• generate "operating cash flow" in excess of our capital investment budget ("CAPEX");

• invest $29.1 million in CAPEX spending; and

• focus on operated properties.

Actions to accomplish these priorities have already commenced. As described in Note 4-"Oil and Natural Gas Properties", we entered into a farmout agreement with Chesapeake Energy Corporation, which will allow us to conserve cash and more importantly direct efforts in areas in which we believe have a greater rate of return for the Company. The majority of the remaining planned CAPEX spending for 2009 will be on our operated properties where we can control the timing and pace of this spending. If prices continue to deteriorate, we will be able to defer planned spending until prices go up and/or service costs go down to support these projects. Under our current budget and with existing prices, we anticipate that all spending will be supported by revenue generated by our expected production and by our derivative contracts. However, if we determine that operating cash flow will not support our spending we will be able to alter our budget so that we retain our financial and operational flexibility in this adverse market environment.
Conduct Exploitation Activities on Our Existing Assets. We seek to maximize economic return on our existing assets by maximizing production rates and ultimate recovery, while managing operational efficiency to minimize direct lifting costs. Development and production growth activities include infill and extension drilling of new wells, re-completion, pay adds and re-stimulation of existing wells and

implementation and management of enhanced oil recovery projects such as waterflood operations. Operational efficiencies and cost reduction measures include optimization of surface facilities, such as fluid handling systems, gas compression or artificial lift installations. Efficiencies are also increased through aggressive monitoring and management of electrical power consumption, injection water quality programs, chemical and corrosion prevention programs and the use of production surveillance equipment and software. In all instances, a proactive approach is taken to achieve the desired result while ensuring minimal environmental impact.
Use of Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays. We believe the use of horizontal drilling and fracture stimulations has enabled us to develop reserves economically, such as our Barnett Shale and Wolfcamp Carbonate gas projects.
Use of Advanced Technologies and Production Techniques. We believe that 3-D seismic surveys, horizontal drilling, fracture stimulation and other advanced technologies and production techniques are useful tools that help improve normal drilling operations and enhance our production and returns. We believe that our use of these technologies and production techniques in exploring for, developing and exploiting oil and natural gas properties can reduce drilling risks, lower finding costs, provide for more efficient production of oil and natural gas from our properties and increase the probability of locating and producing reserves that might not otherwise be discovered.
Acquire Long-Lived Properties with Enhancement Opportunities. Our acquisition strategy is focused on leveraging our geographical expertise in our core areas of operation and seeking assets located in and around these areas. We selectively evaluate acquisition opportunities and expect that they will continue to play a role in increasing our reserve base and future drilling inventory. When identifying target assets, we focus primarily on reserve quality and assets in new development plays with upside potential. Through this approach, we have traditionally targeted smaller asset acquisitions which allow us to absorb, enhance and exploit properties without taking on significant integration risk. While we have not adopted any specific quantitative guidelines for the screening of prospective leasehold or producing property acquisitions, desirable attributes related to reserve life include a reserve to production ratio of greater than 15 years and stabilized exponential decline rates of less than 20% per year. We believe these types of properties provide us with a greater certainty in growing production, reserves and shareholder value through time.
Conduct Exploratory Activities. Although we do not emphasize exploratory drilling, we will selectively undertake exploratory projects that have known geological and reservoir characteristics that are in close proximity to existing wells so data from the existing wells can be correlated with seismic data on or near the prospect being evaluated, and that could have a potentially meaningful impact on our reserves.
The extent to which we are able to implement and follow through with our business strategy is influenced by:
• the prices we receive for the oil and natural gas we produce;

• sources and availability of funds to conduct operations and complete acquisitions;

• the results of reprocessing and reinterpreting our 3-D seismic data;

• the results of our drilling activities;

• the costs of obtaining high quality field services;

• our ability to find and consummate acquisition opportunities; and

• our ability to negotiate and enter into "work to earn" arrangements, joint ventures or other similar arrangements on terms acceptable to us.

Significant changes in the prices we receive for the oil and natural gas we produce, or the occurrence of unanticipated events beyond our control, such as the recent and dramatic downturn in the financial markets, can cause us to defer or deviate from our business strategy, including the amounts we have budgeted for our activities. See Trends and Outlook. Operating Performance
Our operating performance is influenced by several factors, the most significant of which are the prices we receive for our oil and natural gas and the quantities of oil and natural gas that we are able to produce. The world price for oil has overall influence on the prices that we receive for our oil production. The prices received for different grades of oil are based upon the world price for oil, which is then adjusted based upon the particular grade. Typically, light oil is sold at a premium, while heavy grades of crude are discounted. Natural gas prices we receive are influenced by:
• seasonal demand;

• weather;

• hurricane conditions in the Gulf of Mexico;

• availability of pipeline transportation to end users;

• proximity of our wells to major transportation pipeline infrastructures; and

• to a lesser extent, world oil prices.

Additional factors influencing our overall operating performance include:
• production expenses;

• overhead requirements;

• costs of capital; and

• effects of derivative contracts.

Our oil and natural gas exploration, development and acquisition activities require substantial and continuing capital expenditures. Historically, the sources of financing to fund our capital expenditures have included:
• cash flow from operations;

• sales of our equity and debt securities;

• bank borrowings; and

• industry joint ventures.

Overall, the decrease in the sales price of crude oil and natural gas is the most significant factor affecting operating performance for the three months ended March 31, 2009 (the "Current Quarter"). Our production volumes have not fluctuated more than (4.1)% from the prior quarter ended December 31, 2008 or
(2.4)% from the three months ended March 31, 2008 (the "Comparable Quarter"), and our operating expenses, excluding impairment of oil and natural gas properties, have not fluctuated more than

(14.2)% from the prior quarter or (10.9)% from the Comparable Quarter. Considering that our production and operating expenses have been fairly consistent, our revenues have declined (30.7)% from the prior quarter and
(58.5)% from the Comparable Quarter due to the significant decrease in the sales price of oil and natural gas as a result of the global economic slowdown. Furthermore, the decreases in the sales price of oil and natural gas affects the carrying value of our oil and natural gas properties as determined by our ceiling test under the full cost method of accounting. Even though we recorded an impairment of $300.5 million as of December 31, 2008, the continual decline in natural gas prices has created an additional impairment charge of $30.4 million in the Current Quarter. For information regarding prices received, refer to the selected operating data table under "-Results of Operations" on page 28. Our oil and natural gas producing activities are accounted for using the full cost method of accounting. Under this accounting method, we capitalize all costs incurred in connection with the acquisition of oil and natural gas properties and the exploration for and development of oil and natural gas reserves. These costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling productive and non-productive wells, and overhead expenses directly related to land and property acquisition and exploration and development activities. Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction in capitalized costs, with no gain or loss recognized unless a disposition involves a material change in the relationship between capitalized costs and reserves, in which case the gain or loss is recognized. Please see Note 4-"Oil and Natural Gas Properties" for a discussion on the impairment calculation. Depletion of the capitalized costs of oil and natural gas properties, including estimated future development costs, is provided using the equivalent unit-of-production method based upon estimates of proved oil and natural gas reserves and production, which are converted to a common unit of measure based upon their relative energy content. Unproved oil and natural gas properties are not amortized, but are individually assessed for impairment. The cost of any impaired property is transferred to the balance of oil and natural gas properties being depleted. Results of Operations
Our business activities are characterized by frequent, and sometimes significant, changes in our:
• reserve base;

• sources of production;

• product mix (gas versus oil volumes); and

• the prices we receive for our oil and natural gas production.

Year-to-year or other periodic comparisons of the results of our operations can be difficult and may not fully and accurately describe our condition.

The following table shows selected operating data for each of the three months ended March 31, 2009, December 31, 2008 and March 31, 2008.

                                                                      Three Months Ended
                                                          3/31/2009        12/31/2008       3/31/2008
                                                             (in thousands, except per unit data)
Production Volumes:
Oil (Bbls)                                                        252              269             247
Natural gas (Mcf)                                               2,529            2,606           2,662
BOE(1)                                                            674              703             691
BOE per day                                                       7.5              7.6             7.6

Sales Prices:
Oil (per Bbl)                                            $      36.21      $     54.96     $     93.74
Natural gas (per Mcf)                                    $       3.59      $      4.43     $      7.80
BOE price                                                $      27.04      $     37.41     $     63.60

Operating Revenues:
Oil                                                      $      9,147      $    14,756     $    23,169
Natural gas                                                     9,082           11,542          20,772

                                                         $     18,229      $    26,298     $    43,941


Operating Expenses:
Lease operating expense                                  $      8,086      $     6,682     $     6,979
Production taxes                                                  573            1,014           2,289
Production tax refund                                               -           (1,958 )             -
General and administrative                                      3,433            2,949           2,568
Depreciation, depletion and amortization                        6,781           13,305           9,352
Impairment of oil and natural gas properties                   30,426          300,532               -

                                                         $     49,299      $   322,524     $    21,188

Operating income                                         $    (31,070 )    $  (296,226 )   $    22,753

(1) A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of oil.

RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2009 and 2008:
   Our oil and natural gas revenues and production product mix are displayed in
the following table for the Current and Comparable Quarters.
  Oil and Gas Revenues

                                          Revenues           Production
                                       2009      2008      2009      2008
                   Oil (Bbls)             50 %      53 %      37 %      36 %
                   Natural gas (Mcf)      50 %      47 %      63 %      64 %

                   Total                 100 %     100 %     100 %     100 %

The following table shows our production volumes, product sales prices and operating revenues for the indicated periods.

                                                  Three Months Ended March 31,           Increase        % Increase
                                                    2009                 2008           (Decrease)       (Decrease)
                                                                (in thousands except per unit data)
Production Volumes:
Oil (Bbls)                                                252                  247                5                2 %
Natural gas (Mcf)                                       2,529                2,662             (133 )             (5 )%
BOE (1)                                                   674                  691              (17 )             (2 )%
BOE/Day                                                   7.5                  7.6             (0.1 )             (1 )%

Sales Price:
Oil (per Bbl)                                  $        36.21       $        93.74     $     (57.53 )            (61 )%
Natural gas (per Mcf)                          $         3.59       $         7.80     $      (4.21 )            (54 )%
BOE price                                      $        27.04       $        63.60     $     (36.56 )            (57 )%

Operating Revenues:
Oil                                            $        9,147       $       23,169     $    (14,022 )            (61 )%
Natural gas                                             9,082               20,772          (11,690 )            (56 )%

Total                                          $       18,229       $       43,941     $    (25,712 )            (59 )%

(1) A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of oil.

Oil revenues
Average wellhead realized crude oil prices decreased $57.53 per Bbl, or 61%, to $36.21 per Bbl in the Current Quarter, over the Comparable Quarter. This price decrease resulted in decreased revenues by approximately $14.5 million for the Current Quarter, as compared to the Comparable Quarter. Oil production increased by approximately 5,000 Bbls due primarily to new wells and the additional interest acquired in the Diamond M area, where volumes increased approximately 29,000 Bbls in the Current Quarter. This increase was partially offset with natural declines in the Andrews and Fullerton areas. The increase in production offset the revenue decline due to sales price decreases by approximately $500,000 in the Current Quarter over the Comparable Quarter. Natural gas revenues
Average realized wellhead natural gas prices decreased $4.21 per Mcf, or 54%, to $3.59 per Mcf in the Current Quarter, over the Comparable Quarter. This price decrease accounted for a decrease in revenue of approximately $10.7 million. Natural gas production decreased by approximately 133,000 Mcf primarily due to declines in the Barnett Shale area caused by a production pad shut-in partially offset by new wells added in our Barnett Shale and New Mexico Wolfcamp areas. In addition, the overall decrease in natural gas volumes decreased revenue approximately $1.0 million for the Current Quarter as compared to the Comparable Quarter.

Cost and Expenses

                                                     Three months ended March 31,           Increase        % Increase
                                                       2009                 2008           (Decrease)       (Decrease)
                                                                            ($ in thousands)
Lease operating expense                           $        8,086       $        6,979     $      1,107               16 %
Production taxes                                             573                2,289           (1,716 )            (75 )%
General and administrative                                 3,433                2,568              865               34 %
Depreciation, depletion and amortization                   6,781                9,352           (2,571 )            (27 )%
Impairment of oil and natural gas properties              30,426                    -           30,426              N/A

Total                                             $       49,299       $       21,188     $     28,111              133 %

Lease operating expense
Lease operating expense increased approximately $1.1 million or 16%, to $8.1 million during the Current Quarter compared to $7.0 million for the Comparable Quarter. Lease operating expense per BOE increased to $12.00 for the Current Quarter compared to $10.10 per BOE in the Comparable Quarter. The increase in expense was due to higher electricity and well costs associated with the increased production in the New Mexico Wolfcamp and Barnett Shale areas and the additional Diamond M interests acquired in June 2008. Overall costs and volumes increased from the additional interest acquired in the Diamond M area and from the new wells drilled in the New Mexico Wolfcamp and Barnett Shale areas. Ad valorem taxes increased in the Current Quarter by approximately $253,000 over the Comparable Quarter due to an overall increase in our producing property values caused by our drilling activity.
Production taxes
Production taxes decreased $1.7 million for the Current Quarter, as compared to the Comparable Quarter. Production taxes were 3.1% of revenue for the Current Quarter compared to 5.2% of revenue for the Comparable Quarter. The decrease in production taxes is primarily due to lower tax values resulting from lower prices. Production tax rates are also lower in the Fullerton and Barnett Shale areas resulting from tax abatements granted by state regulatory agencies. Production taxes in future periods will be a function of product mix, production volumes, product prices and tax rates.
General and administrative
General and administrative expenses increased 34%, or $865,000, for the Current Quarter, over the Comparable Quarter. This increase was primarily due to increased stock based compensation expense of approximately $464,000, an increase in staffing and salary cost of approximately $100,000 and an increase in professional and consulting fees of approximately $258,000 over the Comparable Quarter. This increase over the Comparable Quarter was partially offset by lower investor relation cost, road show cost and lower bonus cost in the Current Quarter. On a BOE basis, general and administrative costs were $5.09 per BOE in the Current Quarter, as compared to $3.72 per BOE in the Comparable Quarter.
Depreciation, depletion and amortization Depreciation depletion and amortization expense decreased 27%, or $2.6 million, in the Current Quarter, over the Comparable Quarter. Total depreciation, depletion and amortization per BOE was $10.06 for the Current Quarter and $13.53 for the Comparable Quarter. This decrease is primarily a result of the impairment write down which we made at the end of the year in 2008. The rate at which we depreciate our oil and gas properties is dependent on our remaining oil and gas depletable cost base, anticipated future drilling and development costs and our reserve volumes.

Impairment of oil and natural gas properties We recorded a $30.4 million write down in our full cost pool oil and gas property base in the Current Quarter. This write down was primarily the result of the declining natural gas prices during the last three months. The write down was partially offset by a slight increase in crude oil prices. The natural gas price that we used for our March 31, 2009 reserve study was $3.605/MMBtu, a 36% decrease from the December 31, 2008 price of $5.620/MMBtu. The crude oil price that we used for our March 31, 2009 reserve study was $49.66/Bbl, an 11% increase from the December 31, 2008 price of $44.60/Bbl. The decrease in natural gas prices caused an overall decrease in the present value of our oil and gas reserves, which resulted in the impairment. Although we believe prices will recover, we cannot make any assurances where natural gas prices and crude oil prices will be in the short term. Consequently, if prices do continue to decline, we may experience additional impairment write downs in the future.

Other income (expense)

                                               Three months ended March 31,           Increase       % Increase
                                                2009                 2008            (Decrease)      (Decrease)
                                                                      ($ in thousands)
Gain (loss) on derivatives not classified
as hedges                                   $       5,765       $       (21,886 )   $     27,651             126 %
Interest and other income                              69                    33               36             109 %
Interest expense, net of capitalized
interest                                           (6,330 )              (5,518 )           (812 )           (15 )%
Equity in gain of pipelines and gathering
system ventures                                         1                   217             (216 )          (100 )%

Total                                       $        (495 )     $       (27,154 )   $     26,659             (98 )%

Gain (loss) on derivatives not classified as hedges We recorded a gain of $5.8 million in the Current Quarter for derivatives not classified as hedges as compared to a loss of $21.9 million for the Comparable Quarter. Of these amounts, we had a loss of $480,000 in the Current Quarter for changes in fair market value in our interest rate swaps versus a loss of $2.1 million in the Comparable Quarter. For our natural gas derivative contracts, we had a gain of $4.9 million in the Current Quarter versus a loss of $4.6 million for the Comparable Quarter. For our crude oil derivative contracts we had a gain of $1.4 million in the Current Quarter versus a loss of $15.2 million in the Comparable Quarter. The primary reason for the differences in the performance in our commodity derivative contracts was declining commodity prices in the Current Quarter and rising prices in the Comparable Quarter. See Note 8-"Derivative Instruments".
Interest expense
Interest expense increased approximately $812,000. The Current Quarter is higher primarily due to higher average outstanding debt balances over the Comparable Quarter. Partially offsetting the increase in interest expense, our weighted average interest rate decreased to 7.01% for the Current Quarter, from 9.28% for the Comparable Quarter. Capitalized interest for the Current Quarter was approximately $522,000 and $25,000 for the Comparable Quarter. Equity in gain of pipelines and gathering system ventures For the Current Quarter we recorded a gain of $1,000 compared to a gain of $217,000 in the Comparable Quarter for our equity investments. This change is primarily due to the treatment of the Hagerman Gas Gathering System Joint Venture. In June 2008, we acquired all of the assets of the Hagerman Gas Gathering System Joint Venture. The results of operations of the Hagerman Gas

Gathering System are now included in our operating income and not as an equity gain / loss item in our Statement of Operations. We have one remaining equity investment in West Fork Pipeline II, LP. Income taxes, deferred
Income tax benefit was approximately $11.2 million in the Current Quarter, as compared to approximately $1.7 million in the Comparable Quarter. Income tax expense for 2009 will be dependent on our earnings (loss) and is expected to be approximately 35% of income (loss) before income taxes. Basic and diluted net loss
We had basic and diluted net loss per share of $0.49 and $0.07 for the Current Quarter and the Comparable Quarter, respectively. Basic weighted average common shares outstanding increased from 41.3 million shares in the Comparable Quarter to 41.6 million shares in the Current Quarter. Diluted weighted average common shares outstanding increased from 41.3 million shares in the Comparable Quarter to 41.6 million shares in the Current Quarter. The increase in common shares was primarily due the exercise of employee and nonemployee stock options . . .