Earnings Call Transcript - EOG Q2 2020

Operator, Operator

Good day, everyone, and welcome to the EOG Resources Second Quarter 2020 Earnings Results Conference Call. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the conference over to the Chief Financial Officer of EOG Resources, Mr. Tim Driggers. Please go ahead, sir.

Timothy Driggers, CFO

Thank you and good morning. We hope everyone has seen the press release announcing second 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 at www.eogresources.com. Some of the reserve estimates on this conference call and 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, Marketing; and David Streit, VP, Investor and Public Relations. Here's Bill Thomas.

Bill Thomas, Chairman and CEO

Thank you, Tim, and good morning, everyone. EOG's second quarter results demonstrate the company's ability to quickly adapt to an unprecedented drop in commodity prices. We exceeded our own expectations by delivering more oil for less capital and lower operating costs, allowing the company to generate significant free cash flow during the quarter. In May, we published our revised plan which aggressively reduced our full-year capital by more than 45% and LOE by more than 20%. EOG's employees rose to the challenge, not only achieving the incredible reduction targets we set but beating them. Compared to our aggressive plan and guidance for the second quarter, we produced 7% more oil while spending a whopping 26% less capital. Our cash operating costs, which include LOE, transportation, and gathering and processing, were 10% lower. With a rapid reduction in capital and operating costs, the company generated nearly $200 million of free cash flow while oil prices averaged less than $28 a barrel. Our second quarter results are a testament to the return-focused culture of EOG employees and our ability to pivot quickly in response to the unprecedented level of market volatility and industry conditions. Last quarter, we laid out seven strategic focus points for the remainder of 2020. Here's a quick progress report. Our first strategic point is only to invest capital if it generates a premium return. Premium return is defined as a 30% or higher direct after-tax rate of return using a prospect of $40 flat oil. In this downturn, we have raised the return bar even higher by using $30 oil instead of $40 to calculate our 30% rate of return. Our second focus point this year is to exercise operational flexibility to quickly reduce costs, with capital 26% below target and cash operating costs 10% below target. Our second quarter results demonstrate our ability to move quickly in a volatile environment. Our third focus point is to accelerate our technical innovation across the company. This is an area where we're particularly excited. While we anticipated some additional opportunity for innovation because of the slowdown in our pace of development, our employees' ability to accelerate innovation even while working remotely has exceeded our expectations. We recently completed our yearly technical conferences across each discipline, all via video conferencing. We are amazed at the volume of new innovative ideas presented, some creative ways to cut costs and new tools to identify and evaluate prospects. I am confident that the tremendous progress we've made this year will accelerate EOG's lead as the sustainable improvements start paying dividends in the future. By driving down the profitable required generating double-digit returns and extending EOG's industry leadership and return on capital employed. Our fourth focus point is to exit 2020 with momentum into next year by increasing production into the price recovery. As Billy will cover in a few minutes, we've increased our quarterly and full-year production volume estimates. In addition, with the cost reductions we are implementing this year, we have improved our maintenance capital outlook for 2021. We now expect we will be able to maintain higher volumes for the same capital and cover both capital and the dividend with cash flow at less than $40 oil. Our improvements in volume coupled with reductions in well and operating costs are setting us up for strong performance next year. Our fifth focus point this year is to remain hyper-vigilant about maintaining our financial strength. Our goal each year is to spend within cash flow and maintain an impeccable balance sheet to support operations and protect our dividend. This downturn has demonstrated the value of EOG's historically strong balance sheet more than ever. With this goal in mind, we reduced CapEx by more than 45% to $3.5 billion so that full-year cash flow funds CapEx in the low $30s. If oil prices average $40 for the year, full-year cash flow also funds the dividend and generates free cash flow. Sixth, our focus is to continue to invest in the long-term value of the business. In fact, once again, this break in our pace of development has actually accelerated our progress by creating more time to fine-tune our quality exploration work. We continue to drill on prospects that we believe will further improve company performance. You will hear from Ezra in a moment regarding recent exploration progress. The seventh focus this year is the most important. Protecting and enhancing EOG's culture is key to our continued success. We have highly skilled employees who are focused on constantly improving every area of the company; we remain committed to our employees as they are the ones who are making EOG a much better company during this downtime. Armed with extensive data from proprietary apps and information technology, EOG employees are overcoming the challenging conditions by continuing not only to innovate but to accelerate innovation. We believe we're in the process of making another significant improvement in EOG's performance, similar to the last downturn when we initiated our premium drilling program in 2016. As a reminder, with premium standards in place from 2017 through 2019, EOG delivered an industry-leading average return on capital employed of 14%, generated $4.6 billion in free cash flow, increased the dividend by 72%, reduced net debt by $2.2 billion, and increased proved reserves by 55%. The EOG culture is rising to the challenge again, with innovation that is significantly improving the company's current and future performance. EOG's long-term game plan has not changed. We remain focused on high return reinvestment, disciplined organic growth, and generating substantial free cash flow to fund a sustainable growing dividend and maintain a strong balance sheet. EOG will emerge from the downturn a much better company and our commitment to creating long-term value for our shareholders has never been stronger. Before I turn it over to Tim and Billy, I want to note how excited we are to continue our progress towards reducing GHG emissions. We are near the start-up of our 8-megawatt solar and natural gas hybrid electric power compressor station. In addition, we recently formed a sustainable power group within the company. This group will support our innovative culture to bring return-focused, low emissions technology and projects forward quickly. EOG is committed to being an innovative leader in sustainability and the long-term in our energy solution. Next up is Tim.

Timothy Driggers, CFO

Thanks, Bill. EOG proved to be exceptionally resilient during one of the most severe quarters for the industry in our memory. I'd like to review the high-level changes in EOG's cash position during the second quarter. EOG had $2.9 billion of cash at the end of the first quarter. During the second quarter, the company generated discretionary cash flow of $672 million and after deducting CapEx of $478 million, we generated $194 million of free cash flow that nearly covered dividend payments of $217 million. Over time, EOG's working capital position tends to be fairly balanced between current assets and liabilities. However, the increase in market volatility means our working capital balance can fluctuate significantly from quarter to quarter. Changes in working capital in the second quarter represented a net cash outflow of $1 billion, which was more than offset by net cash inflow from working capital in the first quarter of $1.2 billion. We expect changes in working capital will be approximately neutral for the full year 2020 based on the current outlook for commodity prices. Moving on to the financing side of the ledger; EOG issued $1.5 billion of new debt and paid off a total of $1 billion in maturing notes during the quarter. This left the company with $2.4 billion of cash on hand at the end of the second quarter. Considering total debt of $5.7 billion, this yields a net debt to total cap ratio of 14%. In addition to cash on hand, a very strong liquidity position is further supported by a $2 billion unsecured revolving line of credit which has no borrowings against it. Looking ahead, we expect discretionary cash flow to exceed CapEx and dividend payments for the remainder of 2020, with oil prices in the mid-30s. In late April and early May, we elected to close out most of our hedge positions for the remainder of the year, as volatility in commodity markets had abated, and prices seemed to have more upside than downside. We affected this primarily by entering into offsetting contracts for those hedge positions we elected to close. Therefore, the timing of cash received or paid for settlement of these closed-out hedges remains for the periods for which they are effective. We expect to receive $360 million in net cash payments in the second half of 2020 from these hedge positions that have been closed. As 2021 comes into focus, we will be opportunistic about adding hedges if prices look attractive relative to our assessment of market fundamentals. Next up is Billy to review our operational performance.

Billy Helms, COO

Thanks, Tim. Last quarter, we made the decision to shut in existing production and deploy our new wells rather than sell into an uncertain and low-price market. Our intent was that our lowest activity levels, lowest capital expenditures, and lowest production volumes wouldn't coincide with the lowest point of the commodity price curve. By doing so, we enhanced the cash flow and margins for each barrel produced, maximizing the rate of return for our investments. Our employees' execution of our challenging new plan during the second quarter was stellar. They answered the challenge by beating by a wide margin; nearly every capital expense and production goal we targeted under the new plan. After rapidly reducing our full year capital plan by nearly half, second quarter capital came in an additional 26% below target. We also reduced our cash operating expenses a total of 10% compared to the target. One of the hallmarks of EOG is striving for continuous improvements, but the downturn brought a new intensity to this effort. Our employees delivered even more by continuing to innovate capital and expense reductions that will benefit future operations. For example, we increased our full-year total well cost reduction target to 12% up from 8% just a few months ago. Our operating teams continue to drive efficiency in every aspect of our business. Drilling times are consistently improving, yet completion costs are seeing the most improvement during the quarter, down more than 15%. About half the capital savings can be attributed to cost efficiencies and the other half to service cost reductions. Our drilling rigs and frac fleet are largely under existing term contracts, so service cost savings have been more from ancillary services. As rig and frac fleet contracts expire, we expect to see further cost reductions; therefore, we believe most of these savings to be sustainable. Our cash operating costs were down more than $50 million, or 10% relative to our second quarter guidance. Our operating teams went into high gear to identify opportunities to reduce expenses during the second quarter with a focus on every category. Some of the largest cost reductions are reduced workover expenses, water disposal, and lease maintenance and repairs. These reduced expenses played a major role in helping to generate free cash flow during the second quarter. It is also important to note that we have reduced our full-year cash operating cost guidance by almost $20 million, or 6% on a per-unit basis. On the production side, we also beat our forecast. This is mainly due to bringing the shut-in volumes back on sooner than anticipated. One observation from our production data revealed that almost every well exhibited some level of flush production before returning to its previous decline profile; further evidence that the well sustained no damage from the shut-in period. In addition, the decline observed from the base production was less than previously forecasted, also contributing to the production beat. As a result, we have raised our full-year oil production guidance by 16,000 barrels of oil per day or 4%. Our dramatically reduced activity and the temporary shut-in of our production, combined with the expense reductions generated positive net cash flow and deferred a large amount of production into a higher price quarter. Slide 12 of our presentation this quarter illustrates the updated shut-in volumes and the corresponding product price. While we have slowed our overall spending, we have maintained our commitment to reducing GHG emissions by continuing to invest in innovative new technologies and initiatives. Our focus on reducing flaring continues, with our gas capture right now exceeding 99.5%. To further minimize flaring, particularly when caused by unpredictable downstream market interruptions, we tested a new EOG innovation we have named Closed-Loop Gas Capture. Closed-Loop Gas Capture is an automated process developed in-house to reroute natural gas back into existing wells when a downstream interruption occurs. Initial results were successful and indicate that our Closed-Loop Gas Capture process has the potential to both reduce flaring and return a majority of the captured gas from the well back to production. In late 2019, we initiated a pilot project in New Mexico to combine solar and natural gas to power electric motor-driven compressors. Compressors typically use natural gas to power the engines and are a source of GHG emissions from stationary combustion. Since solar power is only available during the day, we designed a hybrid power plant to supplement daytime solar power generation with reliable natural gas generation at night. During the day, the solar panels should produce 8 megawatts of power with no combustion emissions. Compared to traditional natural gas-powered compression, we believe our hybrid power compression will result in lower operating expenses and a meaningful reduction in emissions. This facility will become operational later this month. Both of these projects demonstrate that we approach GHG like every aspect of our business, focusing on sound economic decisions and continuously improving our operations. EOG has a long history of adapting to changing industry conditions and using technology to improve the company. As Bill noted earlier, to further enhance our efforts to be a leader in GHG reduction, we recently announced a new strategic initiative to identify and implement return-focused, low emissions power generation within EOG. We are confident that this initiative led by our sustainable power group will be another area in which EOG will lead the way in finding more cost-effective methods to generate power while reducing our impact on the environment and generating a healthy rate of return. Finally, I am extremely proud of how all of our employees have responded to this year's challenges, and do so while adapting to remote working conditions. Here's Ezra for an update on recent exploration success in Trinidad.

Ezra Yacob, EVP, Exploration and Production

Thanks, Billy. EOG has had very successful business in Trinidad for 27 years. About 20% of EOG's natural gas production comes from shallow water, offshore fields in the Columbus Basin of Trinidad. Most of the gas is sold as feedstock into a sizable petrochemical industry on the island, primarily producing ammonia and methanol. Trinidad has had a competitive financial profile within EOG due to our competitive advantages as a low-cost operator and our long track record of exploration success. While our capital investments in Trinidad typically make up a small percentage of our overall CapEx budget, the returns on that capital are competitive with EOG's domestic portfolio, and consistently generate free cash flow and net income. The latest round of exploration and development in Trinidad kicked off in the spring of 2018 with the acquisition of a set of modern seismic images; the combination of new seismic and updated geologic models provided a deep inventory of prospects to develop our exploration plan. This plan included farming into new acreage held by another operator, where we could apply our low-cost structure to improve the economics on these high-potential exploration blocks. Drilling began in July 2019, and we have recorded 4 initial discoveries with estimated natural gas potential of 1 Tcf gross and 500 BcF net to EOG. The discoveries are located in shallow water off the Southeast Coast of Trinidad. Our two open-water explorations will support the installation of new production platforms beginning in 2021. The final two wells in the current drilling campaign are in process and should be completed by year-end. Production from this drilling campaign will more than offset natural declines from existing wells and provide a foundation for growth in EOG's total production in Trinidad. Lastly, the initial success of this latest exploration program sets up the potential for additional delineation and exploration drilling in Trinidad in future years. I would also like to take a moment to discuss our ongoing domestic exploration effort. We've made good progress moving multiple prospects forward during 2020 despite a reduction to our initial capital plan. Leasing across multiple basins is going well, and we are capturing contiguous positions in what we feel are the sweet spots of these plays. We have initiated drilling in some projects and are currently incorporating modern well logs and core data into our geologic models. We look forward to providing updates regarding the testing of these prospects at an appropriate time. Next up is William to provide concluding remarks.

Bill Thomas, Chairman and CEO

Thanks, Ezra. In conclusion, I would like to note the following important takeaways. First, our second quarter operational results were outstanding. We rapidly reduced capital and operating costs while increasing volumes. This resulted in significant free cash flow. Second, we have improved our full-year 2020 guidance by increasing volumes and further reducing costs. Third, our 2021 maintenance outlook has improved to include more oil with no increase in capital. We can maintain higher volumes and cover both capital and the dividend with cash flow at less than $40 oil. Fourth, as demonstrated by results, the EOG culture continues to rapidly and sustainably improve the company. During this downturn, we believe we're in the process of making another step change to improve further profitability. And finally, EOG's fundamentals have not changed. Our focus on returns, discipline, growth, and generation of significant free cash flow to fund a growing sustainable dividend; and a strong balance sheet have not wavered. Our commitment to creating long-term shareholder value has never been stronger. Thanks for listening. And now we'll go to Q&A.

Operator, Operator

And our first question will come from Leo Mariani with KeyBanc Capital Markets. Please go ahead.

Leo Mariani, Analyst

Hi, guys. I was hoping to get maybe a little bit more color on some of the cost reductions on the well side, from a capital perspective this year. Just looking through the slides, I mean, it looks like maybe it's a little bit more concentrated in the Permian in terms of your expectations. I know that's where a lot of your activity is occurring, but are you seeing kind of outsized gains there, maybe relative to the Eagle Ford in terms your expectations throughout the year?

Bill Thomas, Chairman and CEO

Yes, thank you, Leo. We're going to ask Billy to comment on that.

Billy Helms, COO

Yes. Good morning, Leo. Yes, you're right most of our CapEx is generally directed towards the Delaware Basin. So certainly, on a dollar basis, that's where most of the savings are as well. Just to give you a little more color on the capital savings, about a third of the capital savings are from efficiency gains. A third from pricing improvements, and a third is really just delaying facilities and infrastructure from the second quarter into the future third and fourth quarter. So from that we were able to see most of the cost savings probably on the completion side of our business, as I mentioned during the notes on the call, and you have to remember, we're still under some long-term contracts for drilling rigs and frac fleet. So, as these roll-off, we expect to be able to capture some of the market rate saving on those in the future, but we're seeing savings on some other ancillary services that I mentioned. Largely things like chemicals being down 20% to 25%, some of the equipment rentals being down 20% to 30%. And things like that. So, you're seeing some savings on some of the other aspects of the business, not necessarily on the frac fleets and drilling rigs.

Leo Mariani, Analyst

Okay, that's helpful color for sure. And I guess I was hoping if you could talk a little about the potential issue surrounding federal acreage here. Certainly saw from the slide, you guys are kind of saying roughly half your premium inventory is located on federal lands. Obviously, the election is clearly uncertain. But do you guys have any thoughts as to kind of whether or not there might be any limitations going forward on the event of a Biden victory?

Bill Thomas, Chairman and CEO

Yes, Leo, this is Bill. We've got a lot of experience drilling on federal land for decades, and we've been able to successfully navigate all the changes in the past; we've had many changes over the years. And so I'm confident we're well positioned to continue to adapt and not let those changes significantly affect us. There are two reasons why I'm confident. And then I'll ask Billy to add some additional color. The first is we've got a large amount of premium quality drilling potential on non-federal land; we have a tremendous inventory. That's really not affected by the federal changes; that provides significant operational flexibility. On top of that our exploration program that Ezra mentioned, we believe is going to provide some outstanding opportunities to continue to improve our inventory with better rock. And most of that is located on non-federal lands. And we've got a lot of confidence that we can continue to generate and add non-federal potential. That's even better what we have. And then we've got a very strong growing backlog of approved drilling permits on federal land. And I think Billy's got some numbers on that. And then number two; our government has a system of checks and balances that allow the voices of many stakeholders to be heard. And as a part of these checks and balances, any changes would take time and have to consider all those stakeholder interests. And so the success of our responsible development is aligned with many important states and communities where we operate; for example, from federal lands, they're shared, the revenues are shared with the States and in 2019 over $2 billion or revenue was paid out to over 35 states. And so it's not an easy thing to change significantly the Federal drilling potential. So I'm going to ask Billy to add some more color.

Billy Helms, COO

Yes, thanks, Bill. As Bill mentioned, we're starting with a lot of flexibility with our decentralized culture. Our multi-basin approach gives us the ability to move activity around quite extensively. On top of that, our exploration program, which is in basins really outside of our current operating areas, has the opportunity to further add to our non-federal drilling inventory. As Bill mentioned, we have quite a few premium locations that we've announced and about half of those are on non-federal lands. In addition, almost half of our premium locations that work at $30 are also non-federal lands and you can look at Slide 10 of our deck that illustrates that. So the part of that was to meet the rate of return hurdle at $30, about half of those are non-federal. So it's a pretty good distribution of both federal and non-federal makeup that entire inventory list. And the non-federal inventory is just as high quality as our federal. So the impact of our non-federal inventory supports at least eight years of drilling with similar capital efficiency as we're experiencing in our 2020 plan. And Bill mentioned we have quite a few federal permits, we have about 2,500 federal permits that are approved or in progress, which is certainly more than four years of inventory. And also in the Permian Basin, over 90% of our federal acreage is held by production. Our government also provides, as Bill mentioned, an important system of checks and balances which provides for due process before any regulatory changes, and these changes have to consider the interests of all stakeholders. Ultimately, regulatory and legislative changes that deny access to current property rights could amount to a government taking. So there certainly be some legal consequences of going through the process. And then, just to point out too, we have a very good close alignment with our stakeholders, including the communities we work in. And New Mexico is a great example of that. We recently conducted a very successful partnership with a state control to complete our Closed-Loop Gas Capture project and I mentioned earlier; on a day-to-day basis, I'm very proud of that close working relationship we have built with regulatory agencies to enable responsible development through open communication, paying attention to their needs. It also enables us to meet our goals and operate in a timely and efficient manner. Our success, in turn, has helped support a better quality of life for the people of New Mexico, for example. In 2019, the state received nearly 40% of its overall revenue from the oil and gas industry. And that certainly supports the initiatives to increase funding for public health, education, and infrastructure improvements, and so on. On top of that, oil and gas development supports 100,000 jobs in New Mexico along with the associated economic activity and benefits. A significant amount of that revenue from oil and gas activities on federal lands is also dispersed to the state governments in support of local communities. And of course, the two states that have benefited the most are New Mexico and Wyoming. New Mexico received $1.2 billion and Wyoming $641 million in 2019 alone. The BLM estimates that oil and gas activity on federal lands provided about $70 billion economic uplift nationally and supported about 300,000 jobs. So there are a lot of important considerations and stakeholders involved in any of these decisions to consider when changing the rules on federal land. For these reasons, along with our diversification and really growing inventory, we remain extremely confident that EOG will be able to continue to navigate through any changing regulatory landscape, just as we have in the past.

Operator, Operator

And our next question comes from Bob Brackett with Bernstein Research. Please go ahead.

Bob Brackett, Analyst

Good morning. I'm intrigued by the comments that bringing back shut-ins led to flush production and lower than expected decline. Is there a learning there to apply to future developments? And is the mechanism understood?

Bill Thomas, Chairman and CEO

Billy, do you want to comment on that? Or Ken?

Ken Boedeker, EVP, Exploration and Production

Yes. This is Ken, Bob. The majority of our wells are single-zone wells under primary depletion. So as we shut those wells in, they continue to build bottom-hole pressure, and then we turn them on. Those wells will show flush production until that bottom-hole pressure has gone down to what it was prior to that. So it's a mechanism that's well understood for the horizontal wells that we have that are under that. We don't have any wells that are under water floods or multiple zones where you can have one zone damaging another. So it is well understood and it's following exactly what we expected on the flush production profiles.

Bob Brackett, Analyst

And then what about the lower than expected decline?

Ken Boedeker, EVP, Exploration and Production

On the base decline; in terms of the base decline, we saw that those wells we've forecasted them conservatively, and the wells are performing better than what we thought they would.

Operator, Operator

Our next question will come from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng, Analyst

Thank you. Good morning. I'm just curious that, I mean, one of the comments is that with the slowdown in the activities, you have seen a substantial improvement in efficiency because you have more time there to work on. So if we extrapolate that, I mean, even when the commodity prices are returning to higher levels, is it better off for the company from a return standpoint for you to slow your activity level and not trying to grow as fast?

Billy Helms, COO

Yes, Paul, thank you. The efficiencies we've seen, a substantial amount of innovative ideas that have been generated. I think when people have more time to think instead of just doing things, they are able to look at the data and analyze it. They are able to come up with more ideas and a lot of creative solutions. One of the bases of our disciplined growth strategy is to grow at a pace where we can get better; we don't ever want to grow so fast and have so much activity that we cannot improve simultaneously. So it's really a balance; you can only allocate capital at a certain speed; if you go too fast, you outrun your learning curve, etc. So there is a benefit to a proper pace. We have benefited from this slowdown; every downtime that we experience, we make the biggest improvements in the company. It's a challenge, and the times are challenging. This is no different than any of the others; other than we're working more remotely than we ever have. And we're very fortunate to have our comprehensive information technology system and our database, plus all of our applications. In that we've leveraged all that technology to analyze and adapt and to come up with ideas on how to continue to improve the company. So we're excited about where we're headed. I think we're going to exit this downturn a much, much better company; able to generate even higher returns than we have in the past, and really conduct all our operations better than before. So it's a very exciting time for us.

Paul Cheng, Analyst

Can I follow up on that in a slightly different way? One of your major competitors is also a well-known premium growth E&P company that has drastically shifted their business model and taken a more balanced growth and cash return with a well-defined cash flow reinvestment approach or a distribution approach. And one of the arguments that they also make is that while growing faster may on paper see a higher net percent value, but in logic, you are at the mercy of OPEC. The behavior of NPS and Putin in the recent times shows that may no longer be reliable to depend on. So, I mean do you guys agree with that kind of argument? And if not, why not? I mean we're trying to understand why a premium operator like EOG will not want perhaps to have a more balanced growth and cash return business model and trying to grow at a slower pace than what you previously have, even when the commodity price is getting much higher?

Bill Thomas, Chairman and CEO

Paul, yes, that's an excellent observation. We are fundamentally a return-focused company, and that's what we've been doing for a number of years. If you look back at the last three years, we gave out these numbers. They're on our slide deck, and I talked about it in the opening. We've been a leader in the industry on return on capital employed, so we're focused on improving returns every year. We've also led in generating free cash flow; we generated over $1.5 billion of free cash flow over the last three years every year and for $4.6 billion total. And that funded a very sustainable growing dividend. We increased the dividend by 72% and reduced our debt; our net debt over $2 billion. So we've been a disciplined company, and we did all that at a spending level that was cash, our CapEx to cash flow ratio was about 80%. What you're hearing from the rest of the industry is now moving into the model that EOG has been employing for the last three years. We're thrilled about that. That is fantastic for the industry and for investors, and certainly, it's very positive for all processes as we move forward. So we agree, they're doing the right thing, and that's exactly what we've been doing for a number of years, and we fully support their move.

Operator, Operator

Our next question will come from Neal Dingmann with SunTrust. Please go ahead.

Neal Dingmann, Analyst

Good morning, all. Nice to see the continued diversified approach. My first question is around your comments in your release about the improved 2021 maintenance CapEx leading to a higher fourth-quarter exit rate. Really, I guess the way my comments on this, based on this, could you speak to what this means for the trajectory for next year as well as what this potentially could mean for even 2022?

Bill Thomas, Chairman and CEO

Billy, do you want to address that?

Billy Helms, COO

Yes. Good morning, Neal. This is Billy. So on 2021 maintenance capital; previously, in previous quarters, we outlined the same capital number for about 420,000 barrels a day, which we believed at that time would be our exit rate for 2020. Certainly bringing out a bunch of extra production this year, but also incorporating the cost savings we're achieving this year. We believe we can do this same capital dollar number of $3.4 million, but maintain the exit rate we're seeing this year of 440,000 barrels a day, which is a significant improvement in our capital efficiency number. So we believe we can maintain that as we go forward; it is not just meant to be a single snapshot. I think one thing it doesn't make into that and make sure everybody understands is forecasting on what we're achieving today. It doesn't consider any improvements in and well performance that we expect to be able to continue to see, as well as cost reductions that if things stay where they are. In this environment, we're extremely confident we'll still continue to see cost improvements that will drive our maintenance capital number improvements in the future. So, yes, I'm extremely confident we can have an ongoing maintenance capital program in the same kind of area that we're talking about today.

Neal Dingmann, Analyst

My second question is regarding your technical innovations. Given your strength, which I believe surpasses others in the upstream sector, do you ever think about expanding the business to include clean tech or related investments?

Bill Thomas, Chairman and CEO

Neal, yes, our focus on GHG reductions is in forming this sustainable power group within our company to focus on technology, bringing technology forward more quickly inside the company. It's really another organic effort, like we do everything else inside the company to improve our emissions. We have tons of ideas coming from our divisions, and our folks involved in field operations. So we're really excited about the technology and the innovations that are coming forward. We're excited about continuing to reduce our emissions. Certainly, any kind of technology in this area, we believe will not only benefit EOG, but it could benefit the industry. And so we're open to that; it's not a proprietary thing. It's something we're doing to improve our performance.

Operator, Operator

Our next question will come from Phillips Johnston with Capital One Securities. Please go ahead.

Phillips Johnston, Analyst

Hey, guys, thank you. Just to follow-up on Paul's question. EOG really stands out because unlike all your peers, you never cut the dividend over the last six years, and you also resisted all the pressure to buy back your stock over the last few years. Most of your competitors destroyed a lot of value doing that. The company that Paul talks about has laid out plans to start paying variable dividends or special dividends on top of the regular base dividend. I realize you guys want to continue to grow the base dividend at a healthy clip, but my question is, is there any appetite at the board level to supplement your regular dividend with recurring variable dividends? And if not, what kind of flaws do you see with that type of payout strategy that would prevent you guys from going down that road?

Bill Thomas, Chairman and CEO

Yes, Phil. Yes, your observation is right. We believe a sustainable growing dividend backed by an impeccable balance sheet is certainly the best way to return cash to shareholders, and we're very committed to that. We don't want to take anything away from that. Having said that, we're certainly open to consider other additional options. So we certainly welcome any shareholder input on that, and we will remain open and flexible to do what's best for everybody.

Phillips Johnston, Analyst

Okay, are there any flaws or drawbacks that you kind of see with that type of variable dividend strategy?

Bill Thomas, Chairman and CEO

Well, I think the biggest one is it's kind of unknown and inconsistent. The feedback we've received from many folks is that they really focus on a more consistent growing dividend. And certainly as you pointed out, we've never cut the dividend. We want to ensure it's sustainable and is backed up with an impeccable balance sheet. The mix we've had over the last several years, as we talked about, we believe is a really good mix. We believe that will create significant shareholder value going forward.

Operator, Operator

And our next question will come from Douglas Leggate of Bank of America Merrill. Please go ahead.

Douglas Leggate, Analyst

Thank you. Good morning, everyone. I hope everyone's doing well out there. Bill, I'm afraid I'm going to put Paul’s question a little bit into perspective. And just play a couple of things back to you if I may. It's not that long ago that EOG talked about 15% to 25% oil growth between $50 and $60 oil, and the $58 oil price you referred to was subsidized by Saudi, who ultimately sent a bunch of cargoes to the U.S., presumably to teach the U.S. a lesson. So my question is when you walk through all the things that you're laying out about reinvestment rates and so on, the feedback from your peers is that their shareholders are telling them they don't want as much oil growth. So I guess my question to you is what are your shareholders telling you and asking you to do? And why is it not right to cut oil growth in a market that just doesn't need?

Bill Thomas, Chairman and CEO

Yes, Doug. I think as we stated in the opening remarks: fundamentally, we believe we've got a very, very strong game plan. We've got a tremendous track record to back that up, being the leader in return on capital employed in the industry while generating very significant free cash flow; and giving it back in a very strong dividend increase, and strengthening our balance sheet. We believe that was the right strategy before the downturn. It certainly has put the company in a tremendous position where we are right now. Going forward, we believe that's the right strategy going forward to continue to create significant shareholder value. So we believe our game plan is really solid. Our growth has always been very disciplined. Again, we've only allocated about 80% of our cash to CapEx. We've been able to grow the company at a very disciplined pace. Going into 2021 and the future, we need to keep our eye on the macro view of oil and be aware of the market conditions. We're not interested in growing oil volumes at a strong pace in an oversupplied market. Certainly, that's not the right thing to do. But when the time is right, we want to continue to grow the company at a disciplined pace, at the pace where we can continue to improve our returns and improve our performance.

Douglas Leggate, Analyst

Bill, but as a footnote to the question, I think people would really appreciate your leadership as a company here because you are one of the bigger companies, and capital discipline needs to be defined. I would urge you to try and do that. And my follow-up is maybe in an obtuse way of asking the same question. You're running 10 to 11 rigs right now; you've got the potential clearly to run three times that amount. So I guess what I'm really trying to get at is, are you planning to retain the same operational capability? In other words, should the rest of you move back to that level? Or is like some of the other companies? Is there an opportunity here to address the cost base of the company by rightsizing to perhaps a lower level of activity? And I'll leave it there. Thanks.

Bill Thomas, Chairman and CEO

Yes, Doug, we are really committed to our employees; they are the ones making our company better. They're the most valuable asset we have in the company. We've peaked on employment about four or five years ago; even though we've gotten a much bigger company, our employee base has really not grown. And so they are very highly productive and highly motivated. They're certainly the part of the company we want to keep intact, take care of, and encourage. We believe we're at the right size to be effective and ready as the downturn is over; we are focused on continuing to maintain and actually increase our ability moving forward, so we're very committed to keeping the company in great shape.

Operator, Operator

And our next question will come from Scott Gruber with Citigroup. Please go ahead.

Scott Gruber, Analyst

Yes, good morning. Can you hear me? Great. I think your rig count today, I think, is around half a dozen rigs. Correct me if I'm wrong on that, given the continued efficiency gains that you guys continue to achieve? What is the new level of maintenance rig activity and frac activity?

Bill Thomas, Chairman and CEO

Billy, do you want to answer that one?

Billy Helms, COO

Sure. Scott, this is Billy. So yes, you're right. We have actually 7 rigs counting one in offshore Trinidad. So 6 domestically and 1 offshore. Our maintenance capital plan would require about 20 rigs and 10 frac fleets. We're generally running as I mentioned 7 rigs and 5 or 6 frac fleets today. So we're well under it; when we pulled back our activity, we dropped to a level well below our maintenance capital level. That's important to note. The plan going into the third and fourth quarter is to look at whether or not we want to add a rig or two going into next year to get to that maintenance level or not.

Scott Gruber, Analyst

Got it. And then you mentioned also that you have most of your rigs and frac crews under long-term contracts. I imagine those were the ones you kept just given the cost of ending those contracts. Are these generally multiyear contracts in support of new frac fleets or did the majority roll off over the next 12 months? I am trying to ascertain when those savings manifest; I imagine the rigs and frac crews today, given the deflation on other services, these regional frac crews may be pushing towards 40% or 50% of your direct well costs. I am just trying to get my head around when you could see those savings roll through?

Billy Helms, COO

Yes, sure, Scott. Yes, they are multiyear contracts. I'd say they're various terms on the contracts. But in general, they're starting to roll off in the next 12 to 18 months. I think the one thing that's important to note is we build what we think are valuable relationships with our most trusted service providers. We worked through this in partnership with them to ensure we retained not only the performance and the high-performing equipment personnel, but also the ability to ramp back up when we need to. It gives us a lot of flexibility as we work through this, and I think we build a lot by building that relationship. It’s a very trusted relationship we have; it allows us to capture some cost savings just by being able to capture rates at below market rates in current times but also maintain the high-performance levels of activity that we need to sustain our business. So we're very proud of the relationships we have with them. Yes, they typically roll off in the next 12 or 18 months. We'll reassess where we need to be working with those trusted partners.

Operator, Operator

Our next question will come from Juan Jarrah with TD Securities. Please go ahead.

Juan Jarrah, Analyst

Yes, thanks, guys. And thanks for squeezing me in and congrats on the exploration success in Trinidad. I did want to follow up a bit on your onshore exploration efforts. I noticed it’s easier said than done, but can you comment on any other exploration efforts you consider pursuing outside of the Lower 48, and with that Canada comes to mind, and as you know, one of your peers recently announced adding a position to their Montney in Canada, so just curious on that, and I'll stop there.

Bill Thomas, Chairman and CEO

Ezra?

Ezra Yacob, EVP, Exploration and Production

Yes, thanks. Thanks, Juan. This is Ezra. As you know, we've got—you mentioned our Trinidad exploration effort and then our domestic exploration effort. When we think about anything else outside of the Lower 48, it really comes down to how competitive can it be with our pre-existing domestic portfolio? And that's the main driver on it. When we talk about any of our new exploration ideas, whether it's Trinidad or the new domestic portfolio, we're exploring for prospects and rock quality that will be additive to the front end of our pre-existing inventory. With 10,500 premium locations, we don't necessarily just need more to continue to backfill that deep inventory; what we're really trying to do is add to the front end of it. And that's what the exploration efforts is focused on.

Operator, Operator

The next question will come from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer, Analyst

Thank you. Good morning. You mentioned in the 10-Q that you expect to replace the $750 million of debt coming due next year with other long-term debt. I thought that was interesting because you've been talking about paying down debt and having the cash on the balance sheet to do so. I wondered if you could add a bit more color on a; how you're thinking about the right level of free cash flow to pursue? And then if not allocated to paying down debt, where do you see the best areas of allocation between incremental drilling, returning it to shareholders, or keeping a high amount of cash on the balance sheet or deploying it elsewhere like M&A?

Bill Thomas, Chairman and CEO

Tim?

Timothy Driggers, CFO

Yes. The reason we chose to keep the debt in long-term debt at June 30 was just the uncertainty of the market going forward between now and February when our next debt is due. Certainly, the goal has not changed. That goal is to pay down debt. If market conditions play out such that we have sufficient cash, then we will pay down that debt. But to be conservative, we left it in long-term just because of the uncertainty in the market. I guess, Bill, will address the capital allocation portion of your question.

Bill Thomas, Chairman and CEO

Yes, the right level of free cash flow, Brian, is really a function of—it's obviously variable every year, based on the oil price. We normally have—and we will continue to use a conservative view; our macro conservative view of what oil prices will be that year. We want to generate a significant amount of free cash flow. As an example, over the last three years, we've generated about $1.5 billion a year on average free cash flow. We want to use that to continue, as Tim said, to consider paying our debt now, our goal is to continue to pay our debt down more, and certainly continue to work on our dividends when the environment is healthy. Any free cash flow leftover after all those things are done will certainly be variable year by year according to commodity prices. We will continue to be committed to using that capital to create shareholder value and ensure we get the highest return possible from using that cash.

Brian Singer, Analyst

Right, thank you. And then my follow-up goes back to the exploration program. I think as you mentioned, a couple of comments I thought were interesting—one was that the exploration you're pursuing is even better than what you have and then that it's in basins outside the current operating area, and largely not on federal land. I wondered if you could add a bit more color on what type of impact the onshore exploration you're pursuing could have on your potential production or capital investment. One or two years out how, what the proximity is to being able to really move these plays into development and have a level of materiality on your production. And then whether there are above-ground issues that need to be worked out with the areas from midstream or other perspectives?

Ezra Yacob, EVP, Exploration and Production

Yes, Brian, this is Ezra. Let me try to unpack that one by one here. First, I’d say our domestic exploration effort; these aren't really in Frontier or Wildcat basins. These are in basins with an established legacy of oil and gas production. If these prospects work out the way that we think they will, and they're additive to the front-end quality of our inventory, we should be able to move them into active development relatively quickly, pending results. The second part of that going back to just the quality of what we're looking for; this is better rock quality as we've talked about before. A lot of what we're looking at is tied to what we think we can develop with our horizontal completions technology. How the rock responds and how it will be stimulated and fractured in combination with our stimulation designs. We're focused on those two elements; we think are essential. As we continue to push these prospects forward and gather data on them, we will update you regarding our results on the testing. But we feel very confident that everything we see today will continue to be, as I said earlier, additive to the front end of what is quite a deep inventory to begin with.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Thomas for any closing remarks. Please go ahead, sir.

Bill Thomas, Chairman and CEO

In closing, first, we want to thank all EOG employees for the outstanding job you're doing to improve the company during this historic and challenging downturn. As we said, the company is improving very rapidly. We're going to emerge from this downturn a better and stronger company. We're eager to extend our leadership in return on capital employed; discipline growth, free cash flow generation, and sustainability. 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.