Highlights

    Highlights for the second quarter of 2009 (compared to second quarter  of 2008) include:   * Production increased 12% to 2.3 Bcfe (25.1 MMcfe/d)   * Production was 71% natural gas and 29% oil and NGLs, compared to    82% natural gas and 18% oil and NGLs in the second quarter of 2008   * Revenues decreased 59% to $9.9 million, on a 63% drop in average    realized commodity prices (before the effect of commodity    derivatives) to $4.35 per Mcfe and a 46% drop in average realized    commodity prices (after the effect of commodity derivatives) to    $6.30 per Mcfe   * Net loss was $671,000, or $(0.03) per diluted share, compared to    net income of $928,000, or $0.04 per diluted share, for the second    quarter of 2008, a 172% decrease   * Adjusted net income (a non-GAAP measure) was $2.2 million, or $0.10    per diluted share, a 70% decrease   * EBITDAX (a non-GAAP measure) was $10.2 million, or $0.49 per    diluted share, a 46% decrease 

Second Quarter 2009 Results

Production for the second quarter of 2009 totaled 2.3 Bcfe (25.1 MMcfe/d), compared to 2.0 Bcfe (22.4 MMcfe/d) produced in the second quarter of 2008, an increase of 12%. Production decreased 10% in the second quarter of 2009, compared to first quarter 2009 production of 2.5 Bcfe. Second quarter 2009 production was 71% natural gas and 29% oil and NGLs, compared to 82% natural gas and 18% oil and NGLs in the second quarter of 2008.

Revenues for the second quarter of 2009 totaled $9.9 million, compared to revenues of $24.1 million for the second quarter of 2008. Revenues for the second quarter of 2009 were negatively impacted by a sharp decline in realized commodity prices over the prior year quarter. Average realized natural gas, oil and NGL prices for the second quarter of 2009, before the effect of commodity derivatives, were $3.28 per Mcf, $55.60 per Bbl and $26.84 per Bbl, respectively, versus $11.10 per Mcf, $121.29 per Bbl and $53.93 per Bbl, respectively, for the second quarter of 2008. The Company's average realized price, including the effect of commodity derivatives, was $6.30 per Mcfe for the second quarter of 2009, compared to $11.59 per Mcfe for the second quarter of 2008, a decrease of 46%. Of the $14.2 million decrease in revenues, approximately $16.0 million was attributable to a decrease in oil and gas prices, which was partially offset by approximately $1.8 million attributable to an increase in production from Cinco Terry.

Net loss for the second quarter of 2009 was $671,000, or $(0.03) per diluted share, compared to net income of $928,000, or $0.04 per diluted share, for the second quarter of 2008. Net loss for the second quarter of 2009 included a pre-tax, unrealized loss on commodity derivatives of $4.3 million.

Excluding the unrealized loss on commodity derivatives and related income taxes, adjusted net income (a non-GAAP measure) for the second quarter of 2009 was $2.2 million, or $0.10 per diluted share, compared to adjusted net income of $7.3 million, or $0.35 per diluted share, for the second quarter of 2008. See "Supplemental Non-GAAP Financial and Other Measures" below for our reconciliation of adjusted net income to net income.

EBITDAX (a non-GAAP measure) for the second quarter of 2009 was $10.2 million, or $0.49 per diluted share, compared to $19.0 million, or $0.91 per diluted share, for the second quarter of 2008. See "Supplemental Non-GAAP Financial and Other Measures" below for our reconciliation of EBITDAX to net income.

Lease operating expenses ("LOE") for the second quarter of 2009 were $1.8 million ($0.77 per Mcfe), compared to $1.9 million ($0.91 per Mcfe) in the second quarter of 2008. The decrease in LOE over the prior year period was due in part to lower expenses related to well repair and maintenance costs as well as a $235,000 reduction of our estimated ad valorem tax accrual for the three months ended March 31, 2009, which we recognized during the second quarter of 2009.

Severance and production taxes for the second quarter of 2009 were $507,000, or 5.1% of oil and gas sales, compared to $1.2 million, or 4.8% of oil and gas sales, in the second quarter of 2008.

General and administrative ("G&A") expenses for the second quarter of 2009 were $2.2 million ($0.98 per Mcfe), compared to $1.8 million ($0.89 per Mcfe) for the second quarter of 2008. The increase in G&A expenses was principally due to increased staffing, share-based compensation and an increase in franchise taxes partially due to the timing of payment compared to 2008.

Depletion, depreciation and amortization ("DD&A") expenses for the second quarter of 2009 were $6.2 million ($2.73 per Mcfe), compared to $6.0 million ($2.93 per Mcfe) for the second quarter of 2008. The decrease in DD&A expenses per Mcfe was primarily attributable to an increase in our estimated proved reserves partially offset by an increase in production over the prior year quarter.

Our income tax benefit was $460,000 for the second quarter of 2009. Our provision for income taxes was $804,000 for the second quarter of 2008. Our effective income tax rate for the second quarter of 2009 was 40.7%, compared with 46.4% for the second quarter of 2008.

Capital Expenditures and Drilling Operations

Capital expenditures for drilling and development in the second quarter of 2009 totaled $3.1 million, and included the completion of seven gross (3.5 net) wells that were waiting on completion at March 31, 2009, all of which were completed as producers. Our estimated average daily net production for the month of July 2009 was 22.8 MMcfe/d.

As previously announced, due to the continued weakness in commodity prices, we did not extend the contracts for our two remaining drilling rigs after March 31, 2009, and we released these rigs during the first week of April 2009. We currently expect that our capital expenditures for the year ending December 31, 2009 will not exceed $25 million. We intend to fund our 2009 capital expenditures with internally-generated cash flows, with any excess cash flows applied to debt, working capital obligations or strategic acquisitions. Our capital expenditure budget is subject to change depending upon a number of factors, including economic and industry conditions at the time of drilling, prevailing and anticipated prices for oil and gas, the results of our development and exploration efforts, the availability of sufficient capital resources to us and other participants for drilling prospects, our financial results, the availability of leases on reasonable terms and our ability to obtain permits for the drilling locations.

Liquidity and Commodity Derivatives Update

We have a $200 million revolving credit facility with a $100 million borrowing base, of which $46.2 million and $42.9 million were drawn at June 30, 2009 and July 31, 2009, respectively. As of June 30, 2009, our long-term debt-to-capital ratio (a non-GAAP measure) was 17%. See "Supplemental Non-GAAP Financial and Other Measures" below for our definition of "long-term debt-to-capital ratio."

As of July 31, 2009, we had the following commodity derivatives positions outstanding:

                                 Volume (MMBtu)             $/MMBtu                            --------------------  ----------------------  Period                      Monthly     Total    Floor  Ceiling  Fixed  --------------------------  NYMEX - Henry Hub   Costless collars 2009      180,000    900,000  $ 7.50  $10.50   Costless collars 2009      130,000    650,000  $ 8.50  $11.70   Fixed price swaps 3rd -    4th quarter 2009          150,000    750,000                  $ 4.50   Fixed price swaps 2010     150,000  1,800,000                  $ 5.85   Fixed price swaps 2010     150,000  1,800,000                  $ 6.40  WAHA differential   Fixed price swaps 2009     200,000  1,000,000                  $(0.61)   Fixed price swaps 3rd    quarter 2009              300,000    600,000                  $(0.58)   Fixed price swaps 4th    quarter 2009              300,000    900,000                  $(0.67)   Fixed price swaps 2010     415,000  4,980,000                  $(0.71)   Fixed price swaps 2011     300,000  3,600,000                  $(0.53) 

Management Comments

J. Ross Craft, the Company's President and Chief Executive Officer, commented, "The significant decline in natural gas prices continued to affect our revenues and net income during the second quarter of 2009. We do not anticipate an appreciable improvement in natural gas pricing for the remainder of 2009 and have increased our 2010 hedge position through two fixed price swaps with an average price of $6.13 per MMBtu. However, we remain positive on the long-term outlook for natural gas, a clean, abundant fuel source.