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EOG Resources (EOG) Q3 2017 Earnings Conference Call Transcript

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EOG Resources (NYSE: EOG)
Q3 2017 Earnings Conference Call
Nov. 3, 2017 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the EOG Resources Third Quarter 2017 Earnings 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 our Chief Financial Officer of EOG Resources, Mr. Tim Driggers.

Please go ahead, sir.

Tim Driggers -- Chief Financial Officer and Executive Vice President

Thank you. Good morning. Thanks for joining us. We hope everyone has seen the press release announcing third-quarter 2017 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 in EOG's SEC filings, and we incorporate those by reference for this call. This conference call also contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www.eogresources.com.

The SEC permits oil and gas companies in their filings with the SEC to disclose not only proved reserves but also probable reserves as well as possible reserves. Some of the reserve estimates on this conference call and webcast may include potential reserves and other estimated reserves not necessarily calculated in accordance with or contemplated by the SEC's reserve reporting guidelines. We incorporate by reference the cautionary note to U.S. investors that appears at the bottom of our press release.

Participating on the call this morning are: Bill Thomas, Chairman and CEO; Gary Thomas, President and Chief Operating Officer; Billy Helms, EVP, Exploration and Production; David Trice, EVP, Exploration and Production; Lance Terveen, Senior VP, Marketing Operations; Sandeep Bhakhri, Senior VP and Chief Information and Technology Officer; and David Streit, VP, Investors and Public Relations. An updated IR presentation was posted to our website yesterday evening and we included guidance for the fourth quarter and full year 2017 in yesterday's press release. This morning, we'll discuss topics in the following order. Bill Thomas will review third quarter highlights followed by operational results from Gary Thomas, David Trice, and Billy Helms.

I will discuss EOG's financials and capital structure and Bill will provide concluding remarks. Here is Bill Thomas.

Bill Thomas -- Chief Executive Officer and Chairman

Thanks, Tim, and good morning, everyone. EOG is focused on returns. We demonstrate that focus in the third quarter. We added two new premium oil play, continued cost reductions and delivered strong well performance.

The Woodford oil window and the Anadarko basin and the First Bone Spring in the Delaware Basin had 800 premium drilling locations and 750 million barrels of oil equivalent resource potential net to EOG. As a reminder, for a well to be classified premium, it must have an after-tax rate of return of 30% or greater at $40 oil. Combined with the additions made earlier in the year, we have increased our premium inventory by 2000 locations, which is 4x as many wells as we plan to complete in 2017. EOG continues to improve both the size and the quality of its inventory, organically adding better and better locations substantially faster than our drilling pace.

Strong operational execution was also highlighted from the quarter. We exceeded all our production targets, and we delivered beyond expectations across all per-unit cost, LOE, transportation expense and DD&A. Our 2017 plan is coming together nicely. We're on target to deliver 20% oil growth and pay the dividend all within cash flow.

This morning, I'd like to take a moment to discuss EOG's multi-basin premium portfolio. As we discussed many times before, the most important point to understand about exploration is that not all rocks are equal. Every play has geologic sweet spots with superior rock quality that drives well productivity. We do not want to own the whole play.

Our focus is to capture only the best rock in the best place. We did that in the Bakken in 2005. We did it again in the Eagle Ford in 2009. And last year, we solidified sweet spot acreage in the Delaware and Powder River Basin with the [inuadible] acquisition.

Our ability to identify and capture the best rock is the major reason EOG wells consistently outperform the industry in productivity and returns. With the addition of the word Woodford oil window in the first bombs spring, our premium inventory now total a massive 8000 crude oil drilling locations contained in geologic sweet spots across all 6 major horizontal oil plays. We don't think there's another company in the U.S. with comparable assets.

Specifically, the enormous size and quality of EOG's premium inventory. This premium inventory will fuel EOG's industry-leading returns for many years to come. The diversity of our portfolio is a powerful competitive advantage with multiple benefits. 1 is that single basin risk is minimized.

EOG is active across multiple basins. Therefore, temporary conditions on the single basin such as market tightness or weather events will have limited impact on our performance. Additionally, EOG's diverse multi-basin portfolio allows the company to grow each asset at the optimum pace to maximize its profitability and long-term value. Each play is unique and has a technical and cost optimization learning curve.

It's easy to go through fast and potentially risk long-term value of asset. There are two other points I want to drive home this morning. First is that our decentralized structure was instrumental in accumulating the premium portfolio we have today and will continue to be critical to our success in the future. We had 17 teams operating in North America.

These are dedicated individual offices covering every major basin and specializing in each play. That means 7 prospect-generating machines and 7 cost savings idea teams. Focus teams dedicated to each asset armed with our powerful information technology drive down cost, increase well productivity and maximize the value of each play. Exploring rock and developing wells in multiple divers basins means generating multiple sets of diverse data.

While each play is unique, geologic learnings and technical innovation often transfers to other plays and in turn accelerates the pace of learning across all basins. The final point I want to make is that since our formation, EOG has been a return incentivized company. Last quarter, we discussed EOG's history of discipline, return base capital allocation. The capital discipline this company has demonstrated since its founding is driven by a transparent return based incentive structure that runs through the entire organization.

Evidence of that discipline can be calculated directly from our financial statements as return on capital employed. Our historic ROCE performance averages over 13%. Return-based decision-making is the reason we initiated our premium strategy last year. Rather than patiently wait for commodity prices to improve and allow the cycle to drive our profitability, we prominently redefined our investment hurdle rate and reset the company to be successful in a low commodity price environment.

EOG's ability to capture the best rock and multiple plays is the core reason we have been able to permanently shift to premium drilling. We believe our drilling inventory is the largest and highest quality in the U.S. and it's the reason we're able to grow oil, U.S. oil production this year by 20% and cover the dividend all within discretionary cash flow.

Most importantly, our diverse and industry-leading acreage positions are the reason we are generating the best reinvestment returns among our peers. Now I will turn it over to Gary Thomas to discuss our third quarter production and cost achievements in more detail.

Gary Thomas -- Chief Operating Office and President

Thank you, Bill. In the third quarter, hurricane Harvey presented EOG with a first of its kind operational challenge, one that our decentralized both of teams in Corpus Christi in San Antonio did an excellent job tackling. Our largest concern was the safety of our employees and facilities, and I'm happy to report we experienced no major damage or environmental incidents related to this storm. I want to thank and congratulate our employees in Corpus Christi, San Antonio and Houston for their exceptional performance during a very difficult time.

During the third quarter, there were a few notable achievements to highlight. Time is money and our teams continue to reduce drilling and completion time in every play. After 10 years of drilling Eagle Ford wells, we reduced spud to TD time another 5% this year. And in our newer Delaware Basin plays, the wells are being drilled in 15% last time.

The DD&A rate continued to decline coming in below the low end of our targeted range. The benefits of ongoing operational efficiencies, record low finding and development cost and the addition of premium well reserves are beginning to show up in our financial performance. Per-unit LOE beat expectations despite the double impact from Harvey of both cleanup and repair costs and curtailed production. As noted in the 8-K we issued September 5, the production impact of Harvey on all our oil volumes was about 15,000 barrels of oil per day during the quarter.

With a few adjustments to our completion schedule, we expect to offset the production impact in the fourth quarter. To accommodate the new schedule, we were able to secure additional completion crews and, based on their performance and tightness in that market, we elected to tie up those crews for the remainder of this year. This was a performance and rate of return decision. As a result, we are completing approximately 25 additional wells bringing the total to 505 net completed wells for 2017.

Due to the timing of the additional 25 wells late in the year, there will be a limited impact on our volumes for the full year. We now have 28 rigs working, and we have the best performing services EOG has ever assembled. We do not want to release any of these top-tier service providers. The additional rigs and crews give us a head start as we plan for 2018.

Due to the stellar cost savings and efficiencies gained throughout this year, we don't need to change our capital guidance. However, it is likely we will spend toward the high end of the range. EOG is one of the few E&P companies with the ability to commit capital right now and, as a result, we are securing favorable pricing agreements. We've locked in a major portion of services and suppliers to further lower cost and improve our returns in 2018. Next up is David Trice with the exciting news about our new Oklahoma play.

David Trice -- Executive Vice President, Exploration and Production

Thanks, Gary. This morning, we introduced a new premium oil play in the Eastern Anadarko Basin. Located primarily in the Oklahoma adjacent to the gas condensate plays properly known as the scoop in the stock, the Woodford Oil Window is a black oil play with a concentrated sweet spot of high-quality rock. Our discovery of the Eastern Anadarko Woodford oil play is a great example of how EOG's decentralized structure is a perfect fit for exploration-driven organic growth.

Our team in Oklahoma City identified the potential this area based on historical log and production data and began leasing in 2013. We accumulated over -- we accumulated our 50,000 net acre position at an average cost of just $750 per acre. Over the last four years, we collected additional data through vertical logs, core and 3D seismic to delineate the sweet spot. We were then able to compare and model this data against the vast amount of proprietary data collected in other EOG plays to determine the viability of the Woodford Oil Window as premium play.

Similar to the Eagle Ford, the Woodford is a shale play with a very good rock quality and fairly consistent geology. We completed three horizontal wells in the Woodford Oil Window and applied EOG's refined targeting technique and EOG stock completions to confirm the premium return potential of the play. The curry 21X no.1BH, which -- in August was the third well drilled and have the longest lateral at 10,500 feet. Data collected on the first two wells was used to dial in the correct target before drilling the 2-mile curry well.

The average 30-day initial production was over 1700 barrels of oil equivalent per day, while the 60-day average is holding up at over 1600 barrels of oil equivalent per day with an oil cut of 85%. The relatively low decline is evident in the performance of all three wells drilled and speak to the premium rock quality of the sweet spot. Based on analysis of publicly available production data, we believe that the curry is potentially the most prolific horizontal Woodford oil well drilled to date in Oklahoma. Furthermore, the NPD in the curry well using the current strip is about $10 million.

So we've essentially paid for a quarter of the entire play's acreage cost with this 1 well. We currently estimate that EOG's position in the Woodford Oil Window will support 260 premium locations using 660-foot spacing. The estimated ultimate recovery is one million barrels equivalent per well on a gross basis and 800,000 net after royalty for a total estimated resource potential of 210 million barrels of oil equivalent, 70% of which is oil. To reiterate what Bill said earlier, we are not interested in leasing entire plays, but instead, we are focused on leasing the geologic sweet spot at low acreage costs to maximize long-term ROCE growth.

The Woodford Oil Window and the Eastern Anadarko Basin is a perfect example of the strategy. Within EOG, all projects complete for capital based on returns and the Woodford Oil Window is more than competitive with the rest of EOG's premium inventory on a rate of return and NPV basis. Billy Helms will now tell you about the new first bone spring play in the Delaware basin and provide an update on the Eagle Ford.

Billy Helms -- Executive Vice President, Exploration and Production

Thanks, David. Our 2017 development plan in the Delaware basin has been focused on increasing our understanding of the geological complexities of the various target intervals, testing spacing patterns and delineating our acreage position. As a result, we are providing our initial assessment of yet another target, the First Bone Spring sand. After 15 successful tests across our position, we have the confidence to define the net resource potential of 540 million barrels of oil equivalent from 555 locations, of which 540 remain to be drilled.

The 7 wells completed in 2017 span a distance of 30 miles and produced on average 1825 barrels of oil equivalent per day with initial oil cut of 66% over the first 30 days. For the play, typical well will target 7000-foot laterals with the well cost of $7.3 million. We estimate the EUR or 7000-foot lateral in the first bone spring sand is 1,185,000 barrels of oil equivalent gross and 975,000 barrels equivalent net after royalty. The oil cut through the producing life of the well is estimated at 55%.

It is important to point out that all the wells in our resource estimate meet or exceed our initial premium rate of return hurdle and will compete for capital with the rest of the Delaware basin program. Our technical team in Midland has defined multiple horizons across our acreage position and use the latest interpretation to geosphere the drill bit into the best target intervals. Targeting along with our high-density completions is yielding industry-leading performance as evidenced in Slide no.17 of our latest investor presentation. Our total Delaware Basin premium well inventory now stands at almost 4700 locations, which represents over 25 years of drilling inventory at our current pace of development.

For the third quarter, we completed 22 wells in the Wolfcamp and Combo plays. All of the active areas continue to meet or exceed our expectations for both well performance and reserves. Out of the third quarter activity, I would like to highlight a 3-well package drilled in Southern Lake County. The -- wells are 660 feet apart and average 30-day IPs of 2725 barrels of oil per day each from laterals that averaged about 7000 feet.

This year has been another stellar year for the Delaware Basin team as we explore and define the potential of this target rich area. We are advancing our development plans to address the well spacing and timing needed to maximize the net present value of this asset. We have over a decade of experience with large horizontal programs, and we use this knowledge to address the challenge of developing this multi-target inventory. Once again, our culture and decentralized organization allow our technical teams to focus on these challenges in order to maximize the recovery and economics of our acreage.

We are excited about the tremendous potential we see in the basin. The Eagle Ford continues to be a consistent source for delivering both production volumes and economic reserves. In the third quarter, the average 30-day initial oil production rate from the 44 wells completed was about 1340 barrels of oil per day with an average well cost of $4.5 million. Acreage in the Eagle Ford is close to 99% held by production, and our efforts are focused on maximizing the net present value of every acre through multi-well pad development with increasing lateral lengths.

The vast majority of the wells are drilled on larger multi-well pads, which are well suited to the rigs and completion crews that allow for quick moves and efficient operations. In many of these drilling units, we are targeting additional pay intervals within the lower Eagle Ford as well as adding the upper Eagle Ford where appropriate. As a result, we are harvesting more the resource in each drilling unit and the productivity per well continues to deliver steady and predictable results. The youngest pattern identified on Slide no.33 of our investor presentation is an example of this title space targeted development program that generated improved results with staggered 200-foot spacing.

Another important point to remember about Eagle Ford EOG's Eagle Ford asset is its proximity to a higher price market. All of the oil from the Eagle Ford receives LLS process and typically trades at a premium to WTI. This provides a boost to the already premium results. And with more than 2400 premium locations remaining, the Eagle Ford will continue to be a solid foundation for EOG's success.

Now here's David again for quick update on the Austin chalk in Trinidad.

David Trice -- Executive Vice President, Exploration and Production

Thanks, Billy. In the South Texas Austin Chalk, we continue to drill very prolific and highly economic wells. We have delineated a sweet spot in Orange County that consistently delivers premium well economics that compete with the rest of our portfolio. In the third quarter, we completed 8 wells in the sweet spot that delivered a 30-day average IP rate of almost 4500 barrels of oil equivalent per day each from an average lateral of about 6000 feet.

Well, cost remain low averaging under $4.5 million. The most impressive well during the quarter was the -- unit 103H whose 30-day IP exceeded 7700 barrels of oil equivalent per day on a lateral length of only 3700 feet. Incredibly, this well paid out in less than a month. Our exploration work in the South Texas Austin Chalk is focused on identifying additional sweet spot across our acreage.

The play is geologically and stratigraphically complex, and we expect our ongoing exploration efforts will take time. In Trinidad, we stepped up activity and continued to drill really good wells in the prolific shallow water reservoirs offshore Trinidad. We completed two wells during the third quarter in the Banyan and Osprey areas each with initial production rates in excess of 30 million cubic feet a day of natural gas. We expect to complete another three wells before the year is out and estimate that some of these wells have the potential to produce 100 billion cubic feet of gas over their economic life.

This will allow us to maintain production in the years ahead and generate strong rates of returns from this cash generating assets. I'll now turn it over to Tim Driggers to discuss financials and capital structure.

Tim Driggers -- Chief Financial Officer and Executive Vice President

Thanks, David. We are maintaining our full year 2017 capital expenditure guidance at $3.7 billion to $4.1 billion. As Gary mentioned, we are more likely to be at the high-end of the range in order to hold on to equipment and services as we prepare for 2018. Total exploration and development expenditures for the third quarter were $1.1 billion, including facilities of $147 million and excluding acquisitions, noncash property exchanges, and asset retirement obligations.

In addition, expenditures for gathering systems, processing plants and other property plant and equipment were $50 million. Capitalized interest for the third quarter was $7 million. During September, we repaid our $600 million 5.875% senior notes. At quarter end, total debt outstanding was $6.4 billion for a debt to total capitalization ratio of 31%.

Considering $846 million of cash on hand at September 30, net debt to total cap was 28%. In the third quarter of 2017, total impairments were $54 million. The effective tax rate for the third quarter was 31% and the deferred tax ratio was 175%. Now I'll turn it back over to Bill.

Bill Thomas -- Chief Executive Officer and Chairman

Thanks, Tim. In closing, I will leave you with a few important points. Over the last few months, the investment communities emphasis on capital discipline has certainly grown. I'll repeat what I said at the end of 2014 when the downturn began and what we had repeated virtually every quarter since.

We are committed to returns, living within our means and maintaining a strong the balance sheet. We believe production growth should be the result of investing in high return drilling and have never been fans of outspending cash flow to pursue growth for growth's sake. Second, we have become a permanently premium company. Our track record of adding premium level inventory over the last two years is evident that our premium strategy is sustainable.

Our premium resource potential now totals more than 7.3 billion barrels of oil equivalent in 8,000 locations. That's more than doubled the resource potential and more than doubled the locations from the start of 2016 when we introduced the premium strategy. Furthermore, we are still exploring, still improving existing plays, and we don't see any end to the opportunities to expand our portfolio further. Third, the benefits of a diverse portfolio drive a real competitive advantage for EOG, a strong stable growth profile that generates high returns and maximizing the value of each asset.

It's difficult to sustain both high growth and high returns without the flexibility that multiple premium assets provide. The diverse assets, the result is a focus discipline high return road to growth. And finally, EOG is like the Houston escrows. We never give up, we are never satisfied.

We never quit getting better. Quarter by quarter, we are adding low-cost premium wells to drive down our cost and deliver strong growth. Going forward, our return focus and sweet spot portfolio of assets supported by a bottoms-up flat decentralized organization will drive differentiated ROCE performance in the E&P space. Our no.1 goal is getting ROCE back to our historical average of 13% or better.

We believe this is the best way to create sustainable long-term shareholder value. Thanks for listening. Now we'll go to Q&A.

Questions and Answers

Operator

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the * key followed by digit 1 on your touchtone phone. If you're using a speakerphone please make sure your mute function is turned off to allow signal to reach our equipment.

Questions are limited to one question and one follow-up question. We'll take as many questions as time permits. Once again, please press * 1 on your touchtone telephone to ask a question. If you find that your question has been answered, you may remove yourself by pressing * 2.

We'll pause for just a moment to give everyone an opportunity. We'll take our first question from Evan Calio with Morgan Stanley.

Evan Calio -- Morgan Stanley -- Analyst

Good morning, guys.

Bill Thomas -- Chief Executive Officer and Chairman

Good morning, Evan.

Evan Calio -- Morgan Stanley -- Analyst

Congratulations on the organic premium location additions. On Woodford, what drove the timing of the reveal? Is it that you believe you have acquired all you could? And you mentioned it as a sweet spots, yet how prolific or extensive do you the Woodford with premium characteristics in the scope?

Bill Thomas -- Chief Executive Officer and Chairman

Yes, first of all, the Woodford play, we got a lot of confidence in it. We have drilled three wells but we have a lot of data and it's a pretty simple play with the modeling we've done and the analysis we've done in the history we have in shale plays. And someone ask David to kind of expand on this and give you some a little bit more color on the detail.

David Trice -- Executive Vice President, Exploration and Production

Yes, Evan. Like Bill mentioned, the difference with the Woodford and some of the other places that the Woodford is a shale play so it's fairly simple from geological standpoint. And we started working this area back in 2012, 2013 and had a pretty good idea that it could be premium and so we began collecting data. So we've got nearly 400 full petrophysical models built in and around our acreage that's tied to core data.

And then what we've been able to do over the years drilling all of these horizontal oil plays is we've been able to collect the data and we've gotten very good at building some sophisticated reservoir models. And so what we did on this particular play is we modeled it ahead of time. We took industry data. We took all the petrophysical models and compared it against, in this case, particularly the Eagle Ford and compare the completions versus the reservoir response.

And so going into it we felt very confident that we could make premium wells here in the Woodford. And so we were able to confirm that with the well results that we had, and so we feel confident about the premium status of this. And then just the timing of it, it's pretty tightly held acreage in this part of the world, so we feel comfortable and ahead and releasing the results on it.

Evan Calio -- Morgan Stanley -- Analyst

Just a follow-up to your responses. I mean, 50,000 acres sufficient scale developed?

David Trice -- Executive Vice President, Exploration and Production

Yes, I think -- just like we talked about in our prepared remarks, our focus is on identifying sweet spots and really sweet spots. But the Austin chalk or the Woodford, we want to drill premium wells that are going to continue to lower our funding cost over time and increase our ROCE. So for us, I mean, this is as a decentralized company, it worked really well. This is an instance like Bill we can allocate capital to a different play and development it at appropriate speed.

And so yes, we think it's sufficient scale.

Operator

We'll go next to Paul Sankey with Wolfe Research.

Bill Thomas -- Chief Executive Officer and Chairman

Hi, good morning.

David Trice -- Executive Vice President, Exploration and Production

Good morning, Paul.

Paul Sankey -- Wolfe Research -- Analyst

It's very impressive from a growth standpoint. I was wondering when will we get a big evident, when are you going to start growing the direct cash return to shareholders?

Bill Thomas -- Chief Executive Officer and Chairman

Paul, the dividend is a very strong priority for EOG. We've increased the dividend 16x in the last 17 years. And consistent with our commitment, our board continues to evaluate the business environment every quarter with a goal of returning cash to shareholders through the dividend and increasing that when appropriate. So that's a very high on our list and we're evaluating it and hopeful as a business environment proves to be stable and improving that we will continue to work on that.

Paul Sankey -- Wolfe Research -- Analyst

Yes, if I could just really be at least above the S&P 500 yields would be worth paying, looking at area $100 million a quarter, doesn't seem too onerous to at least double it. Bill, the other thing I'd like to ask about is the scale of the company. How big will all of the success that you have and geologically and operationally? How big is there an optimal size at which you are going to have part of our disposals and taking stuff off the table as opposed to just adding and adding?

Bill Thomas -- Chief Executive Officer and Chairman

I want to ask Billy Helms to talk about our divestitures.

Billy Helms -- Executive Vice President, Exploration and Production

Yes, Paul, this is Billy Helms. I think it's fair to keep in mind that all these plays we are adding are certainly premium quality so they are adding to the high end of our portfolios, which we think that's of the net present value of the company. At the same time, we always manage the bottom end of our portfolio. If you look back over the last several years, we've sold over $6 billion of assets and so that's not to be overlooked.

It's a big part of managing overall asset base, and it's part of our long-term strategy to continue to do so. And every year fluctuates depending on the where that property is stocked development and play. So it's something we constantly look at and evaluate and actually do each year.

Operator

We'll go next to Bob Morris with Citi.

Bob Morris -- Citigroup -- Analyst

You just address my question on effectively with continuing premium locations, which congratulations by the way on that. As you look at your opportunity for continuing to do that. I noticed you continue to spend about $150 million a quarter on expiration and with a lot of companies focusing on capital discipline and sort of trying to manufacturing mode. Has that created more opportunity for you to identify further premium locations as others focus more on manufacturing and you have the flexibility for to look for new plays a repeatable type things like the Woodford that you announced this morning?

Bill Thomas -- Chief Executive Officer and Chairman

Yes, Bob. That is our focus and that's the reason that we continue to have a very robust exploration effort. We don't need more locations. We just are looking for better, better locations and to be additive to the quality of our already high-quality inventory.

So the two plays we talked about today the First Bone Spring and the Woodford already will fall in the upper part of our premium inventory. So they will get more focus than some of the other even premium inventory have in the company. So we believe as we said many times before, the geology makes a huge amount of difference in the productivity of the wells. And we've had a two-decade learning curve on horizontal technology and rock quality, and so we're going to continue to use that to increase the productivity of our wells and the plays that we're looking so we want to get better.

We are never satisfied and we see a lot of opportunity out there to continue to increase the quality of the plays we're in.

Bob Morris -- Citigroup -- Analyst

My second question is you're one of the very few companies that have hedges in the quarter and you're still very minimally hedged in 2018. What does that say? And how does that speak to your view on the commodity pricing managing that?

Bill Thomas -- Chief Executive Officer and Chairman

Yes. Our view on the macro is we are unthinking certainly encouraged by the improving market conditions as we look forward. The market obviously is continuing to rebalance nicely. Inventories are moving toward the 5-year average, and we are watching the market closely for opportunity.

I'm going to ask Lance to comment a little bit more on that.

Lance Terveen -- Senior Vice President, Marketing -- Analyst

No, Bob -- really as we think about, we're going to stay poised. As Bill mentioned, inventories continue to draw globally but also in the U.S. so and then you look at the market and backwardation to for WTI and Brent. Also, in our view, we think U.S.

production hasn't been doing quite as prolific as what others have originally estimated. So as you look at those dynamics in the market, we're going to really stay poised here. We've been disciplined since '15 and we've been waiting for this turn so we're going to continue to watch here going into '18.

Operator

We'll go next to Leo Mariani with Nat Alliance Security.

Leo Mariani -- Nat Alliance Security -- Analyst

Just quick question on the First Bone Spring here. Obviously, the Bone Spring's been a target for a number of years out there in the Permian basin. You guys have been active drilling wells for a little while. Was there some dramatic change that happened recently that caused you guys to kind of move this up into premium position? Maybe can just kind of discussed that a little bit.

Billy Helms -- Executive Vice President, Exploration and Production

Yes, Leo, this is Billy Helms. For the First Bone Spring's, it's just yet another piece on that we've been certainly identified and we've been testing over the last level years. And most of our activity in the past year or two has been focused on certainly the Wolfcamp, which is highly prolific and we've got multiple zones there. We've also previously announced the second bone Springs resource estimates so this was just the next step.

The First Bone Spring was certainly highly prolific and very competitive zone with those targets, and we've now delineated the program with about 15 wells. We're fairly extensive area and have confidence enough to come out delineated the resource potential on our acreage there. So there's really just the next step and the evolution of the Delaware Basin.

Leo Mariani -- Nat Alliance Security -- Analyst

Okay, that's helpful. And just wanted to kind of follow up a little bit on some of the 30-day oil production rate data that you guys provided in the third quarter. Just in the various different underplays, Eagle Ford and DJ, just noticing that your 30-day oil rate while still strong were down a little bit from second quarter averages, just wanted to see if there was anything in particular sort of driving that?

Bill Thomas -- Chief Executive Officer and Chairman

No, there's nothing out of the ordinary there. They vary from quarter-to-quarter based on lateral length and where we're drilling in each part of the play. There is really no distinction and you can draw from. It's kind of up and down a little bit every quarter.

And we are doing appropriate spacing tests especially as we're pretty new in the Delaware Basin. And so that may affect volumes a little bit from quarter-to-quarter. And then the parts of the play very quite a bit. So there's nothing unusual there.

I wouldn't try to read anything in any of that that would be out of the ordinary.

Leo Mariani -- Nat Alliance Security -- Analyst

All right. Thanks, guys.

Operator

We'll go next to Doug Leggate with Bank of America.

Doug Leggate -- Bank of America -- Analyst

Bill, I wonder if I could ask different question about the premium inventory. The Woodford as you disclose the mostly great news but it's 3% of your locations. The Bakken is about 4% of your locations. And I guess my point is that at what -- is it a point in the line where you start to think about monetizing some of these high-quality smaller portfolio positions given how long-dated your premium location inventory now there is a cost -- I'm just wondering if there's optimization decision as you bring the smaller assets into the portfolio?Bill, I wonder if I could ask different question about the premium inventory.

The Woodford as you disclose the mostly great news but it's 3% of your locations. The Bakken is about 4% of your locations. And I guess my point is that at what -- is it a point in the line where you start to think about monetizing some of these high-quality smaller portfolio positions given how long-dated your premium location inventory now there is a cost -- I'm just wondering if there's optimization decision as you bring the smaller assets into the portfolio?

Bill Thomas -- Chief Executive Officer and Chairman

Doug, the Woodford and the Bakken you mentioned specifically, those would not be ones that we would think about monetizing at this point because obviously the Woodford got tremendous upside to it and is on the high-end of our -- the quality of that premium inventory. And we also believe the Bakken is due. It still got a lot of upside. We have as I said in the opening that we capture the sweet spot there and continue to think that there is quite a bit of additional premium drilling to go on both of those.

And so we like having multiple high-quality assets because it allows the company to increase capital or disburse capital with discipline. And it allows us to put to work capital with a lot of confidence that we can continue to have very, very strong returns and execute each one of those plays at the proper speed to maximize the NPV and the funding cost. And that is what really will drive the ROCE improvements in the company going forward. And each one of our plays, we have a slide in the slide deck, I believe that's Slide 16, that shows you that the returns that we have in each one of our plays if we drill premium wells is very, very strong.

And so and they're all fairly equal. And so that's the advantage of having multiple plays and having a decentralized organization that can focus, reduce the cost and improve the quality of the wells at the same time and maximize the value of each one of them.

Doug Leggate -- Bank of America -- Analyst

I know it's a bit of a stretch, but I think I wanted to just take your opinion on portfolio high grading. So my follow-up, it seems the 15% to 25%, 50 to 60 with the well results that you can probably range of growth on a lower oil deck. So I guess my question is, as we see oil starting to get a little bit healthier at least on the out years, how would you think about incremental allocation of capital? Would it been the 15% to 25% is sacrosanct and anything beyond that goes back to shareholders or just how you're thinking about the upside case of the production there?

Bill Thomas -- Chief Executive Officer and Chairman

If prices rise, obviously our discretionary cash flow is very, very strong. It's increasing even if prices don't rise. So the first thing is when we decide to reinvest additional cash, we're going to do it with discipline. We're not going to sacrifice returns to grow faster.

We only incrementally invest if our returns are equal or better. And again that is, I think, an advantage of multiple plays in a decentralized system that we have in place to execute that. What I'd say the high spirit in the company is really to continue to reinvest in the premium inventory because we believe that's the best way to increase shareholder value. But we also want to consider to firm up the balance sheet, and we want to work on that and getting our net debt down lower than what it is now.

So that will be a priority. And then the third thing is as I talked about already is we have a very, very strong commitment to the dividend. So we want to continue to increase cash to the shareholders to the dividend going forward.

Operator

We'll go next to Scott Hanold with RBC.

Scott Hanold -- RBC -- Analyst

Could I ask a little bit more on the Woodford? You drew a box on your presentation of where you see that as a perspective and market of up to 2000 acres. Can you talk about the working interest you have in there? Do you expect -- where do you expect that to go over time?

David Trice -- Executive Vice President, Exploration and Production

Scott, this is David. Yes, so far the wells we've drilled there in the Woodford, there've been very high working interest, probably close to 100%. I would think going forward right now, we're probably on average is going quite a bit across the play but it's probably on average is probably around 50%. So we've got work to do there as far as trade and blocking up and forced pooling and things like that.

So but right now, I'd say it's probably around 50%. But the numbers we've given new as far as resource estimate, that's all net numbers. The 260 net locations and acreage position there.

Scott Hanold -- RBC -- Analyst

Great. So on a growth location, you've got a good 500 plus it sounds like. And so when you talk about ramping that opportunity up in 2018, what kind of pace are you generally thinking about right now?

David Trice -- Executive Vice President, Exploration and Production

Yes, I think we're going to wait to give any kind of specific guidance until the next call on our plan. But we would say that we do intend to ramp that up next year.

Operator

We'll go next to Charles Meade with Johnson Rice.

Charles Meade -- Johnson Rice -- Analyst

I'd like to go back to an earlier question, I believe it was from Bob Morris. He was asking about your macro outlook given that you're unhedged. But there was another comment you make in our prepared remarks that you're going to be the high end of the CapEx guidance to secure the services you guys go into 2018. And to be putting those two together, it really looks like a management team is pretty bullish on the commodity and activity levels.

And I'm wondering that is a fair read, not just on the commodity but all the activity levels. And if it is, if you have any concerns or any kind of look out for pinch point on building in 2018?

Bill Thomas -- Chief Executive Officer and Chairman

Charles, just first off on our -- I think our confidence in the macro and the oil price. The -- we do feel like the market is in an improving situation. There's no doubt about that. But even if oil price stay at $50, no better than they are this year, our discretionary cash flow is growing substantially.

So I'm going to ask Gary Thomas to kind of comment on the services and the availability of equipment and negative pricing there.

Gary Thomas -- Chief Operating Office and President

Yes, Charles. Yes, as brought up this morning, all of our decisions is really based on increasing our rate of return. And you mentioned touch point and touch point would probably be in just thinking about the various services that are available. There's been little equipment added over the last couple of years.

And that's one of the main reasons that have increased activity here with the additional 25 wells is just to ensure that we have top-tier services available to continue to reduce our cost and just develop and produced more of the low-cost oil, which is going to increase our return on investment, capital investment. But the divisions have done an outstanding job assembling our best-performing drilling rigs completion services all those services probably the best ever, and we just want to be careful not to lose those because our intent is just to continue to reduce our cost over time.

David Trice -- Executive Vice President, Exploration and Production

Charles, I'd also like to add that we always build in flexibility to respond to whatever oil price present itself next year. So we are always thinking about that and built that into our thinking on what equipment and how much of it if we put our long-term contracts versus short-term and how we manage our business.

Charles Meade -- Johnson Rice -- Analyst

Bill and Gary, that's helpful color. And then if I could have won my question the poll question on the Delaware basin. perhaps it would be best for Billy Helms. Billy, you guys have the emergence of the First Bone Springs this quarter but as I look at maps of the charts you guys have in the investor book, the Wolfcamp section is about as big as that whole Bone Springs section put together.

And you're just identifying 1 target there right now. So could you talk about what are the prospects over the next coming quarters for you guys to mature another within the Wolfcamp?

Billy Helms -- Executive Vice President, Exploration and Production

Yes, Charles. I'd say, yes, our focus there has been mainly on identifying the best target intervals within the Wolfcamp. So we tested a number of different perspective target. And then really what we're trying to better understand is as we move into development mode how the best way to develop the asset and so we're testing a lot of different -- along with -- testing different target intervals we just think a lot of those spacing patterns was the right spacing pattern within each well between well between target intervals and those kind of things.

So as you know us to get into these large horizontal programs, you have to be able to manage that parent-child interference, the offset depletion a property to maximize the recovery and economics of every play. Just a reminder, we've got over a decade of doing that kind of thing in various plays so we're utilizing all that knowledge that you can't in all these different plays to better understand how to do that. So I'd say a little bit early to think about what we would roll out next but I'd say that there's certainly upside we see in the basin for continued growth, and we're very excited about what we see for the potential of that Delaware Basin.

Operator

We'll go next to Ryan Todd with Deutsche Bank

Ryan Todd -- Deutsche Bank -- Analyst

Great. Maybe a question on allocation of capital. I mean, how should we think about the relative prioritization of capital within the portfolio among the assets as we look in '18. I know you're working on the budget right now.

But should we expect a similar mix of Eagle Ford versus Permian versus others as we saw in 2017? Are there going to be additional relative shift toward others? And in particular, how should we think about allocating capital with the two new assets to maybe start there?

Bill Thomas -- Chief Executive Officer and Chairman

Ryan, the capital allocation certainly the Permian, would be a high priority. Obviously, the Eagle Ford continues to get a lot of capital and then the plays in the Rockies and certainly the new Woodford play, as David talked about, will get quite a bit more capital than it had obviously this year will get into development mode on that. And I think it's the advantage again that we have in the company is that we can disperse capital very easily and have a lot of confidence that we're generating really high returns and because of our decentralized structure and all the plays are very, very high-quality. So it's pretty easy for us to disburse capital out and have a lot of confidence in it.

Ryan Todd -- Deutsche Bank -- Analyst

And within that framework, I guess, historically in the past at some point you talked about it in the kind of $50, $55 oil that the Permian would be the largest growth driver. The Eagle Ford would be probably more of a mid-to-high single-digit trajectory. Is that kind of the right way to think about the Eagle Ford within this current framework?

Bill Thomas -- Chief Executive Officer and Chairman

Brian, yes. That's a good way of thinking about it. The Permian, the Delaware are the primary driver of growth, and the Eagle Ford is the secondary position on that right now. But all of them are getting fantastic returns, and that's the way we want to do it.

We're really focused on returns first and that's the top priority of the company and to maximize the ROCE.

Operator

We'll go next to Arun Jayaram with JPMorgan.

Arun Jayaram -- JPMorgan Chase -- Analyst

Bill, I was wondering if you could give us some commentary how you're thinking about 2018. On Slide 19, you've given us kind of your 15% to 25% kind of long-term growth CAGR. The Street for 2018, is that 18% growth? I'm just wondering if you can just give us how you're thinking about your planning for next year?

Bill Thomas -- Chief Executive Officer and Chairman

Arun, we're not going to give out a specific number at this point. So you just have to wait until our February call on that. Certainly, our long-term guidance, our outlook that we've given 15% to 25% is still valid but we will look to the plan and then we'll let you know the specifics in February.

Arun Jayaram -- JPMorgan Chase -- Analyst

Can we read into anything the fact that you have added a couple of rigs and adding frac or have added frac crews as an indication about next year?

Bill Thomas -- Chief Executive Officer and Chairman

No. You shouldn't read in really anything in that. We wanted to secure those because they're very, very high quality. That kind of equipment is hard to get if you're trying to add something new.

And so we didn't want to let it go and then you're having very -- we have captured it at a very low cost to do so we want to lock that in. But I wouldn't read anything really into anything. We're still working through our plan and we will let you know that in February.

Operator

We'll go next to David Kistler with Piper Jaffray.

David Kistler -- Piper Jaffray -- Analyst

Speaking a little bit about the decentralized capital allocation can you talk a little bit about, even though it's decentralized, how flexible you can be to redirect capital or activity to basically optimize returns and not just an annual basis but in a short-termer basis? For example, LLS prices are great without service environment in the Eagle Ford isn't quite as pressure does other areas. How quickly can you redirect capital or you think about doing that in a decentralized environment?

Gary Thomas -- Chief Operating Office and President

Dave, this is Gary Thomas. Really, the decentralized nature of EOG helps us to turn on the time. We got all these different plays working. We can ramp up, ramped down.

The way we have structured our contracts with our vendors, we can move the equipment from 1 to the other. And as far as, and Bill brought this up and us being able to share what the breakthroughs are the efficiencies, we often get together with our technical groups. We have those conferences that are going to be starting up here right in the first of the year. So there's a tremendous amount of sharing among divisions to ensure that these different divisions that are working different plays finding new and better ways to improve our efficiencies are just continually shared.

So we'd like to think of it as David various think tanks and works really well for us.

David Kistler -- Piper Jaffray -- Analyst

Well, I appreciate that tremendously. And then one last maybe macro question. In the past you guys have talked about scarcity of resources across one of the total U.S. and that you obviously feel advantage and rightfully so with what you have been able to put together but that has enhanced your macro outlook.

As you guys continue to grow premium resources organically within your current acreage base but also as an example with the Woodford outside of it, does that change your thoughts in terms of total resource content in the U.S. or total premium inventory and what that might mean to macro supply on the longer term business?

Bill Thomas -- Chief Executive Officer and Chairman

Dave, no it really doesn't. We think the highest quality sweet spot parts of the crude oil plays are relatively small and compared to the total. And when you look across the U.S. horizontal oil plays, there is a very large percent of wells that we believe are not economic certainly at $50 oil and need a much higher well first of economics.

So these premium plays the sweet spots are really the economic parts of these horizontal oil plays and those are the ones we're focused on obviously only. We're not really interested in most of the acreage. So we believe if oil stayed at $50, the economic limits of the industry U.S. horizontal oil are somewhat limited by that.

Operator

At this time, this does conclude the question-and-answer session of today's call. At this time, I would like to turn the call back over to Mr. Thomas for any final remarks.

Bill Thomas -- Chief Executive Officer and Chairman

In closing, EOG's third-quarter results were remarkable in many ways. As reported today, the company has focused on delivering strong returns by reducing cost, completing great wells and increasing the size and quality of our drilling inventory. We have a sustainable business model, and we're excited about EOG's ability to create long-term shareholder value. In addition, I would like to say thank you to the EOG family for their tremendous contribution of time and money to hurricane Harvey relief.

Our combined efforts raised over $2.8 million. Thank you for listening, and thank you for your support.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

Duration: 66 minutes

Call participants:

Adam Townsend -- Vice President, Corporate Finance and Investor Relations

Les Moonves -- Chief Executive Officer and Chairman

Joseph Ianniello -- Chief Operating Officer

Ben Swinburne -- Morgan Stanley -- Analyst

Jessica Reif -- Bank of America / Merrill Lynch -- Analyst

Alexia Quadrani -- JPMorgan Chase -- Analyst

Michael Morris -- Guggenheim -- Analyst

John Janedis -- Jefferies -- Analyst

Vijay Jayant -- Evercore ISI -- Analyst

David Miller -- Loop Capital -- Analyst

Dan Salmon -- BMO Capital Markets -- Analyst

Doug Creutz -- Cowen & Co. -- Analyst

Bryan Kraft -- Deutsche Bank -- Analyst

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