MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
    EOG Resources, Inc. (EOG) is one of the largest independent (non-integrated) oil and natural gas companies in the United States with substantial proved reserves in the United States, Canada, offshore Trinidad and, to a lesser extent, the United Kingdom North Sea. EOG operates under a consistent business and operational strategy which focuses predominantly on achieving a strong reinvestment rate of return, drilling internally generated prospects, delivering long-term production growth and maintaining a strong balance sheet, with a below average debt-to-total capitalization ratio.
    EOG had another year of record operating earnings in 2004. Net income available to common for 2004 of $614 million was up 47% over 2003 earnings of $419 million, attributable primarily to higher commodity prices and increased production. At December 31, 2004, EOG’s total reserves were 5.6 Tcfe, an increase of 430 Bcfe, or 8% higher than 2003.

Operations
    Several important developments have occurred since January 1, 2004.
    United States and Canada. During 2004, EOG opened a new office in Fort Worth, Texas to expand its drilling success in the Barnett Shale play of the Fort Worth Basin. EOG made significant gas discoveries in the non-core portion of the trend located south and west of the City of Fort Worth. EOG plans to focus on increasing production and further defining the play's ultimate size during 2005.
    EOG’s effort to identify plays with larger reserve potential has proven a successful supplement to its base development and exploitation program in the United States and Canada. EOG plans to continue to drill smaller wells in large acreage plays, which in the aggregate will contribute substantially to EOG’s crude oil and natural gas production. EOG has several larger potential plays under way in Wyoming, Utah, Texas, Oklahoma and western Canada.
    International. In mid-2004, EOG began natural gas sales to NGC under a fifteen-year take-or-pay contract. This gas is being resold by NGC to an anhydrous ammonia plant located in Point Lisas, Trinidad. The plant is owned by N2000. At December 31, 2004, EOG’s subsidiary, EOG Resources NITRO2000 Ltd., owned an approximate 23% equity interest in N2000. Under the contract, EOG supplies approximately 60 MMcfd gross of natural gas to NGC.
    Although EOG continues to focus on United States and Canada natural gas, EOG sees an increasing linkage between United States and Canada natural gas demand and Trinidadian natural gas supply. For example, LNG imports from existing and planned facilities in Trinidad are serious contenders to meet increasing United States demand. In addition, ammonia, methanol and chemical production has been relocating from the United States and Canada to Trinidad, driven by attractive natural gas feedstock prices in the island nation. EOG anticipates that its existing position with the supply contracts to the two ammonia plants and the new methanol plant, will continue to give its portfolio an even broader exposure to United States and Canada natural gas fundamentals.
    In 2004, EOG continued its progress in the Southern Gas Basin of the United Kingdom North Sea. A development well was drilled in the Valkyrie field and commenced production in August 2004. In addition, the production facilities were installed in the Arthur field, which was discovered in 2003, and production commenced in January 2005. EOG continues to review additional opportunities in this area and expects to participate in several exploration wells in 2005.

Capital Structure
    As noted, one of management’s key strategies is to keep a strong balance sheet with a consistently below average debt-to-total capitalization ratio. At December 31, 2004, EOG’s debt-to-total capitalization ratio was 27%, down from 33% at year-end 2003. By primarily utilizing cash provided from its operating activities and proceeds from stock options exercised in 2004, EOG funded its $1.5 billion exploration and development expenditures, paid down $31 million of debt, redeemed all 500 outstanding shares of Series D Preferred Stock for $50 million and increased the dividend paid to common shareholders by 20%. In addition, in 2005, EOG’s Board of Directors increased the quarterly cash dividend on common stock by 33%. As management currently assesses price forecast and demand trends for 2005, EOG believes that operations and capital expenditure activity can essentially be funded by cash from operations.
    For 2005, EOG’s estimated exploration and development expenditure budget is approximately $1.6 billion, excluding acquisitions. United States and Canada natural gas continues to be a key component of this effort. When it fits EOG’s strategy, EOG will make acquisitions that bolster existing drilling programs or offer EOG incremental exploration and/or production opportunities. Management continues to believe EOG has one of the strongest prospect inventories in EOG’s history.

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