The following discussion should be read in conjunction with management's discussion and analysis contained in our 2007 Annual Report on Form 10-K, as well as with the consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.

Gas, Natural Gas Liquids and Oil Production and Prices



                                          Three Months Ended September 30                 Nine Months Ended September 30
                                                                      Increase                                       Increase
                                         2008            2007        (Decrease)         2008            2007        (Decrease)
Total production
Gas (Mcf)                              179,348,090     143,584,304           25 %     498,123,918     378,404,737           32 %
Natural gas liquids (Bbls)               1,427,555       1,257,984           13 %       4,298,364       3,613,286           19 %
Oil (Bbls)                               5,302,631       4,379,439           21 %      14,659,078      12,678,526           16 %
Mcfe                                   219,729,206     177,408,842           24 %     611,868,570     476,155,609           29 %

Average daily production
Gas (Mcf)                                1,949,436       1,560,699           25 %       1,817,971       1,386,098           31 %
Natural gas liquids (Bbls)                  15,517          13,674           13 %          15,687          13,235           19 %
Oil (Bbls)                                  57,637          47,603           21 %          53,500          46,441           15 %
Mcfe                                     2,388,361       1,928,357           24 %       2,233,097       1,744,160           28 %

Average sales price
Gas per Mcf                          $        8.42   $        7.20           17 %   $        8.22   $        7.48           10 %
Natural gas liquids per Bbl          $       53.65   $       45.29           18 %   $       55.14   $       41.22           34 %
Oil per Bbl                          $       93.40   $       70.73           32 %   $       88.55   $       68.17           30 %

Average sales price before hedging
Gas per Mcf                          $        9.31   $        5.48           70 %   $        9.07   $        6.22           46 %
Natural gas liquids per Bbl          $       60.51   $       45.29           34 %   $       61.21   $       41.22           48 %
Oil per Bbl                          $      113.09   $       71.63           58 %   $      109.78   $       62.13           77 %

Average NYMEX prices
Gas per MMBtu                        $       10.24   $        6.16           66 %   $        9.73   $        6.83           42 %
Oil per Bbl                          $      118.52   $       75.21           58 %   $      113.49   $       66.21           71 %

Bbl-Barrel

Mcf-Thousand cubic feet

Mcfe-Thousand cubic feet of natural gas equivalent (computed on an energy equivalent basis of one Bbl equals six Mcf)

MMBtu-One million British Thermal Units, a common energy measurement

Production increases from 2007 to 2008 for the three- and nine-month periods are primarily because of development activity and acquisitions, partially offset by natural decline.

Realized gas prices and average NYMEX gas prices increased from 2007 to 2008. As a result of tighter storage levels and higher oil prices, gas prices reached as high as $13.00 per MMBtu in July 2008. Due to concerns of oversupply from shale gas development, falling oil prices and a mild summer which led to increased gas in storage, recent gas prices have declined. Prices will continue to be affected by weather, the level of North American production, oil prices, the U.S. economy and the level of liquified natural gas imports. Natural gas prices are expected to remain volatile. At October 31, 2008, the average NYMEX futures price for the following twelve months was $7.21 per MMBtu.

Realized oil prices and average NYMEX oil prices increased from 2007 to 2008. As a result of narrowing excess worldwide capacity, weakness in the dollar and continuing tension in the Middle East, oil reached a record above $147.00 per Bbl in July 2008. However, rising crude oil supplies, the tightened credit markets and the potential for lower demand in slowing U.S. and global economies have caused recent oil prices to decline. Oil prices are expected to remain volatile. At October 31, 2008, the average NYMEX futures price for the following twelve months was $71.28 per Bbl.

We use price hedging arrangements, including fixed-price physical delivery contracts, to reduce price risk on a portion of our natural gas, natural gas liquids and oil production. We have hedged a portion of our exposure to variability in future cash flows from natural gas liquids sales through December 2008 and from natural gas and oil sales through December 2010. See Note 7 to Consolidated Financial Statements.

Results of Operations

Quarter Ended September 30, 2008 Compared with Quarter Ended September 30, 2007

Net income for third quarter 2008 was $521 million compared to $412 million for third quarter 2007. Third quarter 2008 earnings include the net after-tax effect of a $24 million non-cash derivative fair value loss. Third quarter 2007 earnings include the net after-tax effects of a $4 million non-cash derivative fair value loss.

Total revenues for third quarter 2008 were $2.13 billion, a 50% increase from third quarter 2007 revenues of $1.42 billion. Operating income for the quarter was $969 million, a 37% increase from third quarter 2007 operating income of $707 million. Gas and natural gas liquids revenues increased $496 million because of the 25% increase in gas production and the 13% increase in natural gas liquids production, as well as the 17% increase in gas prices and the 18% increase in natural gas liquids prices. Oil revenue increased $185 million because of the 21% increase in production and the 32% increase in oil prices.

Expenses for third quarter 2008 totaled $1.16 billion, a 62% increase from third quarter 2007 expenses of $714 million. Increased expenses are generally related to increased production from development and acquisitions and related Company growth. Production expense increased $97 million primarily because of increased overall production, increased power and fuel costs as well as certain one-time and discretionary items related to recent property acquisitions including increased compression, maintenance, and workover costs. Taxes, transportation and other increased $82 million from the third quarter of 2007 primarily because of higher product prices and higher transportation costs related to higher throughput volumes. Exploration expense increased $8 million primarily because of increased seismic costs in the Gulf of Mexico. Depreciation, depletion and amortization increased $172 million because of increased production and higher acquisition, development and facility costs. General and administrative expense increased $35 million because of a $29 million increase in non-cash incentive award compensation and increased other general and administrative expense primarily due to higher employee expenses related to Company growth.

The derivative fair value loss for third quarter 2008 was $45 million compared to $3 million in the same 2007 period. The loss in 2008 is primarily related to the $38 million loss recorded on certain natural gas futures that no longer qualify for hedge accounting due to the September 2008 bankruptcy filing of the parent company of one of our counterparties. See Note 6 to Consolidated Financial Statements.

Interest expense increased $68 million primarily because of a 94% increase in weighted average borrowings incurred primarily to fund acquisitions. The effective income tax rate for third quarter 2008 was 37.8% compared with 35.9% for third quarter 2007. The higher 2008 rate is primarily related to a change in our estimated permanent differences in 2008 and the benefit of a lower Texas state rate in 2007.

Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007

Net income for the nine months ended September 30, 2008 was $1.56 billion, compared to $1.23 billion for the same 2007 period. Earnings for the first nine months of 2008 include the net after-tax effects of a $7 million non-cash derivative fair value gain. Earnings for the first nine months of 2007 include the net after-tax effects of a $27 million non-cash derivative fair value loss.

Total revenues for the first nine months of 2008 were $5.73 billion, 46% higher than revenues of $3.92 billion for the first nine months of 2007. Operating income for the first nine months of 2008 was $2.80 billion, a 35% increase from operating income of $2.08 billion for the comparable 2007 period. Gas and natural gas liquids revenues increased $1.35 billion primarily because of the 32% increase in gas production and the 19% increase in natural gas liquids production, as well as the 10% increase in gas prices and the 34% increase in natural gas liquids prices. Oil revenue increased $433 million because of the 16% increase in production and the 30% increase in prices.

Expenses for the first nine months of 2008 totaled $2.94 billion, a 60% increase from total expenses for the first nine months of 2007 of $1.84 billion. Increased expenses are generally related to increased production from development and acquisitions and related Company growth. Production expense increased $230 million primarily because of increased production and increased compression, maintenance, workover, water disposal and power and fuel costs. Taxes, transportation and other increased $242 million primarily because of higher product prices and higher transportation costs related to higher throughput volumes. Exploration expense increased $29 million primarily because of increased seismic costs in the Gulf of Mexico and the Woodford and Fayetteville shales. Depreciation, depletion and amortization increased $463 million because of increased production and higher acquisition, development and facility costs. General and administrative expense increased $105 million because of a $72 million increase in non-cash incentive award compensation and increased other general and administrative expense primarily due to higher employee expenses related to Company growth.

The derivative fair value loss for the first nine months of 2008 was $3 million compared to a $10 million gain in the same 2007 period. The 2008 loss is primarily related to the $38 million loss recorded on certain natural gas futures that no longer qualify for hedge accounting due to the September 2008 bankruptcy filing of the parent company of one of our counterparties as well as the loss related to the ineffective portion of hedge derivatives. These were partially offset by the gain on natural gas basis swaps that do not qualify for hedge accounting. The 2007 gain is primarily related to the ineffective portion of hedge derivatives. See Note 6 to Consolidated Financial Statements.

Interest expense increased $167 million primarily because of a 101% increase in the weighted average borrowings incurred primarily to fund acquisitions. The 2008 year-to-date effective income tax rate was 36.9% compared with a 36.1% effective rate for the nine-month 2007 period. The higher 2008 rate is primarily related to a change in our estimated permanent differences in 2008 and the benefit of a lower Texas state rate in 2007.

Comparative Expenses per Mcf Equivalent Production

The following are expenses on an Mcf equivalent (Mcfe) produced basis:



                                                Three Months Ended                Nine Months Ended
                                                   September 30                      September 30
                                                               Increase                          Increase
                                           2008      2007     (Decrease)     2008      2007     (Decrease)
Production                                $ 1.19    $ 0.93        28%       $ 1.10    $ 0.92        20%
Taxes, transportation and other             0.94      0.70        34%         0.90      0.65        38%
Depreciation, depletion and
amortization (DD&A)                         2.27      1.84        23%         2.12      1.74        22%
General and administrative (G&A):
Non-cash stock incentive compensation       0.17      0.05       240%         0.18      0.08       125%
All other G&A                               0.21      0.22       (5)%         0.25      0.25        -
Interest                                    0.60      0.36        67%         0.53      0.33        61%

The following are explanations of expense variances on an Mcfe basis:

Production expenses-Increased production expense is primarily because of increased power and fuel costs as well as certain one-time and discretionary items related to recent property acquisitions including increased compression, maintenance and workover costs.

Taxes, transportation and other-Most of these expenses vary with product prices. Increased taxes, transportation and other expense is primarily because of higher product prices and higher transportation costs related to increased third-party transportation.

DD&A-Increased DD&A is primarily because of higher acquisition, development and facility costs per Mcfe.

G&A-Increased stock incentive compensation is related to additional incentive award grants since last year including stock options, performance shares and restricted stock awards and accelerated vesting of options due to our common stock price closing above specified target prices. All other G&A expense decreased for the quarter because of increased production outpacing personnel and other expenses related to company growth.

Interest-Increased interest is primarily because of an increase in weighted average borrowings to fund recent acquisitions partially offset by increased production.

Liquidity and Capital Resources

Cash Flow and Working Capital

Cash provided by operating activities was $3.75 billion for the first nine months of 2008, compared with $2.64 billion for the same 2007 period. Cash provided by operating activities for the first nine months of 2008 increased primarily because of increased production from development activity and acquisitions. Cash flow from operating activities was decreased by changes in operating assets and liabilities of $2 million in the first nine months of 2008 and increased by $83 million in the first nine months of 2007. Changes in operating assets and liabilities are primarily the result of timing of cash receipts and disbursements. Cash flow from operating activities was also reduced by exploration expense, excluding dry hole expense, of $55 million in the first nine months of 2008 and $23 million in the first nine months of 2007.

During the nine months ended September 30, 2008, cash provided by operating activities of $3.75 billion, proceeds from the February and July 2008 common stock offerings of $2.6 billion, proceeds from the April and August 2008 debt offerings of $4.18 billion and proceeds from other borrowings of $300 million were used to fund net property acquisitions, development costs and other net capital additions of $10.75 billion and dividends of $181 million. The increase in cash and cash equivalents for the period was $19 million.

Total current assets increased $1.41 billion during the first nine months of 2008 primarily because of an $849 million increase in derivative fair value as a result of lower natural gas, natural gas liquids and crude oil prices and a $594 million increase in accounts receivable due to increased revenue and receivables acquired from Hunt Petroleum. Total current liabilities increased $1.09 billion during the first nine months of 2008 primarily because of an $855 million increase in accounts payable and accrued liabilities due to increased activity and the payables assumed from the Hunt Petroleum acquisition as well as a $345 million increase in deferred income taxes related to the increase in derivative fair value current assets. These were partially offset by a $137 million decrease in derivative fair value liabilities due to the effect of lower natural gas, natural gas liquids and crude oil prices.

Working capital increased from a negative position of $250 million at December 31, 2007 to a positive position of $77 million at September 30, 2008. Excluding the effects of derivative fair value and deferred income tax current assets and liabilities, working capital decreased $294 million from a negative position of $230 million at December 31, 2007 to a negative position of $524 million at September 30, 2008. For a disclosure of the effect of changing commodity prices on the fair value of our derivative contracts, see Item 3. Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk.

Any payments due counterparties under our hedge derivative contracts should ultimately be funded by higher prices received from the sale of our production. Production receipts, however, lag payments to the counterparties by as much as 55 days. Any interim cash needs are funded by borrowings under either our revolving credit agreement, our other unsecured and uncommitted lines of credit or our commercial paper program.

Recent events in global financial markets have resulted in distortions in the commercial paper markets. In response, in fourth quarter 2008, we have used a combination of commercial paper and borrowings under our revolving credit facility to meet our short-term funding needs. We believe that our expected cash flow from operations, as well as our various funding facilities provide us with adequate liquidity to meet our current obligations. In 2009, given our hedge position and current commodity strip pricing, we expect to generate enough cash flow from operations to fund our capital expenditures and to pay down at least $1 billion of debt.

Acquisitions and Development

During the first six months of 2008, we completed acquisitions of both producing and unproved properties for approximately $2.3 billion. These acquisitions included bolt-on acquisitions of additional producing properties, mineral interests and undeveloped leasehold primarily in our Eastern and San Juan Regions and the Barnett, Fayetteville, Woodford and Marcellus shales. These acquisitions were funded by commercial paper borrowings, proceeds from the February 2008 common stock offering and proceeds from the April 2008 issuance of senior notes and are subject to typical post-closing adjustments (see "Debt and Equity" below).

Additionally, in May 2008, we acquired producing properties, leasehold acreage and gathering infrastructure in the Fayetteville Shale from Southwestern Energy Company for approximately $520 million, subject to typical post-closing adjustments. The purchase price was allocated primarily to unproved properties. The acquisition was funded by proceeds from the April 2008 issuance of senior notes (see "Debt and Equity" below).

In July 2008, we acquired producing properties, leasehold acreage and pipeline and gathering infrastructure in the Marcellus Shale in western Pennsylvania and West Virginia from Linn Energy, LLC for approximately $600 million, subject to typical post-closing adjustments. The purchase price was allocated primarily to proved and unproved properties. The acquisition was funded in part by proceeds from the April 2008 issuance of senior notes as well as commercial paper borrowings (see "Debt and Equity" below).

In July 2008, we acquired producing and undeveloped acreage located in the Bakken Shale in Montana and North Dakota from Headington Oil Company. The total purchase price was $1.8 billion, subject to typical post- closing adjustments, and was funded by cash of $1.05 billion and the issuance of 11.7 million shares of common stock to the seller valued at $742 million. The purchase price was allocated primarily to proved properties. The cash portion of the transaction was funded by a combination of operating cash flow and commercial paper.

In September 2008, we acquired Hunt Petroleum Corporation and other associated entities for approximately $4.2 billion, funded by cash of $2.6 billion and the issuance of 23.5 million shares of common stock to the seller valued at $1.6 billion. Hunt Petroleum owned natural gas and oil producing properties primarily concentrated in our Eastern Region, including East Texas and central and north Louisiana. Additional producing properties, both onshore and offshore, are along the Gulf Coast of Texas, Louisiana, Mississippi and Alabama. Non-operating interests, including producing and undeveloped acreage in the North Sea, were also conveyed in the transaction. The cash portion of the transaction was funded by a combination of operating cash flow, commercial paper and the August 2008 issuance of senior notes (see "Debt and Equity" below).

In October 2008, we acquired 12,900 acres in the Barnett Shale for approximately $800 million, subject to typical post-closing adjustments. The acquisition was funded through proceeds from the August 2008 common stock offering (see "Debt and Equity" below), our commercial paper program and our revolving credit facility.

Exploration and development expenditures for the first nine months of 2008 were $2.41 billion compared with $1.98 billion for the first nine months of 2007. Our 2008 development and exploration budget is $3.5 billion and our budget for construction of pipeline infrastructure and compression and processing facilities is $600 million. We expect these expenditures to be funded by cash flow from operations. Actual costs may vary significantly due to many factors, including development results and changes in drilling and service costs. We also may reevaluate our budget and drilling programs as a result of the significant changes in oil and gas prices.

Raw material shortages and strong global demand for steel continued to tighten steel supplies and caused prices to significantly increase in the first nine months of 2008. With demand decreasing due to slowing global growth as a result of the tightened credit markets, we expect prices to decline. We have negotiated supply contracts with our vendors to support our development program under which we expect to acquire adequate supplies to complete our development program.

Through the first nine months of 2008, we participated in drilling approximately 811 gas wells and 65 oil wells and performed 260 workovers. Our year-to-date drilling activity was concentrated in East Texas and the Barnett Shale. Workovers have focused on recompletions, artificial lift and wellhead compression. These projects generally have met or exceeded management expectations.

Debt and Equity

On September 30, 2008, we had no borrowings under our revolving credit agreement with commercial banks, and we had available borrowing capacity of $1.78 billion net of our commercial paper borrowings. In February 2008, we amended this agreement to, among other things, extend the maturity date to April 1, 2013. In third quarter 2008, we increased the borrowing capacity to $2.84 billion. We have annual options to request successive one-year extensions and the option to increase the commitment up to an additional $0.66 billion. The interest rate on any borrowing is generally based on LIBOR plus 0.40%. If our utilization of available commitments is greater than 50%, then the interest rate on our borrowings will be increased by 0.05%. Interest is paid at maturity, or quarterly if the term is for a period of 90 days or more. We also incur a commitment fee on unused borrowing commitments, which is 0.09%. The agreement requires us to maintain a debt-to-total capitalization ratio of not more than 65%. We use the facility for general corporate purposes and as a backup facility for our commercial paper program. During the nine months ended September 30, 2008, we had not borrowed under our revolving credit facility. Recent events in global financial markets have resulted in distortions in the commercial paper markets. In response, in fourth quarter 2008, we have used a combination of commercial paper and borrowings under our revolving credit facility to meet our short-term funding needs.

In third quarter 2008, we increased our commercial paper program availability to $2.84 billion. Borrowings under the commercial paper program reduce our available capacity under the revolving credit facility on a dollar-for-dollar basis. The commercial paper borrowings may have terms up to 397 days and bear interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. On September 30, 2008, borrowings under our commercial paper program were $1.06 billion at a weighted average interest rate of 3.6%.

In February 2008, we also amended our $300 million term loan credit agreement to increase outstanding borrowings to $500 million and to extend the maturity date to April 1, 2013. The proceeds were used for general corporate purposes.

Additionally in February 2008, we borrowed $100 million under a new five-year unsecured term loan agreement in a single advance that matures February 5, 2013. The interest rate is currently based on LIBOR plus 0.34%, and interest is paid at least quarterly. Other terms and conditions are substantially the same as our other term loan. The proceeds were used for general corporate purposes.

We have unsecured and uncommitted lines of credit with commercial banks totaling $300 million. As of September 30, 2008, there were no borrowings under these lines.

In August 2008, we sold $250 million of 5.00% senior notes due August 1, 2010, $500 million of 5.75% senior notes due December 15, 2013, $1.0 billion of 6.50% senior notes due December 15, 2018 and $500 million of 6.75% senior notes due August 1, 2037. The notes due 2037 constitute a further issuance of the 6.75% senior notes issued in July 2007. The 5.00% senior notes were issued at 99.988% of par to yield 5.007% to maturity. The 5.75% senior notes were issued at 99.931% of par to yield 5.767% to maturity. The 6.50% senior notes were issued at 99.713% of par to yield 6.540% to maturity. The 6.75% senior notes were issued at 94.391% of par to yield 7.214% to maturity. Net proceeds of $2.2 billion were used to partially fund the cash portion of the Hunt acquisition (see "Acquisitions and Development" above).

In April 2008, we sold $400 million of 4.625% senior notes due June 15, 2013, $800 million of 5.50% senior notes due June 15, 2018 and $800 million of 6.375% senior notes due June 15, 2038. The 4.625% senior notes were issued at 99.888% of par to yield 4.651% to maturity. The 5.50% senior notes were issued at 99.539% of par to yield 5.561% to maturity. The 6.375% senior notes were issued at 99.864% of par to yield 6.386% to maturity. Net proceeds of $1.98 billion were used to fund property acquisitions that closed during the second and third quarters of 2008 (see "Acquisitions and Development" above), to pay down outstanding commercial paper borrowings and for general corporate purposes.

In August 2008, we completed a public offering of 29.9 million common shares at . . .