if Super Zippers are the future, and that's giving you a big cost savings, you almost have to plan how do I keep two frac spreads busy for half a decade or a decade.

Yes. So Super Zipper, it just depends on the level of cost savings that you want to be able to achieve, right? Walking rigs, big pads, things of that nature, that's right. If you get big turbines out there and you can start to electrify so it's all scalable.

Two takeaway-related questions. Do you expect pipeline constraints in the Permian over the next few years?

Yes. EOG is well positioned. Similar to how we -- I think I mentioned in Dorado. In all of our plays -- early on, when our first couple of plays, we would take out big anchor shipper, massive pipes. And we figured out that, that's not necessarily the best way to do things in a cyclical business again. So what we typically do now in our assets is we kind of layer in multiple contracts, multiple takeaway options, where we have a little bit of redundancy, but also it takes us to different markets, as I talked about. And we can kind of layer in that takeaway commensurate with our growth plans.

So in the Permian, we're very well positioned. Industry in general, yes, there might be some small constraints, but we've seen some pipes getting announced recently that I think, for the most part, will be kind of just-in-time type of time frames.

Doesn't matter to you. Do you want takeaway constraints in the Permian? Or do you want it to be full open?

When there's more takeaway in the basin, that's not being utilized, that provides an opportunity for us to capture walk-up rates. So I would say, in general, that more takeaway is better. I'm not afraid of that as being a greenlight for growth that might rack the commodity price cycles because, again, we're not a company that's looking to survive off of high oil and gas prices. We're a company more focused on providing value through the cycles and really trying to compete with the broader market.

And then I can use this question as a segue to kind of my final question. What does double-premium mean? And how does it get you better pricing?

Yes. So double-premium is a 60% direct after-tax rate of return at a $40 oil price and $2.50 natural gas price for the life of the well. So every time we make an investment decision on a well, every time our frontline employees put a well on the drilling schedule, it should clear that hurdle. And really, it doesn't necessarily affect our netback pricing. What that really does is that adds lower-cost reserves to the cost basis of the company. What that does is it drives down our DD&A rate.

Better wells, the best way to lower your operating expense is to drill better wells. So it lowers our overall cost basis. What that does is it drives down -- it increases earnings, right? And it drives down the price required to get to that double-digit ROCE, which is one of the metrics that we follow and I mentioned earlier on the -- in the talk.

And then as a closing question, what's the value proposition for owning EOG stock?

The value proposition for EOG stock right now is valued through the cycles. That's what we strive to offer. We're an oil and gas company that offers all the upside of an oil and price upswing. But at the same time, we've limited the downside by being able to provide a low-cost company that has a sustainably growing dividend.

We're focused on being a leader in the space. We think the world needs, wants low-cost, lower-emissions production -- oil and gas production, and we can provide that. And we can provide that while returning high returns to our shareholders. So when you think of EOG, I want you to think of a low-cost, high-return producer that's delivering barrels with a lower environmental footprint.

With that, certainly, thank you, Ezra, and thank you in the audience for joining.