The following discussion and analysis should be read in conjunction with our selected historical consolidated financial data and our accompanying consolidated financial statements and the notes to those financial statements included elsewhere in this report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."

Overview

We are an independent energy company engaged in the acquisition, exploration, development and production of oil and natural gas in the United States. We own interests in 1,693 (896.4 net to us) producing oil and natural gas wells and we operate 937 of these wells. In managing our business, we are concerned primarily with maximizing return on our stockholders' equity. To accomplish this goal, we focus on profitably increasing our oil and natural gas reserves and production.

Our offshore operations were historically conducted through our subsidiary, Bois d'Arc Energy. Bois d'Arc Energy was acquired by Stone Energy Corporation ("Stone") in exchange for a combination of cash and shares of Stone common stock on August 28, 2008. Accordingly, our offshore operations are presented as discontinued operations in our financial statements for all periods presented. Unless indicated otherwise, the amounts in the accompanying tables and discussion relate to our continuing onshore operations.

Our future growth will be driven primarily by acquisition, development and exploration activities. Under our current drilling budget, we plan to spend approximately $366.0 million in 2009 for development and exploration activities. We plan to drill approximately 41 wells (34.8 net to us) in 2009. Thirty-two of

these wells will be horizontal wells drilled in our East Texas/North Louisiana operating region. However, we could increase or decrease the number of wells that we drill depending on oil and natural gas prices. We do not budget for acquisitions as the timing and size of acquisitions are not predictable. We use the successful efforts method of accounting which allows only for the capitalization of costs associated with developing proven oil and natural gas properties as well as exploration costs associated with successful exploration activities. Accordingly, our exploration costs consist of costs we incur to acquire and reprocess 3-D seismic data, impairments of our unevaluated leasehold where we were not successful in discovering reserves and the costs of unsuccessful exploratory wells that we drill.

We generally sell our oil and natural gas at current market prices at the point our wells connect to third party purchaser pipelines. We market our products several different ways depending upon a number of factors, including the availability of purchasers for the product, the availability and cost of pipelines near our wells, market prices, pipeline constraints and operational flexibility. Accordingly, our revenues are heavily dependent upon the prices of, and demand for, oil and natural gas. Oil and natural gas prices have historically been volatile and are likely to remain volatile in the future.

Our operating costs are generally comprised of several components, including costs of field personnel, insurance, repair and maintenance costs, production supplies, fuel used in operations, transportation costs, workover expenses and state production and ad valorem taxes.

Like all oil and natural gas exploration and production companies, we face the challenge of replacing our reserves. Although in the past we have offset the effect of declining production rates from existing properties through successful acquisition and drilling efforts, there can be no assurance that we will be able to offset production declines or maintain production at current rates through future acquisitions or drilling activity. Our future growth will depend on our ability to continue to add new reserves in excess of production.

Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, oil and natural gas, and operating safety. Future laws or regulations, any adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may harm our business, results of operations and financial condition. Applicable environmental regulations require us to remove our equipment after production has ceased, to plug and abandon our wells and to remediate any environmental damage our operations may have caused. The present value of the estimated future costs to plug and abandon our oil and gas wells and to dismantle and remove our production facilities is included in our reserve for future abandonment costs, which was $5.5 million as of December 31, 2008.

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Our operating data for 2007 and 2008 is summarized below:


                                                          Year Ended December 31,
                                                            2007             2008

  Net Production Data:
  Natural gas (MMcf)                                          39,231          53,867
  Oil (MBbls)                                                  1,008           1,009
  Natural gas equivalent (MMcfe)                              45,282          59,923
  Average Sales Price:
  Oil ($/Bbl)                                           $      60.96       $   87.15
  Natural gas ($/Mcf)                                   $       6.89       $    8.92
  Natural gas including hedging ($/Mcf)                 $       6.89       $    8.83
  Average equivalent price ($/Mcfe)                     $       7.32       $    9.49
  Average equivalent price including hedging ($/Mcfe)   $       7.32       $    9.41
  Expenses ($ per Mcfe):
  Oil and gas operating(1)                              $       1.43       $    1.45
  Depreciation, depletion and amortization(2)           $       2.76       $    3.03

(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas properties only.

Oil and gas sales. Our oil and gas sales increased $232.1 million (70%) in 2008 to $563.7 million from $331.6 million in 2007. The increase in our sales is primarily due to a 32% increase in our production combined with stronger oil and natural gas prices in 2008. Our realized oil price in 2008 increased by 43% and our realized natural gas price increased by 28% as compared to 2007. The increase in production is primarily a result of our successful drilling activity and the acquisition of producing properties in South Texas in December 2007.

Oil and gas operating expenses. Our oil and gas operating expenses, including production taxes, increased $21.9 million (34%) to $86.7 million in 2008 from $64.8 million in 2007. Oil and gas operating expenses per equivalent Mcf produced increased $0.02 to $1.45 as compared to $1.43 in 2007. The increase in operating costs is due to the start-up of new wells and higher production and ad valorem taxes due to increased oil and gas prices.

Exploration expense. In 2008, we incurred $5.0 million in exploration expense as compared to $7.0 million in 2007. Exploration expense in 2008 primarily relates to one dry hole drilled, the impairment of unevaluated leases and the acquisition of seismic data. Exploration expense in 2007 included costs for four dry holes, leasehold impairments and costs incurred for seismic data acquisition.

DD&A. Depreciation, depletion and amortization ("DD&A") increased $56.9 million (45%) to $182.2 million in 2008 from $125.3 million in 2007. This increase resulted from our 32% increase in production in 2008 as compared to 2007 and an increase in our average DD&A rate from $2.76 to $3.03 per Mcfe produced. The increase in the average DD&A rate results from the higher finding costs associated with our property acquisitions and exploration and development activities in 2007 and 2008 and downward revisions to our proved reserves due to the lower realized oil and natural gas prices on December 31, 2008.

Impairment of oil and gas properties. We recorded impairments to our oil and gas properties of $0.9 million in 2008 and $0.5 million in 2007. The impairments in 2008 and 2007 relate to fields where an impairment was indicated based on estimated future cash flows attributable to the fields' estimated proved oil and natural gas reserves.

General and administrative expenses. General and administrative expenses, which are reported net of overhead reimbursements, increased $4.5 million (16%) in 2008 to $32.3 million from $27.8 million in 2007. The increase primarily reflects higher personnel costs resulting from increased hiring to support our operating activities and an increase of $1.5 million in stock based compensation in 2008 as compared to 2007.

Interest expense. Interest expense decreased $7.0 million (22%) to $25.3 million in 2008 from $32.3 million in 2007. The decrease was primarily due to lower interest rates in 2008 and the capitalization of interest related to our unevaluated properties on which we are conducting exploration activity. The average interest rate on the outstanding borrowings under our credit facility decreased to 4.5% in 2008 as compared to 6.6% in 2007. We capitalized interest of $2.3 million in 2008 which reduced interest expense. No interest was capitalized in 2007. Average borrowings under our bank credit facility increased to $301.5 million in 2008 as compared to $279.7 million for 2007.

Impairment of marketable securities. We received shares of common stock of Stone from the sale of Bois d'Arc Energy which were initially valued at $211.4 million. Subsequent to August 2008, the market value of the Stone shares declined significantly. We recognized an impairment charge of $162.7 million in the fourth quarter of 2008 based upon our assessment that this decline is other than temporary.

Income taxes. Income tax expense related to continuing operations increased by $9.4 million to $38.6 million in 2008 from $29.2 million for 2007. Higher income tax expenses in 2008 are primarily due to our higher income. Our effective tax rate of 39.9% for continuing operations in 2008 was comparable to our effective tax rate in 2007 of 39.0%.

Income from continuing operations. We reported income from continuing operations of $58.2 million in 2008, as compared to $45.6 million for 2007. The income per diluted share from continuing operations for 2008 was $1.28 on weighted average diluted shares outstanding of 45.4 million as compared to $1.03 for 2007 on weighted average diluted shares outstanding of 44.4 million. The higher income from continuing operations in 2008 results from higher oil and gas sales reflecting increased production and significantly higher oil and natural gas prices received. Higher revenues were only partially offset by higher operating costs, DD&A expense and general and administrative expense. Impairments of $163.6 million in 2008 reduced our income from continuing operations by $106.4 million.

Income from discontinued operations. Income from discontinued operations was $193.7 million in 2008 as compared to $23.3 million in 2007. The increase in income from discontinued operations in 2008 reflects the higher oil and gas prices in 2008 offset in part by higher operating and exploration expenses of the offshore operations. Also included in income from discontinued operations in 2008 is a net gain, after income taxes, of $158.1 million as a result of the sale of our interest in Bois d'Arc Energy.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Our operating data for 2006 and 2007 is summarized below:


                                                      Year Ended December 31,
                                                        2006             2007

      Net Production Data:
      Natural gas (MMcf)                                  30,271          39,231
      Oil (MBbls)                                            921           1,008
      Natural gas equivalent (MMcfe)                      35,797          45,282
      Average Sales Price:
      Oil ($/Bbl)                                   $      55.32       $   60.96
      Natural gas ($/Mcf)                           $       6.81       $    6.89
      Average equivalent price ($/Mcfe)             $       7.19       $    7.32
      Expenses ($ per Mcfe):
      Oil and gas operating(1)                      $       1.51       $    1.43
      Depreciation, depletion and amortization(2)   $       2.10       $    2.76

(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas properties only.

Oil and gas sales. Our oil and gas sales increased $74.4 million (29%) in 2007 to $331.6 million from sales of $257.2 million in 2006. This increase primarily reflects a 27% increase in production and higher prices for crude oil and natural gas in 2007. Prices for crude oil increased by 10% in 2007 as compared to 2006. Our average natural gas price increased by 1% in 2007 as compared to 2006. The higher production in 2007 was primarily due to our successful drilling activity.

Oil and gas operating expenses. Our oil and gas operating expenses, including production taxes, increased $10.9 million (20%) to $64.8 million in 2007 from operating expenses of $53.9 million in 2006. Oil and gas operating expenses per equivalent Mcf produced decreased $0.08 to $1.43 as compared to $1.51 in 2006. The increase in operating costs reflects the start-up of new wells and higher production taxes due to increased oil and gas prices.

Exploration expense. In 2007, we incurred $7.0 million in exploration expense as compared to exploration expense of $1.4 million in 2006. Exploration expense in 2007 primarily relates to dry hole expense on four exploratory wells, the acquisition of seismic data, and impairment of unproved properties. Exploration expense in 2006 includes costs for two exploratory dry holes and seismic costs.

DD&A. DD&A increased $50.0 million (67%) to $125.3 million in 2007 from DDA expense of $75.3 million in 2006. Our DD&A rate per Mcfe produced averaged $2.76 in 2007 as compared to $2.10 for 2006. DD&A increased due to higher production and an increase in the amortization rate caused by higher finding costs related to our acquisition, exploration and development activities.

Impairment of oil and gas properties. We recorded impairments to our oil and gas properties of $0.5 million in 2007 as compared to impairment expense of $8.8 million in 2006.

General and administrative expenses. General and administrative expenses, which are reported net of overhead reimbursements, of $27.8 million for 2007 were 36% higher than general and administrative expenses of $20.4 million for 2006. The increase primarily reflects higher personnel costs in 2007 due to increased staffing necessary to support our exploration and development activities and an increase of $3.9 million in stock-based compensation in 2007 as compared to 2006.

Interest expense. Interest expense increased $11.6 million (56%) to $32.3 million in 2007 from interest expense of $20.7 million in 2006. The increase was primarily the result of higher outstanding borrowings and higher average interest rates in 2007. Average borrowings under our bank credit facility increased to $279.7 million in 2007 as compared to $100.0 million for 2006. The average interest rate on the outstanding borrowings under our credit facility increased to 6.6% in 2007 as compared to 6.4% in 2006.

Derivative Gains and Losses. We had no derivative instruments outstanding in 2007. We did not designate our derivatives we utilized as part of our price risk management program in 2006 as cash flow hedges and accordingly, we recognize gains or losses for the changes in the fair value of these liabilities during each period. The fair value of our liability for these derivatives decreased during 2006 resulting in a net unrealized gain of $11.2 million. We realized losses to settle derivative positions of $0.7 million in 2006.

Income taxes. Income tax expense from continuing operations decreased in 2007 to $29.2 million from $34.2 million in 2006 due to our lower pre-tax income in 2007. Our effective tax rate of 39.0% in 2007 was comparable to our effective tax rate of 38.7% in 2006.

Income from continuing operations. We reported income from continuing operations of $45.6 million for 2007 as compared to $54.1 million for 2006. The income per diluted share from continuing operations for 2007 was $1.03 on weighted average diluted shares outstanding of 44.4 million as compared to $1.24 for 2006 on weighted average diluted shares outstanding of 43.6 million. Higher revenues in 2007 were offset by higher operating expenses and interest expense.

Income from discontinued operations. Income from discontinued operations of $23.3 million in 2007 was $6.7 million (40%) higher than income from discontinued operations of $16.6 million during 2006. The increase in income from discontinued operations in 2007 reflect the higher oil and gas prices in 2007 offset, in part, by higher operating and exploration expenses of the offshore operations.

Liquidity and Capital Resources

Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions. In 2008, our net cash flow provided by operating activities from continuing operations totaled $450.5 million. Our other primary source of funds in 2008 was the after tax proceeds of $421.8 million from the disposition of assets, including sale of our offshore operations. In 2007, our net cash flow provided by operating activities from continuing operations totaled $201.5 million. Our other primary source of funds in 2007 was a net increase of $325.0 million under our bank credit facility. In 2006, our net cash flow provided by operating activities from continuing operations totaled $186.2 million and we also increased the amount outstanding under our bank credit facility by $112.0 million.

Our cash flow from operating activities from continuing operations in 2008 increased by $249.0 million to $450.5 million as compared to $201.5 million in 2007 primarily due to higher revenues which were attributable to our increased production and higher oil and natural gas prices. Our cash flow from operating activities from continuing operations in 2007 increased by $15.3 million to $201.5 million as compared to $186.2 million in 2006 primarily due to our higher revenues which were attributable to our increased production.

Our primary need for capital, in addition to funding our ongoing operations, relates to the acquisition, development and exploration of our oil and gas properties, and the repayment of our debt. In 2008, we reduced the amount outstanding under our bank credit facility by $470.0 million, primarily by using the proceeds from our asset sales. Our capital expenditures in 2008 of $426.4 million decreased by $100.6 million from 2007 capital expenditures of $527.0 million. Capital expenditures in 2007 included $191.3 million for acquisitions of producing properties. We had no acquisitions in 2008. In 2008, we spent $113.0 million to acquire

unevaluated acreage primarily relating to the exploration of the Haynesville Shale formation. Capital expenditures in 2007 increased by $237.0 million over 2006 capital expenditures of $290.0 million primarily due to increased acquisition and drilling activity.

Our annual capital expenditure activity is summarized in the following table:

                                                          Year Ended December 31,
                                                     2006          2007          2008
                                                              (In thousands)

 Exploration and development:
 Acquisitions of proved oil and gas properties     $  61,619     $ 191,290     $       -
 Acquisitions of unproved oil and gas properties       7,031         6,202       113,023
 Developmental leasehold costs                         2,902         2,780         6,242
 Development drilling                                188,131       302,355       230,604
 Exploratory drilling                                  7,776        14,289        61,113
 Workovers and recompletions                          21,270         8,799        14,248

                                                     288,729       525,715       425,230
 Other                                                 1,313         1,257         1,171

 Total                                             $ 290,042     $ 526,972     $ 426,401

The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments except for contracted drilling services. Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. We currently expect to spend approximately $366.0 million for development and exploration projects in 2009, which will be funded primarily by cash flows from operating activities and, to a lesser extent, by borrowings under our bank credit facility. Our operating cash flow and, therefore, our capital expenditures are highly dependent on oil and natural gas prices and, in particular, natural gas prices.

We spent $61.6 million and $191.3 million on acquisitions during 2006 and 2007, respectively. Our acquisitions of producing oil and gas properties in 2007 included the acquisition of certain oil and natural gas properties and related assets from SWEPI LP, an affiliate of Shell Oil Company for $160.1 million in December 2007 and the acquisition of additional working interests in the Javelina field in Hidalgo County in South Texas for $31.2 million in June 2007. These acquisitions were funded with borrowings under our bank credit facility. We did not make any acquisitions during 2008.

Concurrent with the December 2007 acquisition, we entered into a transaction structured as a reverse like-kind exchange in accordance with Section 1031 of the Internal Revenue Code. In connection with this reverse like-kind exchange, we assigned the right to acquire ownership in the oil and gas properties that were acquired from SWEPI LP to an exchange accommodation titleholder. We operated these properties pursuant to lease and management agreements. Because we were the primary beneficiary of these arrangements, the properties acquired were included in our consolidated balance sheet as of December 31, 2007, and we include all revenues earned and expenses incurred related to the properties in our results of operations during the term of the agreements. We completed the exchange with the sale of certain properties in 2008 and the acquired properties were transferred to us from the exchange accommodation titleholder. The taxable gain from these property sales was deferred as a result of the reverse like-kind exchange.

We do not have a specific acquisition budget for 2009 because the timing and size of acquisitions are unpredictable. Smaller acquisitions will generally be funded from operating cash flow. With respect to significant acquisitions, we intend to use borrowings under our bank credit facility, or other debt or equity financings to the extent available, to finance such acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to our financial condition and performance and some of which will be beyond our control, such as prevailing interest rates,

oil and natural gas prices and other market conditions. Lack of access to the debt or equity markets due to general economic conditions could impede our ability to complete acquisitions.

Cash flows from discontinued operations in 2008 of $292.3 million include the cash proceeds received from sale of our offshore operations of $439.7 million less the payment of income taxes associated with this transaction of $146.4 million. Cash used by discontinued operations in 2007 and 2006 of $0.1 million and $36.4 million, respectively, reflect additional investments by us in the offshore operations in each of those years.

We have a $850.0 million bank credit facility with Bank of Montreal, as the administrative agent. The bank credit facility is a five-year revolving credit commitment that matures on December 15, 2011. Indebtedness under the bank credit facility is secured by all of our and our subsidiaries' assets and is guaranteed by all of our subsidiaries. The bank credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of our oil and natural gas properties. As of December 31, 2008 the borrowing base was $590.0 million, $555.0 million of which was available. The borrowing base may be affected by the performance of our properties and changes in oil and natural gas prices. The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group. Borrowings under the bank credit facility bear interest, based on the utilization of the borrowing base, at our option at either LIBOR plus 1.0% to 1.75% or the base rate (which is the higher of the prime rate or the federal funds rate) plus 0% to 0.25%. A commitment fee of 0.25% to 0.375%, based on the utilization of the borrowing base, is payable on the unused portion of the borrowing base. The bank credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $40.0 million, limit the amount of consolidated debt that we may incur and limit our ability to make certain loans and investments. The only financial covenants are the maintenance of a ratio of current assets, including the availability under the bank credit facility, to current liabilities of at least one-to-one and maintenance of a minimum tangible net worth. We were in compliance with these covenants as of December 31, 2008.

We have $175.0 million of senior notes outstanding. The senior notes are due March 1, 2012 and bear interest at 67/8%, which is payable semiannually on each March 1 and September 1. The senior notes are unsecured obligations and are guaranteed by all of our subsidiaries.

We believe that our cash flow from operations and available borrowings under our bank credit facility will be sufficient to fund our operations and future growth as contemplated under our current business plan. However, if our plans or assumptions change or if our assumptions prove to be inaccurate, we may be required to seek additional capital. We cannot provide any assurance that we . . .