Variants and the habitual volatile nature of the global oil market are casting clouds on the energy industry’s attractiveness to potential generalist investors. It will take more visibility on spare capacity and oil prices to lure them, according to Ezra Yacob, president of U.S. shale giant EOG Resources Inc..

It comes down to sustainability, Yacob said this week, of cash return yields and shareholder returns.

“It’s hard to imagine, but it’s still kind of early in the recovery with the number of variants that are out there,” Yacob said during the Barclays CEO Energy-Power Conference. “I think that’s giving a little bit of pause for the generalist. Once that starts to clear up and the generalist investor can really start to see that the industry has changed, there is a lot more discipline in U.S. shale, I think you’ll start to see the generalists come back to the space in more meaningful ways.”

Public E&Ps have continued to stick with promises to remain capital disciplined, resisting the temptation to significantly ramp up production as oil prices rebound from last year’s demand-driven pandemic lows. Oil has been trading at about $70/bbl.

Oil companies like EOG are focused on improving efficiency, growing cash flow and returning cash to shareholders. Second-quarter highlights for the Houston-headquartered company included generating more than $1 billion of free cash flow and paying $600 million in special dividends. EOG increased its oil production 4%, compared to the first quarter but has vowed to stay disciplined, eyeing the return of demand to pre-COVID levels.

“We’ve been pretty consistent with our message that we don’t want to push our barrels into an oversupplied market or a market that doesn’t need it,” Yacob said.

EOG is watching three key mile markers to determine when conditions support the resumption of oil growth: global and U.S. demand, which Yacob said is increasing month-over-month; inventory levels, which are just below the five-year historical average; and spare capacity, including moves by OPEC.

OPEC and its allies, known as OPEC+, are gradually reversing last year’s cuts by raising output by 400,000 bbl/d a month between August and December.

The U.S. Energy Information Administration (EIA) said Sept. 8 it forecasts global petroleum and liquid fuels consumption will average 97.4 MMbbl/d this year, up 5 MMbbl/d from 2020. The EIA expects it to rise in 2022 another 3.6 MMbbl/d to average 101 MMbbl/d, nearly even with 2019 levels.

“We think as demand increases and they [OPEC+] bring those barrels back online, the market will get back into balance,” Yacob said. “Hopefully, that should be sometime in 2022. But again, it’s a little bit early still. … But things are moving forward, and we’re feeling very positive about it.”

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EOG President Ezra Yacob speaks with Jeanine Wai, director of equity research for Barclays, Sept. 8 during the Barclays CEO Energy-Power Conference. (Source: Barclays)

Being in multiple basins enables flexibility whenever the time comes to make changes. Alongside assets offshore Trinidad & Tobago and in Oman, EOG has assets in several U.S. shale basins, including the Permian, Williston, Denver-Julesburg, Powder River and Eagle Ford.

“If we just simply add one rig to each of our operating areas, we can essentially increase our rig count by about 30% to 50% pretty easily,” Yacob said. “That’s really the beauty of having a decentralized company, having a diversified approach and multiple operating areas. It allows you to kind of flex up and down.”

Meanwhile, the company continues to drive down costs, explore and add “double premium” inventory, or wells that yield a 60% direct after-tax rate of return at $40/bbl WTI and $2.50 Henry Hub. “That continues to put us in a spot where we can sustainably return cash to the shareholders dominantly through that base dividend growth,” he said.

Its strategy includes bolt-on acquisitions and international exploration efforts.

In the Delaware Basin, for example, EOG acquired about 27,000 acres at an average of $2,500 per acre across eight deals, Yacob said. The lands’ location either near or contiguous with EOG’s existing position allows it to be quickly drilled and moved into existing infrastructure.

“We’re not interested in doing any large-scale transactions, any large-scale mergers and acquisitions. Not that we don’t evaluate and look at them; we do just to make sure we’re not missing anything,” Yacob said. The business is evaluated on a returns basis, so even small bolt-on acquisitions “need to be not only additive to the quantity of our inventory, but it really needs to be additive to the quality.”

The same goes for international exploration.

EOG recently exited China, selling its tight gas assets in the Sichuan Basin. The company has been on the shallow-water offshore gas scene in Trinidad for about 20 years. Yacob called it a “very high return, cash flow positive business.”

Its latest international entries were to Oman, where the company looks to apply its tight oil expertise, and into Australian shallow water that is home to the giant Beehive prospect.

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“We’re not trying to go international just so that we can be international,” Yacob said. “These need to be prospects that actually compete on a returns basis with our domestic portfolio.”

What he said EOG has been able to find in the last couple of years, however, is a “very low-cost entry environment” with little competition, welcoming regulatory bodies and favorable surface environments that allow for quick evaluation of prospects.

“And those are exactly the types of environments that EOG thrives in,” he added.