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EOG, Anadarko Mark Quarter with Income, Production Gains

Hedging gains and production growth resulted in strong quarterly earnings reports for two Houston-based independents, EOG Resources Inc. and Anadarko Petroleum Corp. During separate conference calls last week, the CEOs acknowledged their oil and natural gas drilling prowess, but they also pointed to their companies' sturdy finances in the uncertain credit market.

Anadarko reported that its cash balance was almost $2 billion at the end of 3Q2008, and EOG said it had minimized its short-term credit needs. EOG's total debt outstanding at the end of 3Q2008 was $1.89 billion for a debt-to-total capitalization ratio of 18%.

"We believe we have a strong capital structure and liquidity position," Anadarko CEO Jim Hackett told analysts. "We closed the quarter with a cash balance of nearly $2 billion, after completing the repurchase of $600 million worth of shares and retiring approximately $350 million of debt. Our $1.3 billion revolving credit facility remains undrawn...We expect to deliver upon our commitment to achieve our debt-to-cap target of between 25% to 35% by year-end."

EOG CEO Mark Papa told analysts that "because maintaining a low net debt-to-total capitalization ratio is a key strategy for EOG, we will manage our capital expenditures [capex] accordingly...We've easily got the organic capability and high rate of return inventories to grow total company production 14% next year and in subsequent years, but we will do so in a high natural gas commodity environment.

"Low debt is still very important criteria to us...The governing factor on our capex budget will be the balance sheet. We will target a capex program that is approximately in line with cash flow, providing roughly flat year-end 2008 and year-end 2009 net debt."

As is his custom, Papa provided EOG's macro outlook for the gas market in the coming months. And while it will be several weeks before EOG knows what winter may bring, "in short, we don't intend to dramatically grow North American gas volume at prices below $8...Simply put, we don't intend the cram gas into an oversupplied market if prices averaged $7," Papa said.

North American natural gas prices in 2009, Papa said, "will primarily be a function of winter weather's severity." A cold or "normal" winter, he said, could lift gas prices above $8/Mcf at the Henry Hub on average, but warmer temperatures likely would cause prices to only average $7 in 2009 -- a scenario that would lead EOG to curtail its capex.

"I continue to believe that the primary determinant of 2009 gas prices will be winter weather," Papa said. "A cold winter will likely generate $8 to $8.50 average prices, and a warm winter, $7. I believe 2009 North American net natural gas supply will grow at most 0.6 Bcf/d year-over-year, which comports well for likely electricity [generation] demand growth."

There is "a large degree of uncertainty regarding future natural gas and oil prices" for 2009, said the CEO. "We believe 2009 gas prices will average more than $8, and we expect to grow the total company's production 14%." But if the winter weather is warmer than expected, "and we average a $7 Henry Hub price, we will curtail our gas drilling activity and total company production will grow 10%...

If there is a "moderate to cold winter, we'll pursue a higher level of drilling activity that generates 14% total company production growth," he said. "In 2009 if gas prices disappoint, we'll defer some gas drilling until a more fortuitous time and target 10% total company production growth. The key point here is we don't intend to run up our debt taking $7 gas. So the production growth numbers provided are essentially debt adjusted per share. One likely positive we'll have in 2009 is lower per well cost, as we're already seeing some decreases in service company prices."

Another change: EOG will alter its course to concentrate more on higher-priced oil production from emerging U.S. plays.

The "logic" behind the strategy shift is "simple," said Papa. "We have enough natural gas and crude oil drilling inventory to last that's roughly 15 years. In 2009 we'll give first priority to oil investments because even at $65/bbl, they're high or over 10% to 33% year-over-year crude oil, condensate and NGL growth. Roughly 40% of our 2009 North American capital budget will be devoted to oil projects," compared with around 30% in 2008.

Total company crude oil, condensate and natural gas liquids (NGL) production is expected to be up 33% in 2009 to 80,000 b/d from 60,000 b/d this year. "The primary growth engine of the liquid will be the North Dakota Bakken [Shale], with a lesser but increasing contribution for the Barnett [Shale] oil and other plays," said Papa. "Second, we expect only a small year-over-year increase in natural gas production in Trinidad, Canada and other international, so most of our gas increase will be eliminated from the U.S."

Because of the current financial market turmoil, it's "unlikely that EOG will pursue a merger or a significant chase high price acreage in 2009," he said. "This is consistent with our belief that organic growth yields intrinsically superior reinvestment rates of return compared to growth of mergers or acquisitions. In hindsight, we're pleased that we didn't participate in the high-price acquisition acreage merger gains during 2008 or the previous year."

EOG pulled out a strong 3Q2008 performance despite hurricane-related shut-ins the Gulf of Mexico during September and operational problems in Trinidad. Quarterly net income totaled $1.56 billion ($6.20/share), compared with net income of $202.4 million (82 cents) for the same period of 2007. The latest quarter's results included a mark-to-market financial hedging gain of $1.38 billion ($889.2 million after tax, or $3.55/share). Adjusted 3Q2008 earnings were $588 million ($2.34/share), topping Wall Street's forecast of $2.23/share.

Anadarko's net earnings rose to $2.17 billion ($4.62/share) -- also on hedging gains -- compared with $481 million ($1.03) in 3Q2007. Minus the hedging gains, Anadarko's profit was $1.62/share, which was ahead of the Street's average forecast of $1.46.

Hackett said that "at one point during the quarter, we achieved a daily record for sales volumes of 600,000 boe. Following major back-to-back hurricanes, our employees and contractors throughout our operating regions performed in an extraordinary fashion to safely overcome the impacts of the storms...enabling us to achieve a 9% increase in overall reported sales volumes over 3Q2007," which for the seventh consecutive quarter, met or exceeded the company's volume guidance.

At the deepwater Independence Hub in the Gulf of Mexico, production was restored within three days of Hurricane Ike. "Anadarko also demonstrated notable growth in the Rockies with new daily production records in both the Greater Natural Buttes area of Utah, where sales volumes increased nearly 40% for the quarter compared to the previous year, and the Powder River Basin of Wyoming, where sales volumes for the quarter were up about 55% year-over-year," said Hackett.

Anadarko's quarterly sales volumes of natural gas, crude oil and natural gas liquids totaled 51 million boe, or 552,000 boe/d. Gas sales volumes averaged 1.994 Bcf/d in the quarter, while oil sales volumes averaged 182,000 b/d. NGL volumes averaged 38,000 b/d.

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