The downturn might be the best thing to happen to EOG Resources Inc. (NYSE: EOG), according to the company’s chairman and CEO, William R. Thomas.

While much of the industry has suffered from a historical plunge in oil prices, EOG has used the price drop as an opportunity for a little remodeling. However, the Houston-based company has not forgotten how to grow oil, Thomas reminded attendees of the Wells Fargo West Coast Energy Conference in San Francisco on June 21.

EOG is set to increase its more than 20 years of drilling inventory following the company’s recent discovery of a play generating high returns that Thomas called “easier” than an Eagle Ford well. The company is also looking to add to its inventory through strategic acquisitions.

“We have an enormous inventory. We are a very prolific, organic, prospect-generating machine,” he said. “We always have been.”

As prices fell and budgets tightened, EOG’s move wasn’t to issue equity. The company didn’t even reduce its dividend. Instead, EOG—the largest oil producer in the Lower 48—stopped all growth and focused only on what could generate strong returns at low to moderate oil prices.

“It’s been the best two years really ever in the company of getting better and redefining ourselves and rebuilding ourselves… We’re going to emerge from this downturn in better shape than we’ve ever been before,” he said.

In 2016, EOG’s plan has been to focus on premium drilling and completions, which Thomas defined as wells that generate a 30% after-tax rate of return at $40 flat oil and $2.50 flat gas. More than 10 years of its drilling inventory is considered premium.

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“What drives this business, the commodity business, is really the quality of your assets,” Thomas said.

Easier Than Shale

EOG is working to add to its premium pile through the discovery of a new hybrid play. Though located close to source shale, rocks in a hybrid play typically consist of carbonate, sandstone and siltstone—not shale.

“[Hybrid] plays actually are better quality rock than the shales and those are easier to generate very high returns on,” Thomas said.

EOG’s first-quarter results showed it had cracked the code on a new geological concept in a hybrid play familiar to most—the Austin Chalk. Using precision target selection and high-density fracks, the company received “surprising” results from two wells recently drilled in the South Texas formation, Thomas said.

“We’re probably like most of the industry and kind of written off the chalk, but we’ve redone it with a new geologic concept and it’s really the same concept that we’re using in the shale plays,” he said.

The company’s initial test well targeting the Austin Chalk, the Leonard AC Unit 101H, came online with average 30-day IP of 2,100 barrels per day (bbl/d) of oil. The well’s production consisted of 295 barrels per day (bbl/d) of NGL and 1.9 million cubic feet per day (MMcf/d) of natural gas.

A second Austin Chalk well, the Denali Unit 101H, was brought online in April with average 20-day IP of 2,265 bbl/d of oil. Production consisted of 415 bbl/d of NGL and 2.7 MMcf/d of natural gas.

EOG intends to drill seven additional Austin Chalk wells in 2016 to further delineate the formation's potential.

“We have many new plays and we’re testing a number of those this year as we ever have in the company,” he said. “You can expect that hopefully down the road we’re going to be adding new potential to new plays.”

Calculated Deals

EOG is also on the hunt for tactical acquisitions, albeit selectively.

“We have all these basins mapped in very much detail so we know where the sweet spots are,” he said. “When those come available we don’t mind paying a very competitive rate.”

Large acquisitions are unlikely because EOG is only interested in deals with high returns. But the company is willing to “aggressively” pursue acreage in a sweet spot, especially areas where the company is already drilling, he said.

Thomas added the company is also seeing a huge opportunity for new acreage in emerging plays.

“Today, it’s the easiest time I’ve ever seen in the business to get acreage in the plays that are emerging because we have literally very little competition,” he said.

Normally competition would be from the entrepreneurial small shops, but they’re literally out of money, he said.

“We’re very upbeat about additional new things,” he said.

In addition, EOG will remain active on the other side of the table, selling off low-margin, low-growth properties over time.

“As we move into premium, we have a lot of properties that will never move into that category” he said. “Those will be great places to sell assets and strengthen our balance sheet.”

Emily Moser can be reached at emoser@hartenergy.com.