A dramatic decline in natural gas revenue and sky-high capital expenses slammed the quarterly profit of Houston-based EOG Resources Inc. The independent posted 10.9% production growth from a year ago, but gas revenue slumped 12% and expenses climbed 23%.

After paying preferred dividends, EOG’s net income totaled $297.3 million ($1.21/share), down from $341.9 million ($1.40) in 3Q2005. A $104.7 million ($67.4 million after tax, 28 cents/share) gain on the value of commodity derivatives contracts offset a year-over-year decline in gas sales. Minus the gain, 3Q2006 net income was $276.9 million ($1.12/share).

Revenue increased 4% to $968.2 million from $934.4 million a year earlier. Gas revenue fell to $661.9 million, while crude oil, condensate and natural gas liquids revenue posted a 10% jump to $200.7 million. However, expenses were up 23% to $506.6 million.

In the United States, gas and natural gas liquids production jumped 17% compared with a year ago, driven by continued success in the Barnett Shale play, as well as EOG’s Rocky Mountain and South Texas operating areas. Gas volumes overall rose to 1.34 Bcf from 1.21 Bcf in 3Q2005. However, average gas prices dropped to $5.35/Mcf from $6.77 a year earlier. Oil production also fell to 27,700 bbl/d from 28,000 bbl/d, but prices rose to $67.68 from $61.22/bbl.

“Third quarter operational results reinforce EOG’s established track record of delivering consistent, high rates of organic production growth, while maintaining a very low level of net debt and generating high rates of return on equity and capital employed,” said CEO Mark G. Papa. “EOG’s natural gas production from the Fort Worth basin Barnett Shale averaged 174 MMcf/d in September, far in excess of our original year-end 2006 target of 155 MMcf/d.” He said EOG had completed “several new ‘monster wells’ in both eastern and western Johnson County” in Texas.

In the Rockies, EOG reported a 19% increase over a year ago to its development drilling program in the Uinta basin’s Chapita Wells Unit in northeastern Utah, and the Midcontinent operations reported a 9.5% sequential increase over 2Q2006. In South Texas, EOG holds an 87.5% working interest in the Slator Ranch W2, which was drilled to 9,300 feet in the Lobo formation, and tested at a gross rate of 17 MMcf/d of gas. The W2 is currently producing more than 9 MMcf/d. Also, EOG’s GPCU 25#1 well in Kansas (100% owned) has been flowing to sales at 15 MMcf/d since August.

EOG said its Trinidad gas sales “considerably surpassed contract quantities” in the first six months of 2006, and “slightly exceeded contract amounts in the quarter.” However, EOG warned Trinidad’s 4Q2006 gas sales are expected to be limited to contract levels, and it revised its total 4Q2006 forecast downward by 9%.

“EOG’s two-year production per share growth for 2005 and 2006 on a debt-adjusted basis is one of the highest in our peer group, and we expect very strong production growth in 2007,” said Papa. “We have the assets to continue this momentum going forward.”

EOG has scheduled a conference call for 9 a.m. CST on Tuesday. It will be available via webcast at www.eogresources.com .

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