Letter to Stockholders

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Ahead of the Curve

EOG is at the forefront of what is being characterized as one of the greatest advancements for the North American onshore exploration and production industry in recent years. New resource plays and hydrocarbon formations that once were effectively uneconomic or only marginally profitable through development with vertical drilling now are being unlocked with horizontal wells. Our success in applying and advancing innovations in horizontal drilling and completion technology is reflected in our 2007 performance and gives us optimism for 2008 and beyond.

Horizontal Drilling and EOG’s Niche

Our corporate strategy remains consistent. Rather than adding reserves through major acquisitions, EOG focuses on organic growth through the drillbit while continuing to rank as a low-cost producer with high reinvestment rates of return. We also place a high priority on maintaining a very conservative balance sheet.

Keeping that proviso in mind, EOG recognized that conventional vertical drilling would always have its place, but horizontal drilling together with improved completion techniques showed promise as a tool for turning previously bypassed reservoirs into economic resources.

Over the last eight years, we have honed our skills in identifying the rock types that hold the most potential for applying the right combination of horizontal drilling and completion technology. These breakthroughs in geologic understanding help EOG target accumulations with significant amounts of hydrocarbons in-place and locate the ‘sweet spots’ where the highest rate of return wells can be drilled. Through systematic experimentation with horizontal drilling and completion techniques, we then optimize reserve recoveries and production rates, turning marginal vertical plays into highly economic, larger-scale horizontal plays.

By identifying possible reservoirs amenable to horizontal drilling in areas where there is little or no activity, EOG has established a first-mover advantage in several evolving onshore North American fields. Leasing large acreage positions with many viable drilling locations provides EOG with the opportunity to drive down drilling, completion and production costs, as well as refine our completion techniques throughout the development phase of these projects.

Horizontal drilling combined with the application of optimal completion technology has become a critical tool in developing new economic resources as EOG moves forward. In 2003, 11 percent of EOG’s wells in the United States were drilled using this technology. In 2008, we expect more than 50 percent of our domestic wells will be horizontal. This shift reflects both EOG and the industry’s appreciation for the opportunities that can be realized through horizontal drilling in tapping remaining reserves in the United States. In 2007, 22(²) percent of all domestic wells drilled across the industry used the technology, versus 10(²) percent just three years ago.

Technology Makes the Difference

In 2007, EOG recorded strong results using horizontal drilling technology in the Fort Worth Barnett Shale, North Dakota Bakken and South Texas.

Refinements in well completion processes resulted in higher well production and reserve recovery rates for Johnson County in the Fort Worth Barnett Shale. EOG’s Johnson County horizontal wells far exceeded the average peak month of production of any other operator’s wells in the area. Reflecting a more efficient drilling program and improved well results, our overall natural gas production from the Barnett Shale exceeded internal estimates with EOG exiting 2007 at approximately 375 MMcfed. The Western Counties, which remain in the early stages of development, are performing as expected. EOG has implemented cost reduction measures utilizing automated rigs and fracture treatment savings, which will improve overall returns during 2008.

EOG reported successful drilling from the Bakken Formation in North Dakota where we have accumulated approximately 320,000 net acres. During 2007, we increased our estimated reserves in the Bakken from 60 to approximately 80 MMbo, net. Currently, the North Dakota Bakken is the highest rate of return play in our drilling program.

In South Texas, EOG identified previously bypassed reservoirs that are amenable to horizontal drilling and by further experimenting with completion techniques, we have set up a good inventory of high rate of return drilling locations.

Also during 2007, EOG discovered several plays that we expect will have a role in driving future reserve and production growth. We developed these opportunities by focusing on previously uneconomic reservoirs using horizontal drilling and completion methods coupled with analyzing technical data from previously drilled industry wells.

Using the same techniques that gave us an early mover advantage in prolific Johnson County, we have unlocked economic crude oil reserves by extending the Fort Worth Barnett Play further north to Montague, Clay and Archer Counties. EOG has accumulated 250,000 net acres and based on initial results, the estimated reserve potential of the Fort Worth Basin crude oil play is approximately 225 to 460 MMboe, net.

In northwest Colorado, we have assembled 100,000 net acres in the North Park Basin, another promising horizontal crude oil play. EOG has tested one horizontal well and plans to drill an additional seven in 2008.

A new horizontal natural gas play for EOG that shows substantial potential is located in northeastern British Columbia’s Horn River Basin. Although the field is in the early stages of delineation, we have assembled approximately 140,000 net acres and will drill additional development wells this year to further refine the drilling and completion processes.

During 2008, drilling and testing will be ongoing in all of these areas.

With the Fort Worth Basin and North Park Basin oil plays added to the North Dakota Bakken in EOG’s portfolio, we expect to increase the proportion of crude oil and natural gas liquids in our total production mix.

The impact of these initiatives is propelling EOG forward in our quest to be the best exploration and production company in North America as measured by total stockholder returns and return on capital employed (ROCE). EOG’s emphasis continues to focus on being the best — not the biggest — because growth for growth’s sake carries no discernable benefits from our perspective.

Robust Performance across the Board

EOG’s overall performance in 2007 was rock solid. We again reported high financial returns with 16 percent ROCE⁽¹⁾. For the eight-year period ended December 31, 2006, EOG’s average ROCE⁽¹⁾ was 20 percent as compared to 8 percent for the S&P 500 Index⁽³⁾.

In 2007, EOG reported an 11 percent increase in overall organic year-over-year production that included a 19 percent increase in the United States. We expect to achieve significant total company organic production growth again in 2008.

Net income available to common stockholders was $1,083 million or $4.37 per diluted share in 2007, as compared to $1,289 million or $5.24 per diluted share for 2006. EOG ended 2007 with a 14 percent debt-to-total capitalization ratio.

At December 31, 2007, EOG’s total reserves were approximately 7.7 Tcfe, an increase of 944 Bcfe, or 14 percent higher than year-end 2006.

Following a 50 percent increase in 2007, EOG’s Board of Directors again has increased the cash dividend on the common stock. Effective with the dividend payable on April 30, 2008 to record holders as of April 16, 2008, the quarterly dividend on the common stock will be $0.12 per share. The indicated annual rate of $0.48 per share reflects a 33 percent increase from 2007, the eighth increase in nine years.

Outlook for the Future

At EOG, we are bullish about crude oil prices and optimistic that North American natural gas prices will provide opportunities to reinvest capital at strong rates of return.

Key to EOG’s continued success is the performance, commitment, creativity and work ethic of our approximately 1,800 employees. With high innate levels of technical skills, our men and women place a high value on simultaneously growing professionally while contributing to the overall success of the company. They are outstanding in their respective fields and understandably proud of EOG’s performance.

What continues to work for EOG is a corporate culture that is decidedly collaborative in nature combined with a highly decentralized operating environment that has a relatively low level of bureaucracy.

For the second consecutive year since EOG was eligible for consideration, our company was named to FORTUNE’s 2008 list of “The 100 Best Companies to Work For.”

Another important facet of EOG’s corporate culture is our company’s respect for, and adherence to, sound safety and environmental practices. Embedded in all aspects of EOG’s operations, this responsibility is a priority shared by every employee throughout the United States, Canada, Trinidad and the United Kingdom.

EOG’s future is dynamic. Our current portfolio has both the depth and quality to position us to deliver strong production growth for the next five years and beyond. Our goal is to develop these assets through the drillbit with a consistent strategy of maintaining one of the lowest net debt ratios in our peer group and focusing on cost control in order to deliver high returns for stockholders as measured by ROCE.

As EOG continues to achieve innovation in horizontal drilling and enhanced completion technology, we expect to identify and exploit other new resource plays. In this exciting industry evolution, EOG is ahead of the curve.

⁽¹⁾ Refer to reconciliation schedules on page 93 of our 2007 Annual Report to Stockholders.
⁽²⁾ Smith Bits Data
⁽³⁾ S&P Compustat

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