EOG Resources suffered a 39% drop in third quarter net income to $69.2 million, or $0.59/share, mainly because of a decline in gas, oil and condensate prices. The company started curtailing gas and condensate production in September and has reduced its operating drilling rig fleet to 35 rigs from 50, according to CEO Mark Papa, who expects commodity prices to remain “sluggish” for about six more months.

Third quarter natural gas production in North America increased 4% versus the same quarter a year ago to 972 MMcf/d. U.S. gas production rose to 834 MMcf/d from 820 MMcf/d during the same period last year. Canadian gas production fell 4 MMcf/d to 138 MMcf/d. Meanwhile, average realized North American gas prices for the company fell to $2.84 from $4.09 in 3Q2000. Average crude oil prices dropped to $25.48 from $31.27.

“For the first nine months of 2001, EOG’s daily North American production increased approximately 4% in line with our original goal,” said Papa. “However, because of weakening natural gas prices, EOG began moderating natural gas and associated condensate production in September. We are continuing this moderation strategy during October and will evaluate November based on natural gas prices.

“EOG continues to monitor its drilling activity based on current market conditions. As a result of increased service costs, we have reduced the number of rigs we are running in North America from 50 to approximately 35. These actions are consistent with our long-term goal of maintaining one of the highest return on equity ratios in the independent exploration and production sector.”

In response to market dynamics, EOG entered into natural gas price swaps and collar transactions, and to a lesser extent crude oil price swaps. During the third quarter 2001, a mark-to-market pretax gain of $58.8 million was recognized as a result of these 2001 and 2002 transactions. Of this amount, $27.3 million was cash realized during the quarter. An average of 276,000 MMBtu/d of natural gas is locked in for the fourth quarter 2001 at an average price of $3.94/MMBtu. For 2002, price swaps for 100,000 MMBtu/d have been locked in an average price of $3.46/MMBtu.

“Looking ahead, we expect natural gas prices might remain sluggish for up to six months, at which point we think declining domestic volumes and increasing industrial demand will result in a price resurgence to $3.25 to $3.50, and we are formulating our business plans in this range,” Papa said.

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