BP and EOG Test OPEC's Beliefs
OPEC had better hope Bill Thomas is right and Bob Dudley is wrong.
Both of these CEOs -- the first runs EOG Resources Inc., the second BP PLC -- hosted analyst calls on Tuesday. One is a U.S. shale producer and the other a global oil major. But in one central aspect their message was the same: We're getting ever more efficient.
They're just coming from different places.
EOG, reporting results for 2016, laid out a plan to raise its oil production this year by 18 percent, assuming an oil price of $50 a barrel (the average to date has been about $53). More importantly, EOG expects to do this while cutting the cost of each well -- in a year when higher oil prices and drilling activity should spark industry inflation as workers and services contractors demand some payback after two years of cuts.
It isn't as if EOG thinks its employees and contractors are especially meek when it comes to demanding money. For one thing, it can rely on internal sourcing of some products, such as sand for fracking, and long-term contracts signed during the crash for some insulation. For the 40 percent of costs EOG says are subject to inflation, it says continuing productivity gains will offset it.
EOG has some credibility on this front. It began 2016 expecting to drill 200 wells and complete 270 with an investment budget of $2.5 billion. As it turned out, it spent a little more -- $2.7 billion -- but drilled 280 wells and completed 445, net. Indeed, while EOG's realized price per barrel of oil equivalent fell to its lowest level since 2009, so did its all-in cost of production:
Hearing all this, it perhaps isn't surprising that one analyst on Tuesday's call, Paul Sankey of Wolfe Research, asked the following:
I think a lot of people, when they hear you talk, get very bearish on oil prices. And I don't think that's the way you look at the world. Bill, can you remind us why what you're doing isn't replicable across the industry? Which I guess is the reason why people would be very bearish.
If that is the question that haunts OPEC, Thomas' response offered a measure of comfort. He acknowledged, rightly, that part of EOG's edge lies in having acquired rights to some of the best geology and another part lies in applying in-house expertise to those rocks to get the best out of them at a competitive cost:
Well, it's two parts. It's better rock and you have to capture that better rock...And then using our very advanced, very proprietary completion technique. So it's a combination of all that technology and that is not very duplicable. It has taken us nearly a decade to get to this point.
OPEC, and anyone else hoping for a big swing back up in oil prices, had best hope EOG really is an outlier. In certain respects, the company does walk a different path from its peers. In contrast to many rivals, it pays a dividend and has an explicit target for return on capital employed, above 13 percent.
This is backed by a relatively unusual set of bonus drivers for EOG's management. Return on capital, for example, has a 20 percent weighting in their plan, against just 4 percent, on average, for peers, according to a survey published in September by ISI Evercore. And whereas production growth has a 16 percent average weighting in competitors' incentive plans, it is just 8 percent at EOG.
OPEC shouldn't rest too easy, though. EOG being much better than many of its peers isn't the same as being unique. In particular, Pioneer Natural Resources Co.'s recent presentation of a 10-year growth plan suggests more than one E&P company has taken some important lessons from the crash. It is clear the sector has weathered the storm of low prices better than anyone expected -- and has been provided some succor of late, courtesy of OPEC itself.
Meanwhile, another disconcerting message emanated from London on Tuesday. BP's CEO told assembled analysts the company aims to be able to cover its investment budget and dividend payments at a real Brent crude oil price of between $35 and $40 a barrel.
In this instance, there's more of a credibility gap to bridge. Only three weeks ago, BP spooked investors by raising its breakeven oil price for 2017 to $60 due to higher capital expenditure. Similar to the other oil majors, BP has to go the extra mile in prioritizing payments to shareholders over growth.
BP, like EOG, aims to become a leaner operation in order to deliver good returns even at relatively low oil prices. For a company more exposed to deepwater drilling than shale, doing that will require transforming the way giant projects get developed. On that front, new partnering approaches proposed by oilfield services companies could help BP.
OPEC may rightly scoff at such medium-term aspirations in a market that's undergone big changes just in the past five years, especially given BP's apparent turnaround on costs.
What OPEC can't be feeling is certainty. By and large, its members need cyclical upswings in oil prices to balance their bloated budgets. Their confidence won't be strengthened by the sight of competitors working toward opposite ends.
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Liam Denning in New York at firstname.lastname@example.org
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