DBRS Confirms EOG Resources at A (low) and R-1 (low)

DBRS has confirmed the Senior Unsecured Debt and Commercial Paper ratings of EOG Resources, Inc. (EOG or the Company) at A (low) and R-1 (low), respectively, with Stable trends. Based on the guarantee of its parent, DBRS has also confirmed the Senior Unsecured Debt rating of EOG Resources Canada, Inc. at A (low), with a Stable trend.

EOG has consistently executed its low-risk North American natural gas strategy, investing its strong cash flow to grow its operations through the drill bit (11% compound annual growth rate for production from 2002 to September 2007), while leading its peer group in cost structure and returns. In comparison, many other companies have resorted to acquisitions and share repurchases to boost production and returns, respectively. EOG has also maintained superior financial flexibility by internally funding most of its sharply increased investment program, which has been supplemented by positive cash balances in recent years. In addition to spending operating cash flow, EOG’s cash balances have declined from a peak of $821 million at March 31, 2006, to $302 million at September 30, 2007, and are currently used mainly to fund capex. Projected capex of $3.7 billion in 2007 (compared with $3.0 billion in 2006) could exceed operating cash flow, leading to a modest increase in net debt-to-total capital from the current level of 13.1%. Going forward, EOG expects to keep 2008 net debt relatively flat with year-end 2007. Despite lower cash balances, liquidity remains strong as a result of $1 billion available under the Company’s revolving credit agreement, which expires in June 2012.

Having had difficulty increasing its North American gas production prior to 2004, EOG has addressed this challenge over the past two years by increasing its focus on newer unconventional natural gas reserves. The most prominent of these reserves is the Barnett Shale field in North Texas, the primary driver of production growth over the past three years. The Company has improved its operational risk after gaining experience in the area, and gradually improving its drilling and completion efficiency. This experience could lead to additional growth as it is being applied to evaluate similar shale, gas and other horizontal drilling plays in North America.

The Company has extended its North American gas strategy to offshore Trinidad and Tobago (Trinidad), where its production (16% of 2006 production) is converted either to ammonia, methanol or liquefied natural gas (LNG) for sale to U.S. and other export markets. While demand is limited by current export capacity (expected to continue growing) and prices are generally capped, the region offers low-risk development opportunities with significant exploration upside over the medium to long term.

The Company’s focus on gas exposes it to potentially greater price volatility than companies with more balanced oil and gas production. Natural gas prices have recovered from their mid-year lows, however relatively high North American storage may result in further weakness in the near term. DBRS believes that the market fundamentals for natural gas remain favourable in the medium term.

To support a measure of cash flow stability, EOG has hedged production in the past, though levels are currently modest at 10% of North American natural gas production. The Company would like to increase the level to between 30% and 35% of North American natural gas production as protection against potentially weaker gas prices. Long-term contracts with the National Gas Company of Trinidad (NGC) also provide greater stability for an additional 19% of total production. EOG is well positioned to manage intermittent price weakness as a result of its flexible, high-volume drilling program and strong balance sheet.

The medium term outlook remains strong for EOG. Though smaller than most comparably rated companies, EOG’s operating strength and conservative financial strategy make it a leader among independent oil and gas producers and support the current rating.

Note:
All figures are in U.S. dollars unless otherwise noted.