EOG Resources Inc. (EOG) reported third-quarter earnings of 81 cents per share, compared with the Zacks Consensus Estimate of 65 cents and a year-ago profit of $2.34. Before adjusting one-time items, earnings were 2 cents per share. Despite an increase in production volumes, earnings were down from the year-earlier level due primarily to significantly lower commodity price realizations.

Total volumes during the quarter increased approximately 4% year-over-year to 195.9 billion cubic feet equivalent (Bcfe), or 2,129 million cubic feet equivalent per day (MMcfe/d), 76% of which was natural gas and 24% liquids. Natural gas volumes decreased 3% year-over-year, led by an approximately 6% decrease in the U.S. volumes to 1,128 MMcf/d, and more than 2% decrease in Canadian volumes to 219 MMcf/d.

Crude oil and condensate production during the quarter was 59.5 thousand barrels per day (MBbl/d), up nearly 23% from the year-ago level. This was primarily driven by a 24% growth in domestic volumes, reflecting increased production in North Dakota. Natural gas liquids (NGL) volumes increased almost 69% from the year-ago quarter to 24.1 MBbl/d.

Average realized natural gas prices decreased roughly 63% year-over-year to $3.01 per Mcf. Prices decreased across all the geographical segments, with domestic realizations down nearly 64% year-over-year to $3.27 per Mcf. Average realized prices for crude oil and condensates decreased approximately 45% year-over-year to $60.65 per barrel.

Prices decreased across all the geographical segments, with domestic realizations down nearly 45% year-over-year to $60.79 per barrel. Quarterly NGL prices were $31.14 per barrel, down approximately 55% year-over-year.

At the end of the quarter, EOG had cash and cash equivalents of $608.5 million and long-term debt of $2.8 billion, representing a net debt-to-capitalization ratio of approximately 22.7%. During the quarter, EOG generated approximately $819.3 million ($3.24 per share) in discretionary cash flow (DCF), compared to a DCF of $1.17 billion ($4.66 per share) in the year-ago quarter.

The company has set a full-year target of $3.1 billion (excluding acquisitions) for exploration and development activities. Additionally, the company has allocated $300 million for natural gas gathering, processing and other expenditures.

With the performance of its North American plays, EOG has increased its 2009 total production growth target from 5.5% to 6%. Total liquids growth target was also increased from 25% to 27%. For 2010, the company has set a total organic production growth target of 13% that includes total liquids production growth of 50%.

EOG has an industry leading organic production-growth profile, strong inventory of drilling opportunities, attractive cost and return metrics and impressive long-term growth prospects. We see EOG as a core holding in the large-cap E&P space. However, its natural gas weighted assets currently is a concern. We recommend a Neutral rating for the stock.

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