Natural gas giant EOG Resources (NYSE:EOG) reported earnings up almost 440% from the year-ago quarter. As with Burlington Resources' (NYSE:BR) 340% increase, higher natural gas prices overcame the slower summer months to generate blockbuster earnings. Judging by the market's reaction, the news was already priced into the stock.

Though it was widely reported that EOG handily beat the consensus analyst estimate, investors may be surprised that the company did not exceed the highest estimates. Said another way, EOG had a great quarter, but it let some people down.

What's expected of next year? The 30 analysts on record expect net income to decline 28%. That sounds bad until you consider the earnings estimate extremes. The lowest calls for a decline of over 50% -- the most optimistic for a 16% increase.

If analysts can spend their days thinking about the natural gas industry and come up with such widely varying estimates, what chance does an investor have at assessing the situation?

A quick answer is that you need to understand the business, the trends, and the company's opportunities. Then you need to decide.

The U.S. natural gas business looks very good. The business used to be boom or bust. Each boom in price brought an abundance of drilling that led to a glut. The latest boom has generated increased drilling. This time, though, an abundance of gas was not found -- and the price of natural gas has stayed high.

The trend for natural gas is favorable. The ExxonMobil (NYSE:XOM) 2003 Economic and Energy Outlook sees strong demand for natural gas and a large increase in the liquefied natural gas (LNG) market.

And EOG's position in the U.S. market is every bit as favorable. EOG just closed its largest acquisition, picking up new fields in the U.S. and Canada. The company expects an increase in 2004 U.S. production of 6.5%.

With increased production, and potentially strong demand as business improves, it is hard to imagine gas and oil prices dropping enough for earnings to decrease 50%. At a modest 12 times projected 2003 earnings, and with a projected debt-to-capital ratio of 34% to 37%, EOG could be a solid choice for anyone wanting to own a quality natural gas producer.

W.D. Crotty can be reached at HawaiiFool@hawaii.com

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