2004 Annual Report to Shareholders Performance You Can Count On FINANCIAL AND OPERATING HIGHLIGHTS (In millions, unless otherwise indicated) 2004 2003 2002 Net Operating Revenues. $ 2,271 $ 1,745 $ 1,095 Income Before Interest Expense and Income Taxes . $ 989 $ 713 $ 179 Net Income Available to Common . $ 614 $ 419 $ 76 Total Exploration and Development Expenditures . $ 1,510 $ 1,333 $ 836 Wellhead Statistics Natural Gas Volumes (MMcfd) . 1,036 955 924 Natural Gas Price ($/Mcf). $ 4.86 $4.40 $ 2.60 Crude Oil and Condensate Volumes (MBbld) . 27.4 23.2 23.3 Crude Oil and Condensate Price ($/Bbl) . $ 40.22 $ 29.92 $ 24.56 Natural Gas Liquids Volumes (MBbld) . 5.6 3.8 3.7 Natural Gas Liquids Price ($/Bbl). $ 27.13 $ 21.13 $ 14.05 The Company Highlights EOG Resources, Inc. is one of • For 2004, EOG reported net income quarter of 2004 and the first quarter of the largest independent (non- available to common of $614 million, 2005. These are EOG’s first producing integrated) oil and natural gas compared to $419 million for 2003. assets in that region. companies in the United States • At December 31, 2004, total company • In Trinidad, total 2004 production with substantial proved reserves reserves were approximately 5.6 Tcfe, increased 25 percent, compared to in the United States, Canada, an increase of 430 Bcfe, or 8 percent 2003. EOG began natural gas sales to offshore Trinidad and, to a lesser higher than 2003. From drilling alone, NGC for the N2000 ammonia plant in extent, the United Kingdom North EOG added 850 Bcfe of reserves mid-2004. In February 2005, EOG Sea. EOG Resources, Inc. is in 2004. announced a 10-year extension and listed on the New York Stock amendments to the pricing terms of Exchange and is traded under • During 2004, total company production the SECC natural gas sales contract the ticker symbol “EOG.” increased 10.4 percent on a daily with NGC and signed a contract to basis, compared to 2003. EOG is supply natural gas to NGC for an targeting 13.5 percent organic LNG plant with start-up planned for production growth in 2005, which mid-2006. includes an 11 percent increase in natural gas production from the United • A two-for-one stock split in the form of States and Canada. a stock dividend, announced in February 2005, was effective March 1, • At year-end 2004, EOG had 2005. In addition, the cash dividend on approximately 400,000 acres under the common stock was increased by lease in the Texas Barnett Shale play 33 percent, following a 20 percent with net production reaching 30 increase in 2004. Beginning with the MMcfed during December. dividend payable on April 29, 2005, the On The Cover • In the United Kingdom North Sea, post-split quarterly cash dividend on A spinning drillbit reflects EOG’s EOG commenced production from two the common stock will be $.04 per high level of drilling activity and Southern Gas Basin wells in the third share, the fifth increase in six years. its continued focus on organic growth, a long-term strategy that Information regarding forward-looking statements is on page 21 of this annual report to positioned the company to shareholders. achieve outstanding performance in 2004. For a glossary of terms see page 56. LETTER TO SHAREHOLDERS Persistence Pays Superior Shareholder Returns was another banner year for 2004EOG Resources with double-digit production growth and shareholder returns that well outpaced most peer companies. Especially noteworthy is our stock price performance viewed over the last five years. Clearly, our long-term strategy is working. When we became an independent company in 1999, we announced our intention to concentrate on the fundamentals of the exploration and production business. Our priorities included: • Focusing on per share results and working diligently to maintain our reputation as a rate of return driven • Adding new, big-target domestic Mark G. Papa company that creates superior plays to our existing program, Chairman and Chief Executive Officer shareholder value, • Developing our offshore Trinidad Edmund P. Segner, III • Being financially conservative and properties, while at the same time President and Chief of Staff managing our company with high seeking another new international ethical standards, venue that fits our strict selection • Growing the company through the criteria, drillbit with an aggressive drilling • Placing our dynamic employees in program concentrating largely on the close proximity to the plays they development of natural gas, along explore and operate, and with select oil targets, • Attracting and retaining top • Seeking higher return, tactical technical talent, while developing acquisition opportunities in areas and honing their skills, as we work where EOG is established, rather than toward being the exploration and pursuing big-ticket mergers and production industry’s ‘employer acquisitions, of choice.’ • Ranking repeatedly as a low-cost industry operator, Since we articulated this • Continuing to explore and exploit our straightforward, flexible yet deliberate existing properties located in almost strategy, we have followed through every major producing basin in the with persistence and the result is United States and Canada with a strong performance over a chain of consistent approach, successful years. 2004 ANNUAL REPORT TO SHAREHOLDERS 1 LETTER TO SHAREHOLDERS Enhancing Shareholder Value external reserve estimates prepared by EOG YEAR-END RESERVES (Bcfe) the independent reserve engineering firm, n keeping with EOG’s ongoing DeGolyer and MacNaughton, that 5,647 dedication to enhancing shareholder evaluated 77 percent of EOG’s proved 5,216 returns, the board of directors recently reserves on a Bcfe basis in 2004. I 4,602 approved a two-for-one stock split in the The impressive performance EOG 4,229 form of a stock dividend effective March achieved in 2004 was derived from our 1, 2005. Following a 20 percent increase strong, established exploration and in early 2004, the board voted to again production activities. With a preference increase the common stock cash dividend for organic growth, EOG’s operations 33 percent in 2005 to an indicated annual continue to expand and flourish. Once rate of $0.16 per post-split share. This again, in 2004, EOG ranked as one of represents the fifth increase in six years. the five most active drillers in the EOG reported record net income United States. available to common of $614 million for During 2004, we announced that we 2004, compared to $419 million for 2003. had identified a big target play located in 01 02 03 04 For 2004, EOG’s return on equity (ROE)(1) the Fort Worth Basin of Texas. Potentially United Kingdom was 25 percent and return on capital significant in scope, the Barnett Shale Trinidad employed (ROCE)(1) was 18 percent. Our play is expected to generate a very high United States and Canada return to shareholders(1) was 55 percent reinvestment rate of return, year after for the 12-month period. year. We have prospects for a multi-year In addition to our growth in net drilling inventory for this notable income and strong returns, EOG’s 2004 discovery, which will be additive to our cash flow essentially funded our capital United States operations. EOG DAILY PRODUCTION program. We ended the year with a 27 Establishing a firm foothold in the (MMcfed) percent debt-to-total capitalization ratio(1), United Kingdom North Sea last year, down from 33 percent at year-end 2003. EOG commenced production in the 1,233 1,100 1,117 EOG also redeemed $50 million in third quarter with current net production 1,086 preferred stock, further strengthening the of approximately 35 MMcfed. In 2005, balance sheet. we have plans to expand our drilling From an operations perspective, 2004 efforts there. was a breakout year. Total company In Trinidad, EOG commenced natural production increased 10.4 percent, as gas sales to NGC for the N2000 ammonia compared to 2003. We are targeting plant in mid-2004. Also, we contracted to outstanding total company production supply natural gas to NGC for both the growth of 13.5 percent in 2005 and 8 M5000 methanol plant, which is percent in 2006. scheduled to come on-line in July, and for At year-end 2004, total company net an LNG plant beginning in mid-2006. 01 02 03 04 proved reserves were approximately 5.6 With significant opportunities Tcfe, an increase of 430 Bcfe, or 8 percent throughout our operations, EOG’s expected higher than 2003. For the 17th capital budget for 2005 is approximately consecutive year, internal reserve $1.6 billion, excluding potential acquisitions, estimates were within 5 percent of versus $1.5 billion spent in 2004. 2 EOG RESOURCES, INC. The Dynamics of Performance Barnett Shale Play While EOG’s Texas Barnett Shale play is creating excitement because of its potential scope and ability to generate high reinvestment rates of return for years to come, the company’s worldwide operations have a very extensive drilling inventory. 2004 ANNUAL REPORT TO SHAREHOLDERS 3 The Technology of Performance Roleta Trend South Texas explorationists, Andy Scott (seated) and Dan Flores (standing), fuel EOG’s penchant for ‘growth through the drillbit’ by generating exciting new drilling opportunities. After increasing total company production on a daily basis by 10.4 percent in 2004, EOG is targeting a 13.5 percent increase for 2005. 4 EOG RESOURCES, INC. LETTER TO SHAREHOLDERS COMPARATIVE Exemplary Shareholder Returns North American Natural Gas FIVE-YEAR RETURNS TO SHAREHOLDERS(1) Story Unfolds (2000 - 2004) hile we are pleased about our 2004 performance, OG continues to view the North 315% WEOG’s five-year return to American natural gas market as tight, shareholders(1) is truly more meaningful Edriven by declining domestic supply because it reflects company and increasing demand to produce performance since we became electricity.