EOG Resources (EOG) Q2 2021 Earnings Call Transcript

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EOG Resources (NYSE:EOG)
Q2 2021 Earnings Call
Aug 05, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to EOG Resources second-quarter 2021 earnings results conference call. As a reminder this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to chief financial officer of EOG Resources, Mr. Tim Driggers.

Please go ahead, sir.

Tim DriggersChief Financial Officer

Good morning, and thanks for joining us. We hope everyone has seen the press release announcing second-quarter 2021 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 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; and Billy Helms, chief operating officer; Ezra Yacob, president; Ken Boedeker, EVP, exploration and production; Jeff Leitzell, EVP, exploration and production; Lance Terveen, senior VP marketing; and David Streit, VP, investor and public relations. Here’s Bill Thomas.

Bill ThomasChairman and Chief Executive Officer

Thanks, Tim, and good morning, everyone. EOG is focused on improving returns. Results from the first half of the year are already reflecting the power of EOG shift to our double-premium investment standard. Once again, we posted outstanding results in the second quarter.

We delivered adjusted earnings of $1.73 per share and nearly $1.1 billion of free cash flow, repeating the record level of free cash flow we generated last quarter. Our outstanding operational performance included another beat of the high end of our oil production guidance, while capital expenditures and total per-unit operating costs were below expectations. We are delivering exceptional well productivity that continues to improve. In addition, even though the industry is in an inflationary environment, EOG continues to demonstrate the company’s unique ability to sustainably lower cost.

Our performance clearly proves the power of doubling our reinvestment hurdle rate, double premium requires investments to earn a minimum of 60% direct after-tax rate of return using flat commodity prices of $40 oil and $2.50 natural gas. I’m confident our reinvestment hurdle is one of the most stringent in the industry and a powerful catalyst to drive future outperformance across key financial metrics, including a return on capital employed and free cash flow. As double premium improves our potential to generate free cash flow, we remain committed to using that cash to maximize shareholder value. The regular dividend, debt reduction, special dividends, opportunistic buybacks and small high-return bolt-on acquisitions are our priorities.

In the first half of this year, we reduced our long-term debt by $750 million and demonstrated our priority to returning cash, significant cash to shareholders with a commitment of $1.5 billion in regular and special dividends. We also closed on several low-cost, high potential bolt-on acquisitions in the Delaware Basin over the last 12 months. Year-to-date, we have committed $2.3 billion to debt reduction in dividends, which is slightly more than the $2.1 billion of free cash flow we’ve generated. Looking ahead to the second half of the year and beyond, our free cash flow priorities and framework have not changed.

As we generate additional free cash, we remain committed to returning cash to shareholders in a meaningful way. We are focused on doing the right thing at the right time in order to maximize shareholder returns. Over the last four years, we’ve made huge progress reducing our GHG and methane intensity rates, nearly eliminating routine flaring and increasing the use of recycled water in our operations. We are focused on continued progress toward reducing our GHG emissions in line with our targets and ambitions.

This quarter, we announced a carbon capture and storage pilot project, which we believe will be our next step forward in the process of reaching our net-zero ambition. Ken will provide more color on this and other emission reduction projects in a few moments. Driven by EOG’s innovative culture, our goal is to be one of the lowest costs, highest return and lowest emission producers playing a significant role in the long-term future of energy. Now, here’s Ezra to talk more about how our returns continue to improve.

Ezra YacobPresident

Thanks, Bill. While we announced our shift to the double-premium investment standard at the start of this year, the shift has been underway since 2016 when we first established our premium investment standard of 30% minimum direct after-tax rate of return using a conservative price deck of $40 oil and $2.50 natural gas for the life of the well. In the three years that followed, our premium drilling program drove a 45% increase in earnings per share, a 40% increase in ROCE in an oil price environment nearly 40% lower compared to the three-year period prior to premium. This comparative financial performance can be reviewed on slide 15 of our investor presentation.

In addition, premium enabled this remarkable step change in our financial performance, while reinvesting just 78% of our discretionary cash flow on average, resulting in $4.6 billion of cumulative free cash flow. The impact from doubling our investment hurdle rate from 30% to 60% using the same conservative premium price deck is now positioning EOG for a similar step change to our well productivity and costs, boosting returns, capital efficiency, and cash flow. Double premium wells offer shallower production declines and significantly lower finding and development costs, resulting in well payouts of approximately six months at current strip prices. The increase in capital efficiency resulting from reinvesting in these high-return projects is increasing our potential to generate significant free cash flow.

This year, we are averaging less than $7 per barrel of oil equivalent finding cost. Adding these lower-cost reserves is continuing to drive down the cost basis of the company, and when combined with EOG’s operating cost reductions is driving higher full-cycle returns. Looking back over the last four quarters, EOG has earned a 12% return on capital employed with oil averaging $52. We are well on our way to earning double-digit ROCE at less than $50 oil, and it begins with disciplined reinvestment in high-return double-premium drilling.

While EOG has 11,500 premium locations, approximately 5,700 are double-premium wells located across each of our core assets. We are confident we can continue to grow our double-premium inventory through organic exploration, improving well cost and well productivity and small bolt-on acquisitions, just like we did with the premium over the last five years. In the past 12 months, through eight deals, we have added over 25,000 acres in the Delaware Basin through opportunistic bolt-on acquisitions at an approximate cost of $2,500 per acre. These are low-cost opportunities within our core asset positions, which, in some cases, receive immediate benefit from our existing infrastructure.

Premium and now double premium established a new higher threshold for adding inventory. Exploration and bolt-on acquisitions are focused on improving the quality of the inventory by targeting returns in excess of the 60% after-tax rate of return hurdle. EOG’s record for adding high-quality, low-cost inventory predominantly through organic exploration is why we do not need to pursue expensive large M&A deals. 2021 is turning into an outstanding year for EOG.

Our exceptional well level returns are translating into double-digit corporate returns and our employees continue to position EOG for long-term shareholder value creation. Here’s Billy with an update on our operational performance.

Billy HelmsChief Operating Officer

Thanks, Ezra. Our operating teams continue to deliver strong results. Once again, we exceeded our oil production target, producing slightly more than the high end of our guidance, driven by strong well results. In addition, capital came in below the low end of our guidance as a result of sustainable well cost reductions.

We have already exceeded our targeted 5% well cost reduction in the first half of 2021. We now expect that our average well cost will be more than 7% lower than last year. As a reminder, this is in addition to the 15% well cost savings achieved in 2020. We continue to see operational improvements outpace the inflationary pressure in the service sector.

Average drilling days are down 11%, and the feet of lateral completed in a single day increased more than 15%. We are utilizing our recently discussed super-zipper completions on about one third our well packages this year and expect that percentage to increase next year. In addition, our sand costs are flat to slightly down year-to-date. We have line of sight to reduce the cost of sand sourcing and processing and expect to start realizing savings in the second half of 2021 and into 2022.

Water reuse is another source of significant savings, and we continue to expand reuse infrastructure throughout our development areas. Finally, we have renegotiated several of the expiring higher-priced contracts for drilling rigs and expect to see additional savings the remainder of this year and next. We also use the strength of our balance sheet to take advantage of opportunities to reduce future costs in several areas. As an example, last summer, we prepurchased the tubulars needed for our 2021 drilling program when prices were at their lowest point.

EOG is not immune to the inflationary pressures we’re seeing across our industry. But this forward-looking approach helps EOG mitigate anticipated cost increases. As a reminder, 65% of our well costs are locked in for the year, and the remaining costs we are actively working down through operational efficiencies. As usual, we have begun to secure services and products ahead of next year’s activity, with the goal of keeping well cost at least flat in 2022.

But as you can rest assured that with our talented and focused operational teams, our ultimate goal is to always push well cost down each year. The same amount of air freight is being placed on reducing our per-unit operating cost, with the results showing up in reduced LOE, driven mainly by lower workover expense, reduced water handling expense and lower maintenance expenses. Savings are also being realized from our new technology being developed internally to optimize our artificial lift. We have several new tools that help us reduce the amount of gas lift volumes required to produce wells without reducing the overall production rate.

These optimizing tools not only reduce costs, but also help reduce the amount of compression horsepower needed, which ultimately reduces our greenhouse gas footprint as well. These and other continual improvements are a great testament to our pleased but not satisfied culture. This quarter, we can also update you on our final ESG performance results from last year. We reduced our greenhouse gas intensity rate 8% in 2020, driven by sustainable reductions to our flaring intensity.

Operational performance in the first half of this year indicates promise for future — further improvements to our emissions performance in 2021, putting us comfortably ahead of pace to meet our 2025 intensity targets for GHG and methane and our goal to eliminate routine flaring. Achieving these targets is the first step on the path toward our ambition of net-zero emissions by 2040. Water infrastructure investments also continue to pay off. Nearly all water used in our Powder River Basin operations last year was sourced from reuse.

For companywide operations in the U.S., water supplied by reuse sources last year increased to 46%, reducing freshwater to less than one-fifth of the total water used. These achievements and other, along with the insight into ongoing efforts to improve future performance will be detailed in our sustainability report to be published in October. We are starting to fill in the pieces on the road map to get to net-zero by 2040. Here’s Ken with the details.

Ken BoedekerExecutive Vice President, Exploration and Production

Thanks, Billy. Earlier this year, we announced our net-zero ambition for our Scope 1 and Scope 2 GHG emissions by 2040. Our ambition is aggressive but achievable and we expect it will be an iterative process requiring trial and error. This approach mirrors how we develop an oil and gas asset.

We pilot creative applications of existing and new technologies to determine the most effective solutions to optimize efficiencies by minimizing costs and maximizing recoveries of oil and natural gas. Here, we are aiming to maximize emissions reductions. We then apply the successful technologies and solutions across our operations where feasible. Our net-zero strategy generally falls into three categories: reduce, capture or offset.

That is, we are focused on directly reducing emissions from our operations, capturing emissions from sources that can be concentrated for storage and offsetting any remaining emissions. Reducing emissions intensity from our operations is a direct and immediate path to reducing our carbon footprint. Our approach is to invest with returns in mind and seek achievable and scalable results. We made excellent progress in the last four years through initiatives to upgrade equipment in the field, invest in pilots using existing and new technologies and leverage our extensive big data platform to automate and redesign processes to improve emissions efficiencies.

As a result, since 2017, we have reduced our GHG intensity rate 20%, our methane emissions percentage by 80% and our flaring intensity rate by more than 50%. We recently obtained permits to expand the successful pilot of our closed-loop gas capture project, which prevents flaring in the event of a downstream interruption. We designed an automated system that redirects natural gas back into our infrastructure system and injects the gas temporarily back into existing wells. The project requires a modest investment to capture a resource that would have otherwise been flared and stores it for further — for future production and beneficial use.

The result is a double-premium return investment that reduces flaring emissions. Our wellhead gas capture rate was 99.6% in 2020 and roll-out of additional closed-loop gas capture systems will help capture more of the remaining 0.4%. Turning to our efforts to capture CO2. We are launching a project that will capture carbon emissions from our operations for long-term storage.

This project is designed to capture and store a concentrated source of EOG’s direct CO2 emissions. We believe we can design solutions to generate returns from carbon capture and storage by leveraging our competitive advantages in geology, well and facility design and field operations. Our CCS efforts are directed at emissions from our operations, and we are not currently looking to expand those efforts into another line of business. We will provide updates on our pilot CCS project as it progresses.

EOG is also exploring other innovative solutions for GHG emissions reductions. Over the past 18 months, we have deployed capital into several fuel substitution projects to power compressors used for natural gas pipeline operations and natural gas artificial lift. Compressors are the largest source of EOG’s stationary combustion emissions. By replacing NGL-rich field gas with lean residue gas, EOG can reduce the carbon intensity of the fuel which lowers CO2 emissions and improves engine efficiency.

Using lean residue gas also earns a very favorable financial return by recovering the full value of the natural gas liquids versus using those components as fuel. Another fuel substitution test we conducted recently was blending hydrogen with natural gas. While it is still in the early stages, we are analyzing the test data to evaluate the emissions reductions that would be possible from this blended fuel at an operational and economic scale. We’re very excited about this part of the business, just like cost reductions, well improvements or exploration success.

This is a bottom-up-driven initiative. EOG employees thrive on this type of challenge. We create innovative solutions and apply technology to solve problems, improve processes and optimize efficiencies while generating industry-leading returns. The EOG culture has embraced our 2040 net zero ambition, and we are focusing our efforts to minimize our carbon footprint as quickly as possible.

Now, here is Bill to wrap up.

Bill ThomasChairman and Chief Executive Officer

Thanks, Ken. In conclusion, I’d like to note the following important takeaways. First, by doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they’ve ever been. Results from the first half of this year demonstrate the power of double premium and the beginning of another step change in performance.

Second, EOG is not satisfied. We are committed to getting better. Sustainable cost reduction and improving well performance are driving returns and free cash flow potential to another level. At the same time, the same innovative culture that is driving higher returns is also improving our environmental performance.

Third, our commitment to returning cash to shareholders has not changed. As we have already demonstrated, returning meaningful cash to shareholders remains a priority. And finally, as Ezra transitions into the CEO role, I could not be more excited about the future of the company. The quality of our assets and the quality of this leadership team are the best in company history, all supported by EOG’s talented employees and unique culture that continues to fire on all cylinders.

The company is incredibly strong and our ability to get stronger has never been better. The future of EOG is in great hands. Thanks for listening. Now, we’ll go to Q&A.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Leo Mariani with KeyBanc. Please go ahead.

Leo MarianiKeyBanc Capital Markets — Analyst

Hey, guys. You obviously highlighted some success on kind of the small bolt-on deals here. And I guess, just from my perspective, it seemed like those were very, very economic, just very cheap per acre cost at around $2,500 per acre. Is a lot of this just a function of the fact that these are very small deals and sort of captive to EOG existing acreage and infrastructure, which just gives you kind of the natural ability to kind of buy these without a lot of competition, and just want to get a sense of how repeatable these type of bolt-ons can be for you guys going forward?

Bill ThomasChairman and Chief Executive Officer

Yeah. Thanks, Leo. I’m going to ask Ezra to comment on that.

Ezra YacobPresident

Yeah, Leo, you described that very, very well. These are smaller deals, as I highlighted, it’s 25,000 acres across eight different deals that we’ve captured and put together over the — over the past 12 months, and these are low-cost opportunities in our core positions within the Delaware Basin. And typically, these are things that are either contiguous with our preexisting acreage position or very, very close to our acreage position. And so, there’s not a lot of outside competition.

A lot of times, we’re just by all regards, we’re the partner that makes sense to go ahead and get these deals because like I said, we have the surrounding wells, information, seismic. And oftentimes, some of these deals can go immediately right into our existing infrastructure. And these are typically — we highlighted the last 12 months, but we wanted to give a sense of the type of scale and the impact that these low-cost opportunities can have when we’re focused on them, and these deals are pretty continuous throughout all of our plays and throughout the year.

Leo MarianiKeyBanc Capital Markets — Analyst

OK. That’s helpful. And I guess I also wanted to ask about your comment around seeing a less than $7 per BOE F&D year to date. Clearly, you attributed some of the factors there, where you talked about how your well costs are coming down.

I know that’s part of it and also the move to double premium. But maybe you can provide just a little bit more color. I mean, I guess that less than $7 seems like a very low number out there. Are there any other just kind of key factors where maybe there’s more of a mix shift to certain plays or perhaps your higher concentration of certain zones in the Delaware this year? And now you guys are also drilling some gas wells in South Texas might be helping.

Just any color around kind of some of the key drivers that are getting you to under $7.

Bill ThomasChairman and Chief Executive Officer

Yeah, Leo. Billy Helms will comment on that.

Billy HelmsChief Operating Officer

Yeah. Leo, it’s strictly a function of moving to our double-premium strategy. We saw a similar change, if you remember back when we shifted to premium a few years ago, and we’re seeing that same compounding effect as we shift to double premium. The quality of our wells improves and as you noted, we have a history of continuing to focus on lowering well costs and just our continued effort in those areas.

So it’s not really attributable from — to one basin or the other, it’s just a function of the impact of shifting to double premium across our portfolio. And I might add as we look to add wells to the inventory of double-premium wells, they’ll be in that same category to compete on both returns and finding cost.

Leo MarianiKeyBanc Capital Markets — Analyst

Thanks, guys.

Operator

The next question is from Neal Dingmann with Truist Securities. Please go ahead.

Neal DingmannTruist Securities — Analyst

Good morning, guys. Nice quarter. My first question is really just around when you’ve talked about shareholder return, obviously, that seems to be the hot topic these days. Bill, I’m glad you don’t do this, but my thoughts about if you guys would ever — there’s been others out there that have sort of guaranteed type of return or an amount or something like that, you guys seem to want to stay more flexible.  But I just would just love to hear more color on — again, obviously, you guys have a monster amount of free cash flow coming in.

That’s not the issue. I’m just wondering how you think about if you put any sort of guarantees on the type or amount going forward?

Bill ThomasChairman and Chief Executive Officer

Yeah, Neal. We’ve outlined a very clear framework and we’ve consistently delivered on our priorities. And so, maybe the best way to think about the future is to look what we’ve done in the past. And I want to ask Ezra to give more color on that.

Ezra YacobPresident

Yeah, Neal. In our investor presentation there on Slide 5 and 6, I think we can reference that. This year, we’ve been very successful executing on all of our cash flow priorities in the framework that we’ve kind of laid out. We’ve been able to increase the regular dividend by 10%, which we feel is our primary mode of capital return.

Secondly, we were able to reduce our debt earlier this year by $750 million by retiring a bond. And then, third, we just paid a $600 million special dividend on July 30 of this year, which we had announced during the last earnings call. So our year-to-date free cash flow commitment is $2.3 billion, which is slightly more than the $2.1 billion we generated. And going forward, our framework and priorities have not changed.

Lastly, we also highlighted in the opening remarks, as we just spoke about a little bit with Leo, some of the small bolt-on acquisitions we’ve done, which is one of the avenues to growing our inventory. And that’s really the — where the entire process begins, is having the depth and quality of inventory to continually improve the business. And with our shift to drilling these double-premium wells, the free cash flow potential of the company continues to expand. And as it does and as we realize the cash, we’re well positioned to continue executing on our priorities.

We’re committed to creating the most shareholder value and our cash return strategy is really a reflection of that. So as the company continues to improve, we’re excited about that potential.

Neal DingmannTruist Securities — Analyst

I agree guys. I really like the cash return strategy. And then, just one follow-up. Exploration opportunities that really you guys continue to stick out there.

You obviously continue to be the leaders, mentioned a number of things that have you excited. Could you just remind us, again, I think the last was it — I forget, Bill, was it maybe 13 or 15, was it unique projects here in the U.S.? I’m just wondering, could you — again, could you tell us maybe or just talk about the upside potential you see for that business this year going into 2022 for the exploration upside?

Bill ThomasChairman and Chief Executive Officer

Yeah, Neal. I think what we’ve outlined is we’ve got about 15 exploration wells built into the capex this year, so in the U.S. So I’m going to ask Ezra to give some more color on that.

Ezra YacobPresident

Yeah, Neal. the exploration prospects are all moving forward. As we discussed on the last call, the prospects have all started to move at different phases, really kind of as a result of some of the slowdown during COVID and during 2020. So we’re — as Bill just mentioned, we’re planning on drilling 15 wells outside of the publicly discussed assets.

Some of these — some of the prospects are initial exploration wells. Some of them are more what we call appraisal wells, evaluating kind of the repeatability of these plays. We’re still leasing across many of the plays as well. And as we’ve discussed, the opportunities are really targeting a higher quality rock than what’s typically been drilled horizontally.

It’s an outgrowth of a lot of technical work we’ve done across multiple basins to combine modern drilling and completions technologies and apply those to reservoirs that have been traditionally overlooked. And really, we’re very happy with our progress to date, and we look forward to sharing additional information at an appropriate time.

Neal DingmannTruist Securities — Analyst

Great detail. Thank you.

Operator

The next question comes from Doug Leggate with Bank of America. Please go ahead.

Douglas LeggateBank of America Merrill Lynch — Analyst

Thank you, guys. I think this is the first time I’ve had a chance to say, Bill, congratulations on your retirement. And Ezra, excited to see what you — how you move forward with the business. But I wonder, Bill, if I could ask you just to maybe a little bit of a retrospective here as you walk out the door, so to speak.

There’s been a lot of changes in the business model, growth transitioning to free cash flow and so on. So I’m just wondering if you can offer any thoughts as to how this business should look going forward, both at the sector level and at EOG level as you kind of look back on your tenure and the changes that have taken place over that time.

Bill ThomasChairman and Chief Executive Officer

Yeah, Doug. Well, thank you very much. And you’re right. I mean, the business has involved — evolved over the last year since the shale business really started, and it’s — obviously, it’s moving in an incredibly great positive direction right now, the focus on returns.

We’ve always been, I think, a leader in focus on returns, and we’re like super excited about that. The capital discipline, spending well below cash flow and generating high returns and giving significant amount of cash back to shareholders, I think, is certainly all very positive. And so, I think really, we’re entering a super new era, and I think it’s more positive than it’s ever been before. I think we, as an industry, are going to generate better returns and going to give more back to shareholders.

And I think we’re in a more positive macro environment than we’ve been in since really the shale business started. I think OPEC+ is solid. I think the U.S. will remain disciplined.

And so, I think the industry is in for a long run of really good results.

Douglas LeggateBank of America Merrill Lynch — Analyst

We’ve enjoyed butting heads with you over the years, Bill. So congratulations again, good luck. Ezra, this is my follow-up maybe for you. EOG has obviously been an organic story for many, many years.

And you’ve touched on exploration again today, but Yates was one of the, I guess, the step-out acquisitions that you did. And if we look at your portfolio position today, there’s clearly a large asset potentially for sale right in your backyard in a very high-quality acreage position, you could argue. Why would M&A not be a feature of the business at some point? And maybe I go so far as to say, would you rule yourself out of being interested in that shale package? And I’ll leave it there.

Ezra YacobPresident

Yeah, Doug. No, we’re not evaluating any large acquisition packages at this time. We’re focused on these small, high-return bolt-on acquisitions. And as discussed in the opening remarks, the larger expensive M&A deals, the opportunity struggle to compete with the existing return profile that we have within the company due to either high PDP cost, the high acreage costs or both.

Oftentimes, acreage being marketed, it might be additive to the quantity of our inventory but not additive to the quality. And as we’ve discussed, as you know, we’re always working to improve the quality of our assets. We’re having a great success with the small bolt-on acquisitions. We’re feeling very confident with our ability to increase the quality of our deep inventory through our organic exploration program.

And so, we’re excited about our prospects there.

Douglas LeggateBank of America Merrill Lynch — Analyst

Very clear. Thanks.

Operator

The next question comes from Paul Cheng with Scotiabank. Please go ahead.

Paul ChengScotiabank — Analyst

Thank you. Good morning, gentlemen. Two questions, please. The first one, maybe that, Bill, you can help us to frame it to understand the decision a little bit better.

If we look at the last quarter, when you announced the special dividend, I think you set a number of preconditions, and that’s all being met, such as you generate substantial free cash flow. You don’t have much of the debt maturity in the near term and your cash is already in excess of what you think is a reasonable level, which is $2 billion. If we look in this quarter, basically, all those conditions are still being match, but you decided not to declare another special dividend. So we’re just trying to understand that what is the additional consideration in that decision.

And also, if you can talk about between buyback and special dividend at this point of the cycle, which is more preferable for you or how do you look at the differences? So that’s the first question. The second question is related to I think that you guys clearly is one of the unquestioned leaders in many of the basins. You are not interested in large scale M&A, which understandable. Does it make sense, however, that to work with some of your peers to pull together the asset to form a really large joint venture? So everyone still have their own equity ownership.

You don’t pay any premium, but you will be able to allow to use your technical know-how to apply to even a larger scale asset and drive even better efficiency gains. Do you think that it makes sense for EOG for that kind of structure?

Bill ThomasChairman and Chief Executive Officer

Yeah, Paul. So on the first question, I think it’s super important. And I think we’ve already shared this. We’ve got a very clear framework and we’ve consistently delivered, as you pointed out, on that framework and significantly given — in that framework, significantly given a lot of money back to shareholders.

And going forward, our framework and priorities are not changed at all. So as we generate additional free cash flow, we’re committed to returning cash to shareholders in a very meaningful way. It’s really all about doing the right thing at the right time. As the company continues to improve, we’re excited about our potential to increase total shareholder return, and in the framework, we do have the option for opportunistic buybacks as long as — along with special dividends.

And so, we look at opportunistic buybacks as being able to have the opportunity to consider buying back shares and countercyclic environments where the market is not well and our stock price is significantly undervalued. Well, that would be an opportunity to consider buybacks. In good times, we think the special dividend is the way to go, and that’s what we’re executing on now, and that’s what we’re hopeful to continue to execute in the future. On the second part of your question on the large-scale M&A, I’m going to ask Billy to kind of think through that question and give his feelings on that.

Billy HelmsChief Operating Officer

Yeah. Thanks, Bill. On the large-scale M&A, as Ezra just talked about a minute ago, certainly, we’re not interested in adding quantity to our inventory, but it’s more about the quality of the assets we have. And as we think about forming maybe a potential larger JV, that same approach needs to apply as we look across the fence.

If our — if our assets are in what we consider the core acreage position in the play, adding in acreage outside of that ring fence would dilute our efforts. We’ve also taken — as you know, taken a lot of effort to build out the infrastructure to make our — to lower our unit cost and continue to improve our returns. And we build out that infrastructure to meet the volume expectations that we have for developing our acreage that may or may not apply as you add in additional acreage outside of that. So I think each operator looks at how to make the most efficient use of the acreage and their capital as they can and forming JVs doesn’t necessarily improve overall company metrics.

So I think while we’ve looked at bolt-ons as a way to shore up a lot of our core area acreage, I think that is a very applicable part of maybe thinking about JV expansions, continuing to core up in your base areas where it adds the same quality, doesn’t dilute your quality of the assets, but just expanding in a basin may or may not do that.

Paul ChengScotiabank — Analyst

Thank you.

Operator

The next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Arun JayaramJPMorgan Chase & Co. — Analyst

Yeah. Good morning. Tim, maybe starting with you. I just wanted to get maybe some of the order of operations around a potential incremental cash return beyond the dividend.

Last quarter, you mentioned that EOG like to keep a $2 billion minimum cash balance plus fund the $1.25 billion bond maturity. So that suggests that you’d like to get to $3.25 billion of cash and anything beyond that is available for cash return beyond the dividend?

Tim DriggersChief Financial Officer

Certainly, you can do that math, but it’s more than that. As Ezra and Bill talked about further, we have to look at all of our priorities and the timing of those priorities to determine when and if there’s another special dividend or share repurchases or bolt-on acquisitions. All those things are in play at all times, and the $2 billion is not an end-of-the-month number. It’s during the cycle.

So cash can vary tremendously during the month. So the $2 billion is the low point during the month, not necessarily at the end of a month. So you have to keep that in mind as well. But yes, you can do that math, but that’s not all there is to it.

We have to look at all of our priorities and where we’re at in the cycle. And as has been pointed out on slide 6, we’ve already distributed more cash than we brought in, in the first half of the year. So we’re well on our way to achieving that. So as we move through the second half of the year, we’ll look at what other cash is generated, and we’ll evaluate how to use that cash at that time.

Arun JayaramJPMorgan Chase & Co. — Analyst

Great. And maybe just a follow-up to Paul’s question. Could you give us maybe some feedback you’ve gotten from some of the shareholders on the special dividend? And your thoughts on the pros and con of moving to a formulaic type of approach around cash return and either special dividends or buyback.

Bill ThomasChairman and Chief Executive Officer

Yeah, Arun. This is Bill. We’ve got enormously positive responses from every shareholder on the special dividend. That was a super hit, and they like our framework.

When you really think through it, it’s not really a complicated framework. It’s a framework where we want to be in a position to maximize total shareholder returns. And as we said, I said, be able to do the right thing at the right time. If you look at the history of what we’ve been doing, really, over the last several years, we have been — we’ve increased the regular dividend by 146%.

And now, we’re working on a special dividend. So as we go forward, it is certainly our goal to continue to return meaningful cash back to the shareholders through the process. So really, it’s a pretty straightforward process if you kind of think through it and the framework is pretty, pretty simple, and it’s just a matter of giving us the ability to have the options to do the right thing to maximize total shareholder return.

Arun JayaramJPMorgan Chase & Co. — Analyst

Great. Thanks a lot.

Operator

The next question is from Michael Scialla with Stifel. Please go ahead.

Michael SciallaStifel Nicolaus — Analyst

Good morning, everybody. And Bill, I’d like to offer my congratulations on a great career as well. I know it’s too early to give details on 2022 but wanted to see if you could speak to at least at a high level, given your outlook for flat to lower well costs next year. If you still see barrels held off the market by OPEC+, would you just look to hold production flattish? And could you do that with kind of equal to lower capital than you spent this year?

Bill ThomasChairman and Chief Executive Officer

Yeah, Mike. Well, thank you very much again. We appreciate your comments. It’s a team effort in EOG.

I’d tell you what, we’ve got a lot of great employees and a super management team. So it’s a team effort, and it’s been an honor to be able to work with all the — everybody. About 2022, it’s really too early to talk about growth. We need to watch the pace of demand and recovery and the spare capacity drawdown.

So we don’t want to really speculate on anything specific for 2022. But I’m going to ask Ezra to make some additional color on that.

Ezra YacobPresident

Yeah, Michael. As Bill said, it’s pretty early on 2022. It’s still pretty early to discuss any type of growth. EOG is — we’re committed.

We’re not going to grow until the market clearly needs the barrels, and we’ve outlined what we’re looking for, we’re committed to staying disciplined. And currently, we want to see demand return to pre-COVID levels, low spare capacity and we want to see inventories at or below the five-year average. Every year, market factors are going to determine the plan for that year, and we’re going to remain flexible and modify our plans to fit the market conditions. As you said, we have made great progress this year on our total well cost reductions.

And going forward, that’s strengthening the underlying capital efficiency of the company and continuing to lower the cost base of the company. And so, as we move forward, regardless of any type of growth rates, we’ve set the company up with this double-premium investment plan to continue to expand the free cash flow generation potential of EOG.

Michael SciallaStifel Nicolaus — Analyst

OK. And I guess really just my question there was if you were to hold the production flat, it looks like the capital required to do that is not going up at least over the next 12 to 18 months as you see the world now. Is that fair to say?

Bill ThomasChairman and Chief Executive Officer

Yeah, Mike, that’s certainly fair to say. I mean, we’re reducing costs all the time and improving well productivity. So we’re hopeful that our maintenance cost in the future will be lower than it is today, and that’s certainly directionally what we’ve done in the past, and that’s hopefully what we’re going to do in the future.

Michael SciallaStifel Nicolaus — Analyst

OK. Great. And then, I just want to follow up with Ken on you mentioned the CCS pilot you have there. Is there any more detail you can offer Ken in terms of — it sounds like it’s EOG specific, at least at this point? Can you talk about what the source of emissions are, where you’re focused within your footprint? And are you looking at storing CO2 in depleted fields or aquifers? Just any more detail you can give us there.

Ken BoedekerExecutive Vice President, Exploration and Production

Sure. Thanks for that question. At this point in time, we really don’t anticipate any partners on our pilot project, but with our geologic and operational expertise, we’ll evaluate partnering on future projects on a case-by-case basis. This project is really part of our broader strategy of reduced capture and offset, and it’s focused on capturing our CO2 emissions in an area where we can generate a return via some tax incentives and have a concentrated stream of CO2 that can be aggregated to an injection well for permanent and secure geologic storage in an interval thousands of feet below the surface.

And that’s pretty much what we’re giving out at this time.

Michael SciallaStifel Nicolaus — Analyst

Very good. Thank you.

Operator

The next question comes from Bob Brackett with Sanford C. Bernstein. Please go ahead.

Bob BrackettSanford C. Bernstein — Analyst

Good morning. To put you on the spot a little bit. You highlighted the various well cost categories. Tubular sticks out as being both significant and also exposed to inflation.

You tackled the problem last year with prepurchasing. Can you throw out some ideas that the organization has come up with to sort of attack that cost category?

Bill ThomasChairman and Chief Executive Officer

Billy, do you want to comment on that?

Billy HelmsChief Operating Officer

Yeah. Bob, obviously, yeah, steel costs are going up, which is affecting tubular costs. This last year, we were very fortunate to take advantage of pre-purchasing the tubulars we needed for this year’s program and benefited greatly from that. As costs go up in the future, we use the same approach and try to take an opportunistic look at when to secure tubulars for the next coming drilling program, and so, we’ll continue to look at that.

Undoubtedly, it’s likely that the cost for tubulars will be higher next year than they are this year, which is why in that slide No. 10 we tried to give you some color on other ways we’re trying to keep our well cost flat to down going into next year. And those come from the efficiencies we’re seeing across the operation from drilling time to the implementation of our super-zipper technology on the completion side to newer contracts at a lower rate for some of the services we have. So it’s a mixture of things we use to offset those inflationary pressures we see in the different parts of our business.

Bob BrackettSanford C. Bernstein — Analyst

OK. That’s clear. And just as a quick follow-up, could you contrast super zippers the way you think about them versus, say, a traditional zipper frac that we might think of or even a dual frac?

Billy HelmsChief Operating Officer

Sure. So our super-zipper technique is very similar to what the industry calls a simo-frac. The differences would be in how we actually implement it on a well-to-well basis. We keep very close control over the injection rates and pressures of individual wells within the super-zipper operation.

So it’s a very scripted and very detailed procedure that allows us to control the rates and pressures just like we were doing a conventional frac with any other fleet. But the advantages, of course, has been able to double the amount of stages you get in a particular day by attacking the locations two at a time, and we really are advancing that technology quite a bit. Last year, we probably did less than 10% of our wells across the company benefited from super-zipper. This year, it’s probably directionally closer to one third of the wells, and we expect that percentage to increase going into next year.

So we think it’s going to give us a tremendous cost advantage next year as we go into the program.

Bob BrackettSanford C. Bernstein — Analyst

Thanks for that.

Operator

The next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Scott HanoldRBC Capital Markets — Analyst

Thanks. And, Bill, again, I also want to congratulate — give you congratulations on your tenure. Obviously, you all navigated a lot of ups and downs over the past few years fairly successfully. So congrats for that.

I just have one question, and you all seem to be doing better than expected. I mean, certainly, it seems like production, especially oil production on the upper end of your range, and can you just give us some general thoughts. I know you’re not in a position where you’re going to talk to 2022, and how you think about growth. But if you are running a little bit ahead based on outperformance of your wells, would you think about tapering as you get into 2022 a little bit just to maintain the flattish kind of production you all expected this year?

Bill ThomasChairman and Chief Executive Officer

Yeah, Scott. Again, thank you so much for your comments. And I’m going to ask Billy to comment on the remainder of this year and particularly the fourth quarter.

Billy HelmsChief Operating Officer

Scott, so certainly, we’re very pleased with the progress we’ve made on both reducing our well cost and the performance we’re seeing from the wells we are bringing to production this year. It’s a testament to the strategy of shifting the double-premium standard again. So as we go into the rest of the year, we started out the year a little — with a little bit higher activity level. We had a little bit higher rig count at the start of the year.

And then, this tapered off. And we’re running at a pretty consistent rate now and expect that to continue through the end of the year. And then, next year, as Bill elaborated, it’s kind of hard to anticipate what we’ll need this year. But I think the performance that we’re seeing this year will continue into next year, certainly.

And the pace of activity will be dictated by what we see in the market conditions. So that’s kind of the color I could give you, but our performance will continue to at least stay flat or improve.

Scott HanoldRBC Capital Markets — Analyst

Understood. Thanks for that.

Operator

The next question comes from Neil Mehta with Goldman Sachs and Company. Please go ahead.

Neil MehtaGoldman Sachs — Analyst

Good morning, and congratulations, Ezra. Congratulations, Bill. Bill, last quarter, you talked a little bit about the analytics that you were building around monitoring the oil macro. I’d love your latest real-time thoughts.

A lot of moving pieces here, OPEC, demand uncertainty, Iranian barrels, U.S. supply, how are each of those parameters evolving here as you guys are evaluating?

Bill ThomasChairman and Chief Executive Officer

Yeah, Neil. As we’ve all seen, we’re definitely — demand is on a strong recovery. It’s a bit lumpy, obviously, due to the virus resurgence in a few areas, but we expect — even with that, we expect pre-COVID demand to be reached by early ’22. Inventories are already below the five-year average really in the U.S.

and in the world. So that has already been checked. And on the supply side, as I said before, we believe that the U.S. will stay disciplined and there’ll be a small growth in the U.S.

next year, but not much growth. And we see OPEC+, they look to be very solid. So they’ll continue to bring back on their shut-in volumes and spare capacity as needed gradually, and we see that spare capacity. If the recovery continues like we expect, we see spare capacity could be very low by the second quarter or by the middle of next year.

So we’ll just have to watch and see how it goes. But overall, we see a very positive macro environment.

Neil MehtaGoldman Sachs — Analyst

And then the follow-up is just as you think about the U.S. production profile, maybe you can get a little bit more granular in terms of how you’re thinking about those volumes. But the question we continue to get asked is where are we in terms of resource maturity? Have the best of efficiency has been driven out of the shales? And maybe you talk about the Permian, the Eagle Ford and the Bakken. What are you seeing in each of those plays? Where are we in terms of efficiencies? And then is the slowdown in U.S.

production being driven by resource maturity, or is it really being driven by capital at this point?

Bill ThomasChairman and Chief Executive Officer

Yeah. We see — we run the numbers on all the different groups from the private to the public to the majors. And then, generally, particularly in the private, we see definitely well productivity is going down, not up. So it takes a lot more wells for that group to maintain production or even think about growing it.

And overall, in the other groups, not specific to EOG, but we generally see well productive — well production to be flat, to not improving over time. And so, I think that is a function of resource maturity. I think when you get in down spacing and spacing and in timing and all that, I think it’s going to subdue the productivity. And so, literally, the biggest factor, of course, is in the capital discipline where you’re spending tremendously amount of less cash flow than we’ve been spending in the previous year.

So when you put all that together, we do not see — we think the discipline will remain with the group. We do not see the U.S. growing significantly next year. So that’s a very positive, I think, for shareholders and positive for the macro.

Neil MehtaGoldman Sachs — Analyst

Thanks, Bill.

Operator

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

Bill ThomasChairman and Chief Executive Officer

So in closing, I’d like to say thank you to all the EOG employees who continue to make EOG so successful. And it’s truly a privilege and an honor to be on the same team with each one of you. As Ezra transition into the CEO role and Billy steps up to president and chief operating officer, along with the rest of the senior management team, I could not be more excited about the future of the company. So to all shareholders and future shareholders, we want to tell you thanks for listening and certainly, thank you very much for your support.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Tim DriggersChief Financial Officer

Bill ThomasChairman and Chief Executive Officer

Ezra YacobPresident

Billy HelmsChief Operating Officer

Ken BoedekerExecutive Vice President, Exploration and Production

Leo MarianiKeyBanc Capital Markets — Analyst

Neal DingmannTruist Securities — Analyst

Douglas LeggateBank of America Merrill Lynch — Analyst

Paul ChengScotiabank — Analyst

Arun JayaramJPMorgan Chase & Co. — Analyst

Michael SciallaStifel Nicolaus — Analyst

Bob BrackettSanford C. Bernstein — Analyst

Scott HanoldRBC Capital Markets — Analyst

Neil MehtaGoldman Sachs — Analyst

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