EOG Resources 2004 Annual Report to Shareholders

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Management’s Discussion and Analysis

Management’s Responsibility for Financial Reporting

Report of Independent Registered Public Accountanting Firm

Consolidated Statements of Income & Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Supplemental Information to Consolidated Financial Statements

Selected Financial Data

Quarterly Stock Data and Related Shareholder Matters

Reconciliation Schedules

Certifications & Glossary of Terms

Officers and Directors

Shareholder Information

11. PRICE, INTEREST RATE AND CREDIT RISK MANAGEMENT ACTIVITIES
    Price and Interest Rate Risks. EOG engages in price risk management activities from time to time. These activities are intended to manage EOG’s exposure to fluctuations in commodity prices for natural gas and crude oil. EOG utilizes derivative financial instruments, primarily price swaps and collars, as the means to manage this price risk. In addition to these financial transactions, EOG is a party to various physical commodity contracts for the sale of hydrocarbons that cover varying periods of time and have varying pricing provisions. Under SFAS No. 133 - “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137, 138 and 149, these various physical commodity contracts qualify for the normal purchases and normal sales exception and therefore, are not subject to hedge accounting or mark-to-market accounting. The financial impact of these various physical commodity contracts is included in revenues at the time of settlement, which in turn affects average realized hydrocarbon prices.
    During 2004, 2003 and 2002, EOG elected not to designate any of its derivative financial contracts as accounting hedges and accordingly, accounted for these derivative financial contracts using mark-to-market accounting. During 2004, EOG recognized losses on mark-to-market commodity derivative contracts of $33 million, which included realized losses of $82 million and collar premium payments of $1 million. During 2003, EOG recognized losses on mark-to-market commodity derivative contracts of $80 million, which included realized losses of $45 million and collar premium payments of $3 million. During 2002, EOG recognized losses on mark-to-market commodity derivative contracts of $49 million, which included realized losses of $21 million and a $2 million collar premium payment.
    Presented below is a summary of EOG’s 2005 natural gas financial collar contracts at December 31, 2004. As indicated, EOG does not have any financial collar or swap contracts that cover periods beyond March 2005. Moreover, EOG has not entered into any additional natural gas financial collar contracts or natural gas or crude oil financial price swap contracts since December 31, 2004. EOG accounts for these collar contracts using mark-tomarket accounting. The total fair value of the natural gas financial collar contracts at December 31, 2004 was $11 million.

The following table summarizes the estimated fair value of financial instruments and related transactions at December 31 of the years indicated as follows (in millions):

Credit Risk. While notional contract amounts are used to express the magnitude of commodity price and interest rate swap agreements, the amounts potentially subject to credit risk, in the event of nonperformance by the other parties, are substantially smaller. EOG evaluates its exposure to all counterparties on an ongoing basis, including those arising from physical and financial transactions. In some instances, EOG requires collateral, parent guarantees or letters of credit to minimize credit risk. At December 31, 2004, EOG’s net accounts receivable balance related to United States and Canada hydrocarbon sales included two receivable balances, each of which constituted 11% of the total balance. These receivables were due from two integrated oil and gas companies. The related amounts were collected during early 2005. The amounts due from an integrated oil and gas company and a utility company at December 31, 2003, which approximated 14% and 11%, respectively, of the United States and Canada net accounts receivable balance, were collected during early 2004. No other individual purchaser accounted for 10% or more of the United States and Canada net accounts receivable balance at December 31, 2004 and 2003. At December 31, 2004, EOG had an allowance for doubtful accounts of $21 million, of which $19 million is associated with the Enron bankruptcies recorded in December 2001.
Substantially all of EOG’s accounts receivable at December 31, 2004 and 2003 result from hydrocarbon sales and/or joint interest billings to third party companies including foreign state-owned entities in the oil and gas industry. This concentration of customers and joint interest owners may impact EOG’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral or other credit enhancements from a customer or joint interest owner, EOG analyzes the entity’s net worth, cash flows, earnings, and credit ratings. Receivables are generally not collateralized. During the three-year period ended December 31, 2004, credit losses incurred on receivables by EOG have been immaterial.

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