U.S. natural gas production will begin to fall by mid-year and be down 2.5 Bcf/d by year’s end, or 4.3% below 2008’s output, EOG Resources Inc. CEO Mark Papa said Thursday.

Falling industrial demand will more than offset a decline in gas supply, which should keep gas prices at around $5/Mcf through the year, Papa told financial analysts during a quarterly earnings conference call. The low prices and oversupplied market led EOG to dramatically revise its 2009 plans, he said.

“We’re throttling back our gas drilling and expect to generate minus 1% North American gas growth this year,” Papa told analysts. “Last year we averaged 73 total drilling rigs, and this year we’ll average about 45 rigs in our overall drilling program.” EOG now is running around 64 rigs. Thirty-six rigs now are under long-term contracts, and as the year progresses and rig contracts fall off, 19 more will be laid down.

Because EOG does not want to pay rig termination fees, “we’ll be in the process of shedding rigs throughout the year,” Papa said. The company has the flexibility to revise its forecasts up or down, depending on conditions. “Our estimates are based on the assumption that gas prices will remain pretty dismal throughout 2009,” and “we’re in no hurry to rush production and cram more gas into the market with signs of oversupply.”

Even with a cut to its drilling program, EOG’s total oil and gas volumes still will rise 3% overall this year, said Papa. North American gas output growth will drop to minus 1%, but that will be offset by a 14% rise in crude oil condensate and natural gas liquids.

“Given the macro outlook and current gas prices, our 2009 business plan is predicated on the following items,” said Papa. “First, continue to run the company as a business with returns as the main criteria and not volume growth. Second, don’t spend capital to grow volume and cram them into currently oversupplied gas and oil markets. Third, keep capex and cash flow roughly balanced. And fourth, continue to generate horizontal resource play ideas.”

By 2010 EOG expects gas prices to regain strength to $8-8.50/Mcf “as supply declines and recovery in the industrial sector take effect.”

The Barnett Shale of North Texas drove EOG’s growth in 2008. However, EOG’s internal models indicate that overall, the play’s total gas output “will peak at about 4.9 Bcf/d in the first quarter and by the end of this year, the Barnett Shale will be down to about 4.3 Bcf/d, a drop of about 600 MMcf/d from its peak,” said Papa. Even with an inventory of wells to be completed, “we don’t think it will go to 6 Bcf/d, and the first quarter will be the apogee…

“I don’t want to say that the Barnett Shale is completely tapped out,” said the CEO. What EOG’s models indicate is “that a huge amount of people are dropping rigs in the Barnett and likely moving their activity to the Haynesville” shale in northwestern Louisiana and East Texas. EOG plans to drill around 200 gas wells in the Barnett Shale this year, compared with 290 gas wells in 2008 “based on our macro view.”

EOG has a 116,000 net-acre leasehold in the Haynesville play, and it estimates its net reserve potential there is 3-4 Tcf. Last year EOG drilled two horizontal wells: the Martin Timber No. 2H tested at a rate of 17.4 MMcf/d gross; the Bedsole 27 No. 1H tested at a rate of 17.5 MMcf/d gross. Because of pipeline constraints, the wells now are producing at a combined restricted rate of 17 MMcf/d until additional infrastructure is in place, Papa said.

EOG posted a 29% jump in 4Q2008 earnings to $461.5 million ($1.84/share), boosted by a $529 million ($1.36) gain from oil and gas hedging positions. In 4Q2007 EOG earned $358 million ($1.44/share). Adjusted net income in the quarter reached $186.0 million (74 cents/share), compared with 4Q2007’s $319.4 million ($1.29).

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