Earnings Call Transcript
EOG RESOURCES INC (EOG)
Earnings Call Transcript - EOG Q3 2020
Operator, Operator
Good morning and welcome to the EOG Resources' Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Tim Driggers, CFO. Please go ahead.
Tim Driggers, CFO
Good morning and thanks for joining us. We hope everyone has seen the press release announcing third quarter 2020 earnings and operational results. This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and EOG's SEC filings, and we incorporate those by reference for this call. This conference call also contains certain non-GAAP financial measures. Definitions, as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures, can be found on our website. Some of the reserve estimates on this conference call or in the accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday. Participating on the call this morning are Bill Thomas, Chairman and CEO; Billy Helms, Chief Operating Officer; Ken Boedeker, EVP Exploration and Production; Ezra Yacob, EVP Exploration and Production; Lance Terveen, Senior VP of Marketing; and David Streit, VP Investor Relations and Public Relations. Here's Bill Thomas.
Bill Thomas, CEO
Thanks Tim and good morning everyone. Our third quarter results underscore EOG's unique ability to organically create sustainable shareholder value through the commodity cycle. Along with substantial cost reductions and solid earnings results, we announced Dorado, our new premium South Texas natural gas play. We also introduced a three-year reinvestment and production outlook. First, I want to highlight our stellar execution this year then provide some context on our capital allocation and three-year outlook. We continue to make rapid and sustainable improvements to our cost structure and capital efficiency through innovation while also improving the quality and size of our premium portfolio through exploration. Our results show we can invest in both innovation and exploration to improve the company while also generating significant free cash flow, improving the balance sheet, and protecting the dividend. Capital spend for the third quarter was $2.7 billion, over $300 million less than our revised plan had forecasted. In the third quarter, we substantially beat our cash unit cost targets as well as each of our oil, NGL, and natural gas production targets. As a result, we generated more than $930 million of free cash flow year-to-date, already more than enough to cover the full year dividend. Our 21 Tcf Dorado natural gas play announced yesterday is a great example of EOG's ability to identify and capture high-quality rock and add substantial premium inventory to our organic exploration efforts. We believe Dorado will be one of the lowest-cost and lowest-emission natural gas plays in the U.S., with advantaged access to both domestic market hubs and international market via LNG. EOG has a long and successful exploration history, and we continue to be excited about the potential of our current exploration portfolio. I'm incredibly proud of EOG employees' performance during this pandemic. They remain highly motivated and have demonstrated EOG's return-focused culture by improving the company at a record pace in a volatile environment. We will emerge from this downturn an even stronger company, positioning EOG to excel through the commodity price cycles. Yesterday, we also introduced a three-year outlook. The goals of disclosing this outlook are to provide more transparency into our capital allocation process and meaningful visibility into the next three years, particularly given the ongoing level of uncertainty in the oil and gas market. Our capital and growth profile optimizes the total shareholder value of the company through the cycles. Our strategy remains dynamic, and our operations are flexible enough to adjust our spending to match market conditions. At the bottom of the cycle, as we find ourselves today, we have no interest in growing oil into an overbalanced market. In an improved market, our disciplined growth strategy compounds the benefits of growth and continuous operational improvements to optimize returns and free cash flow potential, and maximize long-term shareholder value. EOG represents a full-cycle investment opportunity. At lower prices, EOG is clearly a sustainable business. Maintenance capital and the dividend can be funded with oil in the mid-30s. In a more constructive market, EOG has significant leverage to higher oil prices through high-return reinvestment and significant incremental free cash flow. EOG has a unique business model in our industry. We approach this business differently, which has become more apparent than ever with recent industry developments. First, the state of recent M&A activity stands in contrast to one of our most distinctive competitive advantages, organic exploration. Capturing high-quality rock is the primary way of improving the quality of our premium inventory. It's how we create more value than our competitors. Our newest play Dorado is a prime example. It's great rock in a great location, and that's a resource you can't buy through M&A. Second, we're decentralized. Value is created in the field, not at headquarters. The exploration idea behind Dorado emerged bottom-up from one of our eight operating areas. In fact, perhaps for the first time in our history, every one of our eight areas has significant potential for premium plays, plays that if successful, will add to the top of our inventory, not the bottom. Third, the improvements we're making are sustainable. The number one source of our cost reduction this year is from innovation, not cyclic service price reductions. Once again, that's the power of our decentralized organization. It's an innovation incubator and a driving force behind EOG's leading performance. Fourth, we execute our operational plans reliably and consistently. This year, we worked hard to provide transparency in our operations by providing guidance throughout one of the most volatile periods in the industry's history, and we've delivered on our plan. Fifth, performance drives our ESG efforts, not PR. We believe the demand for oil and natural gas will gravitate towards the most efficient producers, the most efficient from a capital perspective and the most efficient from an emissions perspective. Our goal is to be part of the long-term global energy solution while generating strong returns for our shareholders. Finally, and most importantly, we believe we have the most talented and motivated employees in the industry. We've not laid off employees, and we've empowered our workforce by leveraging our robust information technology infrastructure to support collaboration and innovation. Our employees and culture are a massive competitive advantage during these unusual times. And we're not standing still. Our relentless drive to improve means that this is just a starting point. We are confident that we will continue to improve performance through the development of new plays like Dorado, further cost reductions, and well productivity improvements. We're excited about the future of EOG. Now, here's Tim.
Tim Driggers, CFO
Thanks, Bill. Our goal is to maximize shareholder value through the cycles. We measure our progress against a number of metrics: return on capital, free cash flow, sustainable dividend growth, operating costs, and finding costs and financial leverage. We create business value through a balanced approach that maximizes returns as well as both current and future free cash flow generation. It's an integrated optimization exercise, not a simple formula. Reinvestment ratios and growth rates are outputs of this exercise. Our three-year outlook provided this quarter addresses the currently oversupplied market and assumes gradual improvement over the next three years. Our plan each year is based on conservative price assumptions. The pace of activity is optimized to generate high returns on incremental capital, increased return on capital employed, support improvements in operating efficiencies and technical advances, and fund our free cash flow priorities. That said, our outlook is just that, an outlook. We have operational flexibility to adapt quickly to changing supply and demand conditions. At $50 oil, reinvesting 70% to 80% of discretionary cash flow generates up to 10% oil growth with significant free cash flow. At higher prices, we would expect to maintain this optimal level of activity and production growth, while returns and free cash flow expand significantly. But why grow at all? And how is the optimal growth rate determined? Volume growth drives higher ROCE, free cash flow potential, and is the fundamental driver of a growing sustainable dividend. Reinvesting in high-return wells with low operating and finding costs improves the company's recycle ratio, expanding our return and cash flow leverage. We have determined the optimal growth rate from our current assets through 2023 is about 8% to 10%. This pace of activity and growth maximizes the operational and capital efficiency of our current premium inventory. Due to the short payback periods of our investments, capital invested today is quickly recovered by free cash flow in the future. Relative to a lower growth scenario, the value of the additional cash flow we earn after the third year of our outlook far outweighs the incremental reinvestment to support our 8% to 10% plan. The proof is in our performance. During 2017 to 2019, EOG improved our return on capital employed, improved our return of capital through the dividend, reduced debt, and grew production while reinvesting less than 80% of discretionary cash flow at $58 oil. Reinvesting at high returns and growing production over the last three years is the reason we believe EOG will generate more free cash flow over the next three years at $50 oil than we did at $58 oil. Sustainable dividend growth is our highest priority for returning cash to shareholders. It is a stream of cash flow that clearly demonstrates our confidence in the resiliency of our financial model and reinforces capital discipline. Strategically, free cash flow generated from higher oil prices should be at least partially directed to shoring up the balance sheet to preserve financial flexibility for future downturns. Value preservation and value creation are two sides of the same coin when it comes to managing the balance sheet in a capital-intensive cyclical industry. This year has demonstrated the value of a strong balance sheet like no other, and we worked hard to maintain our financial strength. Cash at the end of the third quarter was $3.1 billion, offsetting total debt of $5.7 billion for a net debt to total capitalization ratio of 12%. We remain committed to pursuing our objective to strengthen our balance sheet further during upturns. Beyond the regular dividend and debt reduction, we regularly review performance scenarios that may present options for additional cash return to shareholders. We haven't ruled out buybacks or a variable or special dividend, and we'll consider all options for additional return of cash to shareholders when the opportunity presents itself. Next up is Billy to review our operational performance.
Billy Helms, CFO
Thanks, Tim. During the third quarter, we exceeded our volume expectations across the board while spending well below our forecasted capital. The capital savings were largely attributed to achieving our 12% well cost reduction target for the year. Our expectation for full year capital expenditures remains $3.4 billion to $3.6 billion. The savings provided by our well cost reductions allow us to increase activity and exit the year near the level required to maintain production through 2021. Savings will also be used this year to invest in future value drivers for the company. Our organic exploration program is as active as ever, and we are optimistic we can capture additional acreage at competitive pricing. That will further improve the quality of what we believe is already one of the best portfolios of assets in the industry. Finally, we are excited to initiate a number of infield innovations to improve our environmental performance. These projects have the potential to both reduce future emissions and improve efficiencies to generate a healthy return on capital. In the third quarter cash operating costs, which include LOE, transportation and gathering and processing expenses, were 13% below target. LOE savings were generated across the board, as we have streamlined our lease-up key practices and other facets of our production operations. We track about 100 different categories of LOE spending, and 94 of these were flat to down in the third quarter compared to the second quarter on a per-unit basis. We are excited about the steady improvements we continue to make. I am confident that most of the capital efficiency gains and operating cost reductions we are making this year will sustain into 2021. With current oil market fundamentals, we plan to maintain flat oil production in 2021 at about 440,000 barrels per day, which is where we expect to exit the fourth quarter this year. Capital required to maintain fourth quarter production throughout the year is about $3.4 billion. Due to sustainable cost reductions achieved this year, maintenance capital and the current dividend can now be funded with oil in the mid-30s. If oil prices allow, additional funds will be allocated to: One, balanced activity across all of our premium plays, including our new South Texas gas play Dorado and the Powder River Basin; Two, fund infrastructure investments that further improve our cost structure, increase water reuse and reduce emissions; and Three, advance both our domestic and international exploration opportunities. At $40 oil, we can meet all of these priorities while spending within 80% of discretionary cash flow and comfortably funding our dividend. In late September, we published our 2019 sustainability report that details a number of step-change improvements to our performance on emissions, flaring, water use, and safety. We reduced our total greenhouse gas intensity rate more than 15%, improving emissions efficiency across all significant sources. For the second year in a row, we reduced our methane intensity rate by 45%, thanks to an effort to retrofit and remove pneumatic controllers and pumps in the field. We continue to find opportunities to reduce flaring. Our wellhead gas capture rate improved to 98.8% last year and we are on track to be over 99% this year. Freshwater volumes used in our operations declined nearly 30% as a result of significant expansion of our water reuse capabilities. Most importantly, our safety rates, both total recordable incidents and lost time incidents, improved significantly. The goal of preparing this report every year is to clearly demonstrate how our ESG efforts are integrated into our strategy, planning, and operations. In this year's report, we want to step further with our commitments. We established longer-term targets for greenhouse gas and methane rate reductions. We have also set annual goals to reduce emission rates which are tied to executive compensation. At EOG, our approach to ESG is performance-based. While we are committed to enhancing the disclosure of our policies and metrics that are important to our operations, we evaluate the success of our ESG efforts by performance and performance improvement. Just like every other area of our operations, we drive performance improvement through innovation. New ideas are coming from every corner of the company, driven by passionate employees who are excited about the opportunity to invent new ways to lower emissions, reduce our freshwater use, and make a stronger positive impact in the communities where we live and work. Finally, I want to thank our employees for maintaining focus in a volatile year. We have significantly reduced both well cost and cash unit operating costs. We kept a close eye on our environmental and safety performance. In fact, the trend indicates we will once again improve wellhead gas capture rate and safety rates this year. Constant experimentation, exceptional company-wide collaboration, and a no-limits mindset are why I'm confident EOG will continue to lead the industry on performance and technology. Here's Ken to provide details on our newest play Dorado.
Ken Boedeker, EVP Exploration and Production
Thanks, Billy. We're excited to announce a major new natural gas discovery in the Western Gulf Coast Basin. Located in South Texas, Webb County, we've named this discovery Dorado. With a breakeven cost of less than $1.25 per Mcf, we believe this play represents the lowest cost supply of natural gas in the United States. We have identified an initial resource potential of 21 Tcf net to EOG in the Austin Chalk and Lower and Upper Eagle Ford formations. Both targets display premium level economics. At Henry Hub prices of $2.50 per Mcf, Dorado competes directly with our premium oil plays. This play is a textbook example of how our exploration program is focused on adding to the top of our premium well inventory, elevating the overall quality of our assets. We first identified the potential of the Austin Chalk formation as an oil play on top of our Eagle Ford footprint back in 2016. We have since completed about 100 gross Austin Chalk oil wells in that area, capturing 59 million barrels of oil equivalent of reserve potential net to EOG. Shortly following that discovery, we began evaluating the Austin Chalk formation in the Gulf Coast Basin and identified its potential as a dry natural gas play in Webb County. Our current 163,000 net acre position is a combination of legacy acreage and new acreage captured through low-cost organic leasing, trades, and a bolt-on property acquisition. We believe our position covers the majority of the sweet spot of the play. We completed our first two wells in Dorado in January of 2019, targeting the Austin Chalk in the Eagle Ford. To further delineate the play and collect more data, we completed 15 more wells over the remainder of 2019. We paused our drilling activity during 2020 to evaluate both the production results and the significant amount of technical data we collected from cores, petrophysical logs, and 3D seismic surveys. This data, including a year's worth of production history from our drilled wells, has generated a robust reservoir model, giving us confidence in our resource estimates and projections for well performance. We are leveraging our proprietary knowledge built from prior plays to move quickly down the cost curve with our initial development. We currently estimate a finding cost of $0.39 per Mcf in the Austin Chalk and $0.41 in the Eagle Ford. Combined with EOG's low operating costs and an advantaged market position located close to several major sales hubs in South Texas, access to pipelines to Mexico, and several LNG export terminals, Dorado is in an ideal position to supply low-cost natural gas into markets with long-term growth potential. Dorado is dry gas with close proximity to multiple markets. Therefore, we expect Dorado's gas will have a lower carbon footprint than most other onshore gas plays in the U.S. In addition, the recently formed Sustainable Power Group, which we introduced last quarter, is leveraging company-wide expertise to build out an operationally efficient and low-emissions field. As we expand development of Dorado into a core asset, we expect it will help lower EOG's company-wide emissions intensity rate. In 2021, our preliminary plan is to turn about 15 net wells to sales, with initial development targeting the Austin Chalk. Eagle Ford development, where we are expecting lower drilling and completion costs, will follow. The Eagle Ford utilizes a lower cost wellbore design optimized to a more forgiving drilling environment compared to the Austin Chalk. In addition, we can leverage water and gas gathering infrastructure put in place for the Austin Chalk. We will evaluate the capital allocation to the South Texas gas play each year based on market conditions. Dorado adds 1,250 net locations on fee acreage to our premium inventory, with 530 of those from the Austin Chalk and 720 from the Eagle Ford. These new premium Dorado locations, along with approximately 150 new locations from other premium plays, make up the 1,400 new net premium locations added in 2020, replacing three times what we drilled and, more importantly, improving the overall quality of our portfolio. The number of wells in our premium inventory that have returns of 30% or more at $30 oil and $2.50 natural gas has now increased from 4,500 to 6,000 wells. We also divested the remainder of our Marcellus Shale position during the third quarter for proceeds of about $130 million. The sale of this non-core sub-premium asset will fund much of Dorado's development capital next year and upgrades the quality of our gas portfolio. This is a great example of how EOG's organic exploration strategy and disciplined capital management creates significant shareholder value. Now I'll turn it over to Bill for concluding remarks.
Bill Thomas, CEO
Thanks, Ken. In conclusion, I'd like to note the following important takeaways. Number one, EOG continues to significantly lower operating costs and well costs with sustainable technology and efficiency gains. The company will emerge from the downturn a much lower-cost company. Number two, our organic exploration effort delivers another significant industry-leading play. We believe EOG's Dorado natural gas play will be one of the highest margin and lowest emission gas plays in the U.S. Dorado is an example of how our robust exploration portfolio will continue to lower the cost structure and improve the future capital efficiency of the company. Number three, our multiple year outlook is designed to deliver industry-leading financial performance and free cash flow. It's a balanced strategy that maximizes total shareholder value through the cycle. EOG represents a full-cycle investment opportunity with significant leverage to higher oil prices. Number four, EOG is a leader in innovative initiatives to lower GHG and methane emissions. Every aspect of ESG is embedded in and driven by EOG's talented and return-focused culture. New ideas are coming from every corner of the company, driven by passionate employees who are excited about making our environment and communities a better place to live. EOG is committed to being a leader in the future of energy. And finally, EOG's third quarter results demonstrate our unique and sustainable organic business model, whether it's exploration, operations, information technology, or ESG performance. Our culture-driven value creation throughout the company has never been better. EOG's ability to maximize long-term shareholder value through the cycles has never been stronger. Thanks for listening. Now we'll go to Q&A.
Operator, Operator
Our first question comes from Arun Jayaram with JPMorgan. Please…
Arun Jayaram, Analyst
Could you provide your outlook for 2021 and your thoughts on the additional investments mentioned on the slide beyond the $3.4 billion sustaining figure? Also, do you have any initial insights regarding the shift in activities among the premium plays to the PRB and Dorado?
Bill Thomas, CEO
Yes. Thanks, Arun. I'm going to ask Billy to comment on that.
Billy Helms, COO
Yeah. Good morning, Arun. Just to make sure, I understood your question. I guess for the 2021 outlook, our maintenance capital as we've stated was about $3.4 billion. We are likely to evaluate. It's early yet to say what our capital might look like next year, but we'll certainly do the same as we always have. We'll allocate it based on our outlook at oil prices at the beginning of the year, of course. And as we move into that year, we have certainly a lot of flexibility to allocate between our different plays. So as we mentioned in the prepared remarks, we can fund our maintenance capital and our dividend down to oil prices in the mid-30s. So as we see oil prices moderate either above that level or wherever they might be, we'll have flexibility to allocate capital to our new play Dorado and the Powder River Basin as we explained in our prepared remarks.
Arun Jayaram, Analyst
Okay. Fair enough. But you did say, Billy, at $40 oil, you could reinvest 80% or have an 80% reinvestment rate and cover the dividend and some of these incremental investments. Is that...
Billy Helms, COO
Yes, that's true.
Arun Jayaram, Analyst
Is that fair?
Billy Helms, COO
Yes. Well, I'm sorry we missed the first part of your question, so I apologize.
Arun Jayaram, Analyst
No problem, no problem. And just my follow-up maybe for Tim. EOG has historically been pretty conservative on the oil and gas prices that underpin your outlook. So some question from investors on just the rationale for using $50 per barrel. I know it is a bit longer term, but which is quite a bit above the strip. And maybe if you could help sensitize those future growth outlooks if we assumed, call it a $40 to $45 WTI type number?
Bill Thomas, CEO
Yes, Arun, this is Bill. Yes, the outlook $50 is how we ran the model to determine how to optimize the company and what the most important parameters are. But I wouldn't get too hung up on $50. Whether it's $45 or $50 or $55, the fundamentals of the outlook stay the same. We're focused on returns. The first thing that we have to determine each year are the market fundamentals. Is the market still in an overbalanced situation? If it still is, we don't want to force oil into that situation. But if it's a balanced market and it turns out at $45 oil, certainly we believe the 8% to 10% growth rate, the reinvestment rate of 70% to 80%, the focus on optimizing returns and compounding the growth with operational improvements and margin improvements further, and maximizing current and future free cash flow, and doing all that to maximize the total shareholder value of the company. The guidelines really apply to almost any price that would be in a balanced market.
Arun Jayaram, Analyst
Great. Thanks, Bill.
Operator, Operator
The next question comes from Leo Mariani with KeyBanc. Please go ahead.
Leo Mariani, Analyst
Hey, guys. Just wanted to kind of ask a couple of things just surrounding Dorado. If memory serves me correctly, this seems to be kind of EOG's first kind of major foray into a gas play, probably harkening back to sort of the 2003, 2004 time frame where I think you guys made a concerted effort to kind of move more to oil plays based on the macro, which was certainly the right decision over that period of time. Just wanted to get a sense, are you guys sensing that there may be some shifting macro dynamics on the gas side, which can make the Dorado play something that becomes a lot more meaningful in the years to come? You guys did outline 15 wells for 2021, which in the grand scheme of things given EOG's size doesn't seem like a big number. I just wanted to kind of get your sense on how that can play out over the next few years.
Bill Thomas, CEO
Yeah, Leo. I think the first thing is, we've had a premium price deck. It's based on $40 flat oil and $2.50 flat gas prices. So any kind of play that would have premium economics for a 30% rate of return at those flat prices, that's okay with us. We're not particular on the commodity, whether it's gas or oil or even a combo play. So that's the first thing. And then the second thing is, yes, we do believe that gas has got a prominent future in the future energy supply. There's no doubt about that. And this play just happens to be, we believe, the best – one of the best plays, the best play probably, dry gas play onshore U.S. It is a fantastic play and it's really driven primarily through the extremely high rock quality of the Austin Chalk. And so it fits everything we're looking for in the company. It upgrades our portfolio. It gives us more exposure to gas going forward. It gives us a lot of optionality in the future to switch capital between types of plays as commodities prices might vary a little bit. But all of it is based on our premium price deck: $40 flat and $2.50 flat gas, and this one certainly generates super high returns at $2.50 flat gas.
Leo Mariani, Analyst
Okay. That's great color. And just focusing on the third quarter for a second. It certainly looks like EOG beat production guidance pretty handily, but it did also look like the shut-ins that you had were actually slightly higher than you projected for the quarter. So just wanted to get a sense of what kind of drove the better-than-expected third quarter production performance?
Bill Thomas, CEO
Billy?
Billy Helms, COO
Yeah, Leo. This is Billy. So yes, the outperformance is really driven by – and you touched on it there, the shut-in wells bringing those back on production. As we brought the wells back on production that had been shut in for some time, we exhibited some amount of flush production from those wells, as we've talked about before. And then the second part of that is, we did start bringing on a few newly completed wells, and those outperformed our type curves. So that's really kind of what drove the two parts of our beat on the volumes.
Leo Mariani, Analyst
Okay. Thanks for the color.
Operator, Operator
The next question is from Brian Singer with Goldman Sachs. Please go ahead.
Brian Singer, Analyst
Thank you. Good morning. Wanted to ask on the maintenance capital of $3.4 billion. This is the number you've been talking about for the last couple of quarters, and I think you were a bit more upfront. I think it was slide 8 of talking about in an ideal world some of the potential other additional investments, you want to fund. And I wondered if you could kind of quantify what that – what those would represent, the ESG exploration, cost structure improvements, and balancing activity, how much is a normal level of spending there? And then potentially to offset that, I think you've talked in the past that cost savings and efficiencies and cost reductions for the last couple of quarters are not included in the $3.4 billion. What would that represent based on today's cost structure?
Billy Helms, COO
Yes. Good morning, Brian. This is Billy. Regarding our $3.4 billion in maintenance capital, you're correct that it does not expect any improvements in our cost structure moving forward. It's based on our current costs. As we look ahead to the year, we aim to provide some guidance on capital allocation. For next year, considering the outlook for oil prices, we are focused on maintaining our exit rate from this quarter into the next year. If oil prices fluctuate, we will assess how much we can invest in various projects, including infrastructure, exploration, or ESG-related initiatives, based on those price indicators, ensuring we stay within our spending target of 70% to 80% of our discretionary cash flow. This provides a general framework, but it is still early to determine the specific amount we might invest.
Brian Singer, Analyst
Got it. Thanks. And then, my follow-up is, with regards to the exploration portfolio. If we look at the plays you've announced in recent quarters, Trinidad and the Dorado play, they've been more natural gas focused. And I wondered if you could characterize the exploration optimism from here, or at least the exploration portfolio from here, on oily versus wet gas versus dry gas plays and how you see that playing out over the next year or two.
Ezra Yacob, EVP Exploration and Production
Yes, Brian, this is Ezra. Good morning. Thank you for the question. As Bill mentioned, our exploration program is currently focused on identifying areas where we can secure the best acreage positions. We aim to find plays that will enhance the front end of our inventory. As we have discussed, we are evaluating multiple exploration plays. Our goal is not just to expand our inventory, but to strengthen it. This year, our minimum rate of return on our 11,500 premium well inventory yields a 30% direct after-tax return at $40 oil and a $2.50 flat natural gas price. Our program this year has demonstrated the significant value of concentrating on the best parts of our inventory, resulting in lower well costs, increased production performance, and higher investment criteria focused on the top half of that inventory. In other words, our median well inventory with a 60% premium return will generate returns approximately twice as quickly as a 30% return well. Our commitment to organic exploration has been crucial to our success and continues to be a sustainable method for replacing what we drill each year in our inventory. The Austin Chalk announcement today exemplifies the benefits of higher rock quality in our exploration activities. The Austin Chalk behaves like a hybrid play, exhibiting qualities of both unconventional and conventional reservoirs. When we apply our technology and data collection on core and log to pinpoint the optimal landing zones that perform well with our horizontal completions technology, we become excited about the potential of these hybrid plays. We anticipate strong performance in oil plays from these hybrid zones, with a declining profile that flattens out and reduced finding and development costs as we advance.
Brian Singer, Analyst
Great. Thank you.
Operator, Operator
The next question is from Jeanine Wai with Barclays. Please go ahead.
Jeanine Wai, Analyst
Hi. Good morning everyone. Thanks for taking my questions. My first question is on the base decline. I think in the 2022, 2023 outlook you now anticipate that BOE growth will outpace oil growth. And I think some of that is related to Trinidad and Dorado. But how does the oil base decline trend in your 8% to 10% per year growth rate scenario? And is that level of growth enough to kind of allow the base to moderate?
Bill Thomas, CEO
Yes. Hi, Jeanine. I'll ask Billy to comment on that.
Billy Helms, COO
Yes. Good morning, Jeanine. I believe you're right. The base decline from the oil properties is slowing down over time. This is due to both the activity levels this year and the quality of the inventory we're bringing into production. Higher quality rocks tend to have a lower decline rate over time. These two factors are contributing to the moderation of the oil base decline. Additionally, the maintenance capital we have planned is adequate to sustain this going forward.
Jeanine Wai, Analyst
Okay. Great. That's very helpful. Thank you. My follow-up question is, maybe dovetailing on a few of the other ones about the other CapEx that is going to be included in the 2021 outlook. So on the potential investments on slide eight that you list, we know that the amount of CapEx will depend on the headroom that you have in oil prices. I think I heard you say that previously. But can you comment on how that 2021 amount might compare to prior years? But I guess more specifically, how much of that other CapEx is really embedded in that $50 2022-2023 outlook? Thank you.
Billy Helms, COO
Yes, Jeanine, this is Billy again. You're correct. The extent of our spending in those various categories will definitely be influenced by the oil price. I would say there is some of that factored into the $50 estimate for the outer years, but it doesn't constitute a large portion of our capital expenditure. So, it aligns with our historical spending patterns.
Jeanine Wai, Analyst
Great. Thank you very much.
Operator, Operator
The next question is from Bob Brackett with Bernstein Research. Please go ahead.
Bob Brackett, Analyst
Hi. Good morning. You've gone quite down dip in Dorado. And those 9,000-foot laterals imply some of these wells are approaching four miles measured depth. And so it seems cost control is absolutely critical. Is there some innovation there to share with us?
Bill Thomas, CEO
Yeah. Bob I'm going to ask Ken to comment on that.
Ken Boedeker, EVP Exploration and Production
Yeah Bob, this is Ken. We have a strong track record of developing the Austin Chalk alongside the Eagle Ford, particularly in the oil window. We've drilled 17 wells in that area, and the results have been excellent. We haven't faced many drilling or completion issues, which helps keep costs in line with what we've outlined in our 2021 program. We are very confident that we will achieve the returns we've indicated, which are competitive with our other premium oil plays at $2.50.
Bob Brackett, Analyst
So I'll do a combo follow-up. So it's not sort of managed pressure drilling say like the Powder River? And then my follow-up would be, you mentioned domestic and international exploration activities in that seriatim, that people keep referring to. Could you remind us of what is included in the international bucket?
Ezra Yacob, EVP Exploration and Production
Yes. Bob, this is Ezra. On the international front, I want to emphasize that we recently completed our drilling campaign in Trinidad with some remarkable results. We mentioned some of the discoveries during the last call, but I’d like to add that our latest completion, the Oilbird well off the Oilbird platform, started producing in the third quarter at over 60 million cubic feet a day of natural gas and an additional 2,500 barrels of condensate per day. We also brought on a well from our Kitscoty platform, which is currently cleaning up, showing flow back rates of approximately 30 million cubic feet per day of gas. We are excited about the discoveries we made during this campaign and look forward to sharing further results from this high-return asset. Additionally, during the third quarter, we entered Oman with the acquisition of about 4.6 million net acres in Block 36, which is in the southwest portion of the country, located in the Rub Al Khali basin, a well-known hydrocarbon-bearing basin. As we looked outside the U.S. for the right opportunities to apply our expertise in tight oil development, we see Oman as a promising option. It has a very low geopolitical risk and access to competitively priced oilfield services and equipment that we believe will be essential for tight oil success. As part of the agreement, we plan to drill two test wells in the next two years to assess the potential of the acreage. We are very excited about the low cost of entry in Oman and the opportunity to explore a basin with significant potential upside. I think Ken might be able to add some additional insights on this.
Ken Boedeker, EVP Exploration and Production
I wanted to clarify something, Bob. When you mentioned managed pressure drilling like in the Powder River Basin, we are implementing managed pressure drilling in Dorado as well. Additionally, we have substantial experience with this approach across multiple plays within the company.
Bob Brackett, Analyst
Great. Thanks for all that.
Operator, Operator
The next question comes from Subash Chandra with Northland Securities. Please go ahead.
Subash Chandra, Analyst
Yeah. Hi, everybody. Just doing some, I guess, bar napkin math, using your decline rates and the dollar for flowing capital efficiency calculation. I'm coming up with, I don't know, maybe around $5 billion for what CapEx requirements are for 10% type oil growth. Do you think I'm in the right ballpark there?
Billy Helms, COO
Yeah Subash, this is Billy Helms. It's a little premature to maybe give out a directional number, but I think you can approximate. With the data we've given you, I think you can derive some pretty close estimates. I'd say you're probably not too far off the right numbers.
Subash Chandra, Analyst
Okay. Great. Thanks. And then secondly just on, dividend decision. I guess the next one comes up in the early part of the New Year. I'm just curious the $3 billion in cash you talked about having the right balance sheet cushion to ride out the cycles. From a cash perspective, is there a right number that we should be assuming? And is it and should we also assume that the cash does not go into the dividend decision, that the dividend decision is just derived from operating cash flows or free cash flows?
Tim Driggers, CFO
This is Tim. And you're exactly right. It is the operating cash flows that determine the sustaining dividend. As far as the $3 billion in cash, we do have a bond coming due in February. And currently, we are anticipating being able to pay that bond off with that cash. But we have significant flexibility if the market changes to do whatever we need to do. So, we're in a good position to manage that situation.
Subash Chandra, Analyst
Okay. And to ask it a different way, should we assume some sort of minimum cash that you'd want to keep on the balance sheet?
Tim Driggers, CFO
We evaluate our situation based on the conditions at that time. Therefore, I can't provide a specific number. It depends on the price of commodities at that moment, which affects how much cash we need on the balance sheet. Additionally, our capital budget and the amount of capital we'll be spending will also play a role.
Subash Chandra, Analyst
Okay. Great. Thank you.
Operator, Operator
The next question is from Paul Cheng with Scotiabank. Please go ahead.
Paul Cheng, Analyst
Hi. Thank you. Good morning. Just curious that when you look at the three-year outlook for your capital allocation and the growth target or that the maximum growth ceiling, should we assume that that's also applied for the longer term? And if not, is there any reason that the same will not be applied?
Bill Thomas, CEO
Yes, Paul I think three years with those parameters are a good guide. We did include - we did not include any additional well cost, operational cost advancements in those projections. So certainly, we expect to continue to do that. We have a very sustainable model of being able to do that. So as time goes on, and certainly in three years, we expect we'll be a lot better company. So I wouldn't just apply those numbers to what we could do four years from now. I think we're hopeful. Through these exploration efforts getting better rock and continuing to reduce our costs, we should be a much better company.
Paul Cheng, Analyst
And then my second question is that on – whether it's the Dorado or your overall CapEx spending certainly, that the price signal is important. But with the future strip moving quite substantially from one day to another so that's probably not a very good indicator or at least let's say a forecast vehicle. So what are the factors that you guys are using maybe that's more determinative of how you decide on your program for a particular year if the price signal from the future market is unreliable there as we can see?
Bill Thomas, CEO
Yes, Paul I think the first thing is, what's the price based on, and that's whether we're in an overbalanced market situation or a balanced market. And we believe there's significant structural changes obviously that have been going on in the business, particularly in the U.S. with a lot more capital discipline, a lot more return of cash to shareholders. They need to work on balance sheet consolidation, et cetera. In the international arena, there have been folks that have basically changed their business philosophy and they're certainly not going to be investing as much in oil in the future. So there's a lot of things that go on in there. And all that leads to – in the future, certainly we believe OPEC will be the swing producer, really totally in control of oil prices. So we want to take that into consideration and make sure that the market is balanced. We've taken all that into consideration as we formulate our plans.
Paul Cheng, Analyst
Thanks.
Operator, Operator
The next question is from Doug Leggate with Bank of America. Please go ahead.
Doug Leggate, Analyst
Thank you. Good morning, everyone. Bill I'm really just looking for a little clarification on a couple of the things you've announced today. First of all, at the beginning of the year you talked about your cash breakeven being around $40. Second quarter you said it was a little less than $40. Now it's dropped to the mid-30s. Can you tell us what's changed there given that the sustaining capital is still $3.4 billion?
Bill Thomas, CEO
I'll ask Billy to comment on that.
Billy Helms, COO
Yes. Good morning, Doug it's really the cost structure of the company continues to improve. We continue to drive down our well cost. As I mentioned earlier, we've already achieved our 12% cost reduction that we expected throughout the year. And then our unit costs, we've driven down our unit operating costs quite substantially this year. So those combination of things is allowing us to continue to reduce that breakeven cost.
Doug Leggate, Analyst
Is the gas price a factor, Billy?
Billy Helms, COO
No sir, it's really not. It's really driven mainly by the cost reductions, the structural changes we've made, and the cost reductions of the company.
Doug Leggate, Analyst
Okay. My follow-up is really, Bill, I hate to do it but go back to the 10% growth number. I know you've been asked a lot about it today. But I want to put a hypothetical to you. So let's assume oil is $50 but it's only there because Saudi is still – or OPEC+ has still got seven million barrels off the market. That's not exactly a balanced market. So what does EOG do in that scenario?
Bill Thomas, CEO
Yes, Doug, that's exactly right. We would not want to force oil into that kind of situation. We don't want to put OPEC in a situation where they feel threatened like we're taking market share while they're propping up oil prices. So that much commitment by them, that's not a time we would force oil.
Doug Leggate, Analyst
That's the clarity I was looking for. Thanks so much, guys. I appreciate it.
Operator, Operator
The next question is from Paul Sankey with Sankey Research. Please go ahead.
Paul Sankey, Analyst
Thank you. Good morning, everyone. Could you provide us with an activity and volume outlook for the Dorado to assist us with valuation? Also, considering its organic success, can you share your perspective on the consolidation we've observed in the sector from EOG's viewpoint? Thank you.
Ken Boedeker, EVP Exploration and Production
Yeah. Paul, this is Ken. On Dorado's volume and activity outlook, it's a little early to give any volume outlook for 2021 or the future years. We have talked about a 15-well program in 2021 that we should be bringing on some gas early in the year and then towards the second half of the year from there. As far as M&A...
Billy Helms, COO
Yes, Paul, this is Billy. Regarding the M&A question, I believe the industry definitely needed some consolidation. We are supportive of what has happened so far. At EOG, we have evaluated nearly every potential combination available. We recognize the financial benefits that could come from a corporate merger, but we view it as a one-time occurrence. For us to consider entering that market, we want to assess the long-term effects any potential M&A could have on our current inventory. We compare the inventory of a potential company against what we already possess and what we’re discovering in our exploration program, and currently, we don't see any opportunity that justifies allocating funds at this time. None align with our objectives. This confidence is rooted in our ongoing exploration program, which focuses on enhancing the quality of our premium inventory.
Paul Sankey, Analyst
I thought you might say that, Billy. You’ve made some adjustments to your framework. Could you discuss your philosophy on hedging and whether your perspective on it has changed? I’ll leave it there. Thank you.
Bill Thomas, CEO
Yeah. Paul thanks. Yeah, we haven't changed our philosophy there. We're always opportunistic. We have a very robust, rigorous commodity analysis macro view. We're working all the time. It's quite a rigorous process. So we believe we're not always right, but we believe we've got a pretty good idea where oil prices are headed. So we'll just stay opportunistic on that, and same thing with gas prices.
Paul Sankey, Analyst
So you're currently less hedged?
Bill Thomas, CEO
Sorry. What was the question? I'm sorry I missed it.
Paul Sankey, Analyst
Which is to say that you're less hedged right now?
Bill Thomas, CEO
Yeah. That's right. We're not hedged on oil.
Paul Sankey, Analyst
Okay. Thank you.
Operator, Operator
The next question is from Charles Meade with Johnson Rice. Please go ahead.
Charles Meade, Analyst
Good morning, Bill, and to your entire team. I wanted to ask about the Dorado play. The drilling and completion cost you mentioned for the Austin Chalk seems to be higher than that of the Eagle Ford. I'm curious about the reasons behind that. Is the Austin Chalk located in a deeper section, or is the lateral more challenging to drill? What insights can you provide on this?
Ken Boedeker, EVP Exploration and Production
Yeah. Charles, this is Ken. We just see a little bit harder drilling conditions when we're drilling the Austin Chalk compared to the Eagle Ford, so we've added in additional cost for that at this point. We always work on lowering our cost basis, and you can see that on every one of our plays. So we anticipate that we'll be able to lower the cost in Dorado as well as we drill some additional wells in that play.
Charles Meade, Analyst
Got it. Thank you. And then as a follow-up, I wanted to touch on the Delaware Basin. It's still a big driver for you guys obviously. Are you guys seeing anything different, or do you expect to see anything different either in the operating environment out there or the opportunity set to continue to add out there?
Billy Helms, COO
Yeah. Charles, this is Billy. Really nothing's changed, except our continuous improvement. We're seeing in the well performance and the cost structure of our Delaware Basin plays. We're extremely proud of the team we have there and the improvements they continue to make. We haven't really changed a lot as far as the well spacing or anything like that, that a lot of other companies talk about. I think we continue to make improvements in the way we drill and complete the wells. And I think we're delivering a lot more consistent results as a result of that. So, we're extremely confident in our ability to continue to execute that program and deliver superior results. We are continuing to have success in blocking up acreage through trades, and we've been doing that really for many years. So I don't expect that's going to continue to change. But outside of that, that's kind of what we see.
Charles Meade, Analyst
Great, thanks a lot.
Operator, Operator
At this time, the question-and-answer session is concluded. I will turn the conference over now to Bill Thomas, Chairman and CEO for concluding remarks.
Bill Thomas, CEO
Yeah. In closing, I'd just like to say, we cannot be more proud of our EOG employees. Our third quarter results were outstanding, thanks to everyone in the company. The culture of EOG is performing better than ever, and our ability and commitment to creating long-term shareholder value has never been stronger. Thanks for listening, and thanks for your support.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.