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EOG Steps Back From Gas Activity

Dismal natural gas prices, which EOG Resources Inc. expects will linger for a while, have turned the company's attention from gas to crude oil and liquids production. The shift in focus will eventually change EOG's production profile to roughly 50% liquids, but that doesn't mean gas activity will be forsaken as the Barnett Shale and other plays continue to offer an abundance of supply, CEO Mark G. Papa told financial analysts last Tuesday.

"Our North American gas inventory position is particularly deep and geographically widespread between the Barnett, Haynesville, Marcellus, Horn River and Uinta basins," Papa said. "Practically speaking, we can grow our North American gas production at any annual rate between zero and double digits per year gross for at least the next seven years by simply deciding what level of capital to deploy each year."

But the turning of the money tap for gas plays will have to wait for more robust gas prices. "We're not going to cram gas into markets that are already full," Papa said. "If [gas] storage gets full before November, we'll probably react to it by curtailing some gas, but we'll just have to see how that plays out."

Papa said EOG expects gas prices to "remain depressed" until next year when they are expected to recover to the $7-8 range.

"For domestic gas, we've taken a stab at modeling the impact of the rapid decline in drilling activity, and we expect year-end 2009 production to be 4.5 Bcf/d lower than year-end 2008, assuming a year-end gas rig count of 650," he said. "Our analysis indicates Texas natural gas production has already begun to decline. We expect full-year 2010 total domestic production to average 3.8 Bcf/d less than full-year 2009. In Canada we expect total production to decline by 0.8 Bcf/d in 2009 and another half Bcf/d in 2010."

Papa said he expects the company's production profile to evolve with the market over the coming years. "In 2006 our North American production mix was 24% liquids, 76% gas," Papa said. "Currently it's about 35% liquids, 65% gas for this year. We expect that ratio by 2013 to be somewhere where liquids would be 45-50% of our total North American production mix; now that's at a 10-1 Btu equivalency ratio.

"Until we believe gas prices are going to get back up to $7, we're not going to get very aggressive on our gas activity."

As for laying down gas rigs, the company has cut its rig census down to the number of rigs for which it has term contracts, preferring not to buy its way out of contracts. "At least if you're drilling, you get something in return," he said.

This is not the case in the Haynesville Shale, though, where EOG has four rigs running and is reserving acreage, Papa said.

EOG reported first quarter net income of $158.7 million, or 63 cents/share, compared with first quarter 2008 net income of $240.5 million, or 96 cents/share. Results for the first quarter included a $351.4 million ($226.1 million after tax) net gain on the mark-to-market of financial commodity transactions. During the quarter net cash inflow related to financial commodity contracts was $311.0 million ($200.1 million after tax).

The company increased its full-year 2009 organic production growth target from 3% to 5.5% based on first quarter operational results and stronger-than-anticipated domestic crude oil and gas liquids volumes. Crude oil production in the United States increased 47% over the same period last year. The higher level of total liquids recorded during the first quarter and projected for the second half of 2009 is primarily due to higher-than-expected production from the North Dakota Bakken play and the Fort Worth-area Barnett Shale, EOG said.

"Based on economic investments at current crude oil and natural gas prices, we are increasing our total 2009 production growth target to 5.5%, all organic. EOG is positioned to achieve total company liquids growth of 22%, to approximately 75,000 b/d in 2009. The majority of the increases will come from U.S. crude oil and natural gas liquids production during the second half of the year," Papa said. "With this momentum, we are targeting total liquids growth of 20%, to roughly 90,000 b/d in 2010."

EOG is continuing its Fort Worth-area Barnett Shale gas development drilling program in Johnson and Hill counties. With more than 750 remaining drilling locations in Johnson County alone, EOG can remain active in the play for several years, the company said. The company estimates that its total production from the Barnett Shale gas and combo plays will average approximately 460 MMcfe/d in 2009, increasing to 700 MMcfe/d in 2012, contingent on hydrocarbon prices recovering from current levels.

"What we're really going to be looking at are the production data that comes out each month to see whether our estimates are tracking correctly," Papa said. "And also we're going to be looking at what happens to this gas rig count. In other words, if the gas rig count falls below 650 by year-end, we'd probably be a bit more aggressive in gearing up our gas drilling. Conversely, if the gas rig count doesn't get below 750, we'll probably be pretty hesitant to step up gas drilling. We're going to look beyond what the current gas price is to what we expect to happen in 2010."

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