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EOG Increases 2006 Production Growth Estimate

EOG Resources has upped its production growth target for next year from 8% to 9.5% with a strong showing expected from its North American operations, including Barnett Shale natural gas plays, EOG Chairman Mark Papa said in a meeting with analysts last week.

This year the company's overall growth is expected to be at 15.5%, with North American gas production gaining 12%. And while overall production growth will slip in 2006 to 9.5%, North American gas production will grow by 13%, Papa said. Beyond that he expects annual production growth in 2007-2010 will fall between 7% and 11% for an average 9% a year growth.

North American natural gas "is the sweet spot in the entire worldwide energy market," Papa said, and EOG has enough properties lined up to keep the company busy for the next five years.

"We're pretty well set. It's very unlikely we will chase any large property acquisitions or mergers over the next five years," Papa said. The company's growth will be organic because "it's that kind of growth that brings the highest reinvestment returns." Acquisitions are an expensive proposition, "particularly in today's market when all the companies are starved for production growth. It's a seller's market."

Once you've paid high dollar for a property, you have to lock in a hedge, forgoing the future upside, Papa said. And another cost that doesn't show up until later is that in today's market the buyer has to assume all legal and environmental liabilities. The EOG executive figures organically grown operations can return "a good 20% plus," while the return on an acquired property is likely to be in the neighborhood of 8%.

And it's the return that EOG is chasing. "First and foremost we want to maintain our industry lead in return on equity and return on capital employed," Papa said. "We've never desired to become the biggest independent E&P producer. The concept of the super independent has lost a lot of its luster."

EOG's strategy calls for growing organically with a low debt burden. By the end of this year it will have reduced debt from 26% of equity down to 10%. In future years Papa expects the company will have free cash flow that could be used to repurchase stock, or it could expand its capital expenditures if an "intelligent" spending opportunity presents itself.

In the Barnett Shale, EOG is switching from "capture to exploit," Papa said at the company's annual analysts conference. In other parts of the United States EOG is drilling and exploring other potential developments. In its Trinidad operations, EOG will be doing exploratory drilling in 2006, looking to a 2008-09 payoff. It also is developing its UK properties.

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