Letter to Stockholders

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• Full color online version from 2009 Annual Report
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Developing New Frontiers in Horizontal Oil

While our long-standing fundamentals remain intact, EOG can no longer be considered primarily a natural gas company. Our strategy shift toward a more balanced portfolio with an increased focus on crude oil and natural gas liquids is well underway.

We are accomplishing this significant transformation by successfully adapting the same technological skill set that we honed in horizontal natural gas shale plays to unlock challenging new liquids-rich unconventional reservoirs. Our proficiency in identifying viable geologic play candidates and the application of industry leading completion techniques is providing EOG with a competitive advantage in a number of different North American petroleum basins. EOG is at the forefront of the industry in developing new frontiers in horizontal oil.

The decision to move a greater portion of EOG’s capital expenditures and exploration budget away from natural gas toward crude oil and natural gas liquids began several years ago. It was based not only on EOG’s demonstrated technical edge but also our long-term view of North American natural gas and global crude oil market fundamentals. Since we made this strategic decision, we have captured commanding positions in several proved and prospective oil plays that will drive our liquids production growth for many years to come.

Outlook for North American Markets

EOG expects North American natural gas prices to be fairly static during the first half of 2010 but rebound in the second half of the year as the decline in North America’s natural gas supply becomes more apparent. However, due to the industry’s overwhelming horizontal drilling success in natural gas shale plays, our longterm view of North American natural gas continues to be that future price growth will be less robust than that of crude oil. By decreasing our exposure to natural gas, EOG will be less dependent on vagaries such as weather, as well as the impact from liquefied natural gas and Canadian imports. Factors such as these have caused extreme volatility in natural gas prices and wide revenue swings.

In contrast, NYMEX crude oil prices have been surprisingly robust with the second half of 2009 averaging over $72 per barrel. We anticipate that prices will average over $75 per barrel during 2010 and likely increase further over the next 10 years and beyond. Global demographic trends, particularly in Asia, suggest that total worldwide demand for crude oil is expected to significantly increase over the next 20 years as population growth and per capita utilization increase in the developing world.

Changing Strategy but Not Focus

For the past decade, EOG has been a heavily weighted North American natural gas producer. In 1999, 81 percent of our total wellhead revenues and 86 percent of our North American volumes were natural gas. In 2009, 60 percent of our total wellhead revenues and 75 percent of our North American volumes were derived from natural gas.

In 2010, we expect EOG’s North American revenue mix to be divided almost equally between liquids and natural gas. However, EOG is not walking away from natural gas. Over the years, we have organically developed and captured early-mover acreage positions in such outstanding shale plays as the Fort Worth Barnett, British Columbia Horn River Basin, Haynesville and Marcellus. While these plays will drive EOG’s North American natural gas production growth in 2010, we will continue to access our deep inventory of high rate-of-return natural gas assets when markets are favorable. The fiscal discipline that is one of EOG’s key attributes provides us with the balance sheet flexibility to pursue exploration concepts in a variety of market conditions. This provides EOG with the ability to maintain a steady exploration program and expand acreage positions at favorable early-mover costs when there is little competition. At year-end 2009, EOG had a net debt-to-total capitalization ratio⁽²⁾ of 17 percent.

EOG’s transformation into a more balanced crude oil and natural gas company will be accomplished without significantly changing the precepts on which our company has been built. We will maintain EOG’s long-standing high rate of return organic approach – by growing through the drillbit – rather than seeking major mergers and/or acquisitions. We will continue to pursue EOG’s consistent game plan because it yields consistent results for our stockholders by generating strong debt-adjusted production growth per share. We will still add value by remaining a low cost producer, monitoring the balance sheet, maintaining a low debt level and focusing on return on capital employed (ROCE).

Fueling EOG’s Momentum

The two biggest contributors to EOG’s 2010 crude oil and natural gas liquids growth will be the Fort Worth Barnett Shale Combo and North Dakota Bakken Plays.

EOG holds a major position in the Fort Worth Barnett Shale Combo, a crude oil and liquids-rich natural gas trend in the Fort Worth Basin, outside the core natural gas area. In 2010, we will move into development drilling of both vertical and horizontal wells in eastern Montague and western Cooke Counties.

With a position of over 500,000 net acres in the North Dakota Bakken, we have expanded our development activities beyond Bakken wells in the Core Parshall Field by drilling wells in the Bakken Lite and Three Forks Formation. Initial production profiles from the Three Forks are encouraging with recoverable reserves expected to be similar to the Bakken Lite.

Last year when EOG recognized that crude oil production in the North Dakota Bakken exceeded the pipeline capacity in the basin, we built and placed in operation a rail transportation system. Designed to initially facilitate one unit train per day with a maximum capacity of 60,000 gross barrels, the system is comprised of a crude oil loading facility in Stanley, North Dakota, an unloading facility in Stroud, Oklahoma and a 17-mile pipeline running from that point to a terminal in Cushing, Oklahoma. The project is an example of EOG’s agility, its ability to make decisions quickly and to implement solutions to resolve issues that might stymie other operators. While the Fort Worth Barnett Shale Combo and North Dakota Bakken Plays are expected to provide significant momentum for the foreseeable future, EOG is pursuing additional horizontal crude oil and liquidsrich concepts in basins across North America.

Returns Still Matter

EOG’s goal always has been to be the best rather than the biggest exploration and production company. We continue to define “best” as measured by delivering superior stockholder value.

For the three, five and 10-year periods ended December 31, 2009, EOG’s stock appreciation was 56 percent, 173 percent and 1,008 percent, respectively, significantly exceeding the performance of the S&P 500 Oil and Gas Exploration and Production Index for these three periods.

EOG’s persistence in managing costs and maximizing reserve recoveries has resulted in superior returns, year after year. Our average ROCE⁽²⁾ for the 10-year period ended December 31, 2009 was 18 percent. EOG’s outperformance on stockholder returns and ROCE validates its long-term organic growth strategy.

EOG reported net income available to common stockholders of $547 million in 2009, or $2.17 per share as compared to $2,436 million, or $9.72 per share in 2008. For the year, total company production increased 6.5 percent, with a 28 percent increase in total company crude oil and natural gas liquids production.

At December 31, 2009, EOG’s total proved reserves were approximately 10.8 Tcfe, an increase of 2.1 Tcfe, or 24 percent higher than year-end 2008. Total reserve replacement from all sources⁽²⁾ was 364 percent at attractive total reserve replacement costs.

Following an increase in 2009, the EOG Board of Directors again increased the cash dividend on the common stock in February 2010. Effective with the dividend payable on April 30, 2010 to holders of record as of April 16, 2010, the quarterly dividend on the common stock will be $0.155 per share, an increase of 7 percent over the previous indicated annual rate. The current indicated annual rate of $0.62 per share reflects the 11th increase in 11 years.

EOG’s People Make the Difference

EOG delivers strong, steady results year-in and year-out because of the tenacity, creativity and commitment of approximately 2,100 employees, whom we consider unparalleled in any industry. They work hard, they work safely and they are committed to increasing stockholder value and safeguarding the environment. They also make a positive difference in their communities by contributing their talent, time and resources. Although EOG recently was named again to Fortune’s list of “100 Best Companies to Work For®” for the fourth consecutive year that it has been eligible, the laurels rightfully go to our employees. They have made EOG what it is, and we salute their efforts.

We all are proud of what EOG has accomplished as primarily a natural gas company over the past decade. Looking ahead, we have an early-mover position in several horizontal crude oil concepts, plus we are optimistic about the strength of crude oil prices in the future. Therefore, our long-term ROCE outperformance versus our peers can be perpetuated over the next decade, which should continue to be reflected in superior stockholder returns.

At EOG, we are energized by the challenge of developing new frontiers in horizontal oil.

Footnotes
⁽²⁾ Refer to reconciliation schedule on page 105 of our 2009 Annual Report to Stockholders

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