DBRS Confirms EOG Resources, Inc. and Subsidiary Ratings at A (low) and R-1 (low)

DBRS has today 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 EOG, 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 (12% compound annual production growth rate from 2003 to September 2008), 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. 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 strong operational cash flow, EOG’s liquidity has remained strong, with cash on hand of $886 million at September 30, 2008, and full availability under its $1 billion revolving credit facility. Projected capex of $5.0 billion in 2008 ($4.2 billion spent to September 30, 2008 compared with a total of $3.7 billion over 2007) could exceed operating cash flow, leading to a very modest increase in net debt-to-total capital.

Going forward, EOG expects an increase in total company production of 10% to 14% in 2009, depending on the strength of natural gas prices. In the event that commodity prices remain weak over the medium term, overall production growth will be closer to the stated 10% target, whereas stronger prices would likely be the catalyst for production growth nearer to 14%. In any case, significant contribution to growth will come from oil production (18% of production for the nine months ending September 30, 2008 (9M 2008)), principally in the North Dakota Bakken field, with the Company targeting 2009 crude oil production growth of 43% regardless of the commodity pricing environment.

Having had difficulty increasing its North American gas production prior to 2004, EOG has addressed this challenge over the past three years by intensifying 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 North American natural gas production growth over the past four years. The Company has improved its operational performance 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 pursue similar shale, gas and other horizontal drilling plays in North America, such as the Horn River shale region in British Columbia and the North Dakota Bakken region.

The Company has extended its North American gas strategy to offshore Trinidad and Tobago (Trinidad), where its production (16% of 2007 volumes) 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 natural gas (82% of total production over 9M 2008 and potentially declining to 79% and 77% in 2009 and 2010 respectively, with rising Bakken crude volumes) exposes it to potentially greater price volatility than companies with more balanced oil and gas production. DBRS believes that there is potential for near-term gas price weakness to persist as global energy demand moderates. Any price weakness is expected to be relatively short-lived, however, resulting in reduced drilling activity and a decrease in supplies compared with a more extended price downturn. Further, pricing for natural gas is significantly influenced by weather, including both summer and winter peaks and hurricane-related events.

To support a measure of cash flow stability, EOG has hedged approximately 31% of its production in 2008 at $8.51/mmcf and has since benefited from those contracts as natural gas prices have declined precipitously. For 2009, the Company has about 38% of its North American natural gas production hedged at $9.71/mmcf and no hedges in oil production. Long-term contracts with The National Gas Company of Trinidad and Tobago Limited (NGC) also provide greater stability for an additional 16% 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 relatively stable for EOG. The Company’s operating strength and conservative financial strategy make it a leader among independent oil and gas producers and support the current rating. The Company has stated it will maintain its focus on organic growth in its core areas rather than seeking more expensive acquisitions.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on the DBRS website under Methodologies.

This is a Corporate Rating.