Enron Oil and Gas split from Enron in 1999 and became EOG Resources, Inc (EOG). The company is one of the largest independent oil and gas companies in the United States (independent oil and gas companies do not integrate the refining of oil into gasoline as part of their portfolio). EOG has been able to out perform its competitors by successfully cutting costs and finding innovative ways to increase oil and gas production.
EOG’s goal is to to deliver the highest shareholder appreciation measured by total shareholder returns and to be the most profitable independent exploration and production company in terms of return on capital employed (eogresources.com).
EOG strives to achieve their goal by cheaply drilling and completing their wells, quickly bringing them on production, maximizing production from each well, and minimize the production costs of each well. They strive to maximize price earned for each barrel of oil by delivering to underserved markets, and to deliver the a high rate of return on each dollar spent by shortening their drill to production cycle.
Low Costs –A key to gaining a competitive advantage in North American shale plays is to lower the cost of each well drilled. The total cost of wells drilled can fall anywhere between $5M and $15M. EOG has done two things in particular that are unique and have given them a competitive advantage. They’ve invested in railroads and sand mines.
In 2012, EOG built a rail spur and off-loading terminal in St. James, Lousiana which allowed them to access new refining markets to unload their Bakken oil (Bakken is an unconventional oil field in North Dakota). The new markets allowed them to earn a premium on their oil versus selling it at often glutted oil hub of Cushing, Oklahoma.
EOG also invested in three sand mines and two processing plants in northern Wisconsin. Sand plays an integral part in the production of oil and gas from shale plays. Shale plays are very impermeable and need to be hydraulically fractured and propped open with sand in order for the wells to produce enough oil to make them economical. Depending on several variables such as the specific geologic characteristics of the formation, the length of the well, and the completion design, companies may use anywhere from 3 million pounds of sand to more than 15 million pounds of sand in each well. The cost of sand makes up a large majority of the total completion cost for a well, so having access to cheap sand greatly reduces costs.
Agility – Another key component of EOG’s operating model is their agility. In terms of barrels of oil equivalent per day (BOED) per employee, they are at 200. Using this metric, EOG has the highest production per employee of it’s peer group. A couple other number for reference are ConocoPhillips at 86.5 BOED/employee and Marathon Oil Corporation at 129 BOED/employee. Their decentralized organization with a small number of employees allows them to efficiently execute their strategy.
Aligning the Business and Operating Models
EOG has aligned its operating model very well in order to achieve the highest return on capital employed. The sand mine cut costs by approximately $500,000 per well drilled. Along with very low overhead due to their low number of employees, and other cost saving operational improvements such as pad drilling, their well costs are among the lowest in their peer group.
EOG has done a great job of aligning their model to minimize the denominator in the return on capital employed equation by cutting their costs; however, their operating model also helps them increase the numerator. By finding new markets to earn a premium on their oil, they are increasing return on the same amount of capital employed. Their small employee base and decentralized structure also allows for quick decision making, which is key for success in the rapidly evolving unconventional oil and gas sector. Many of the learnings from one well can easily be applied to the next well drilled, whereas some of their larger competitors fail to learn and adapt as quickly. This agility has been key to maximizing the amount of oil produced from each well and minimizing the time it takes to produce it, both effectively increasing returns.
EOG understands the business it is in very well and has ensured that its operating model fully supports its number one goal of increasing return on capital employed. It has become an top player in unconventional oilfields and will continue to lead the way in maximizing returns as long as it sticks to its agile core operating model.