This report contains forward-looking statements that involve risks and uncertainties that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated in our forward-looking statements due to many factors. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report and in our annual report filed on Form 10-K for the year ended December 31, 2008.

Discontinued Operations

Our offshore operations were conducted through our subsidiary, Bois d'Arc Energy, Inc. ("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, the 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 operations.

Results of Operations


                                                Three Months Ended March 31,
                                                  2009               2008
                                               (In thousands, except per unit
                                                          amounts)
        Net Production Data:
        Natural gas (Mmcf)                         12,793              13,130
        Oil (Mbbls)                                   216                 243
        Natural Gas equivalent (Mmcfe)             14,088              14,586

        Revenues:
        Natural gas sales                      $   54,878         $   108,193
        Hedging gains (losses)                      5,912                (244 )
        Total natural gas sales including
        hedging                                    60,790             107,949

        Oil sales                                   7,561              19,772
        Total oil and gas sales                $   68,351         $   127,721

        Expenses:
        Oil and gas operating expenses(1)      $   16,959         $    21,202
        Exploration expense                    $       13         $     2,238
        Depreciation, depletion and
        amortization                           $   47,272         $    41,505

        Average Sales Price:
        Oil (per Bbl)                          $    35.03         $     81.49
        Natural gas (per Mcf)                  $     4.29         $      8.24
        Natural gas including hedging (per
        Mcf)                                   $     4.75         $      8.22
        Average equivalent (Mcfe)              $     4.43         $      8.77
        Average equivalent including hedging
        (Mcfe)                                 $     4.85         $      8.76

        Expenses ($ per Mcfe):
        Oil and gas operating(1)               $     1.20         $      1.45
        Depreciation, depletion and
        amortization(2)                        $     3.34         $      2.84

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

Revenues -

Our oil and gas sales decreased $59.3 million (46%) to $68.4 million for the three months ended March 31, 2009 from $127.7 million for the first quarter of 2008. This decrease is primarily related to lower natural gas and crude oil prices. Our average realized natural gas price decreased by 48% and our average realized crude oil price decreased by 57% in the first quarter of 2009 as compared to the first quarter of 2008. Our natural gas sales for the three months ended March 31, 2009 benefited from a gain of $5.9 million from our hedging activities. The three months ended March 31, 2008 included a realized hedging loss of $0.2 million. Our production in the first quarter of 2009 decreased by 3% to 14.1 Bcfe, as compared to 14.6 Bcfe in the first quarter of 2008. The decrease was mainly attributable to the divestitures of certain oil and gas properties we completed during 2008.

Costs and Expenses -

Our oil and gas operating expenses, including production taxes, decreased $4.2 million (20%) to $17.0 million in the first quarter of 2009 from $21.2 million in the first quarter of 2008. Oil and gas operating expenses per equivalent Mcf produced decreased $0.25 (17%) to $1.20 in the first quarter of 2009 from $1.45 in the first quarter of 2008. The decrease in operating expenses reflects lower production taxes resulting from lower oil and natural gas prices.

The decrease in exploration expense in the first quarter of 2009 is the result of no exploratory dry holes in the first quarter as compared to one dry hole drilled in the first quarter of 2008.

Depreciation, depletion and amortization ("DD&A") increased $5.8 million (14%) to $47.3 million in the first quarter of 2009 from DD&A of $41.5 million in the first quarter of 2008. Our DD&A per equivalent Mcf produced increased $0.50 (18%) to $3.34 for the three months ended March 31, 2009 from $2.84 for the three months ended March 31, 2008. These increases primarily reflect our higher drilling costs and downward revisions to the estimate of proved oil and gas reserves at the end of 2008 attributable to lower oil and natural gas prices.

General and administrative expense, which is reported net of overhead reimbursements, increased by $3.6 million to $9.8 million for the first quarter of 2009 as compared to general and administrative expense of $6.2 million for the first quarter of 2008. Included in general and administrative expense is stock-based compensation of $3.7 million and $2.7 million for the three months ended March 31, 2009 and 2008, respectively. General and administrative costs increased due to increasing our professional staff which occurred throughout 2008 and the higher costs of stock-based compensation.

Interest expense decreased $7.8 million (78%) to $2.2 million for the first quarter of 2009 from interest expense of $10.0 million in the first quarter of 2008. The decrease was primarily due to lower borrowings under our bank credit facility, lower interest rates and capitalizing interest. Our average borrowings outstanding decreased to $64.9 million during the first quarter of 2009 as compared to $508.1 million in the first quarter of 2008, and the average interest rate we were charged on borrowings outstanding under our credit facility decreased to 1.5% in the first quarter of 2009 as compared to 5.2% in the first quarter of 2008. We capitalized interest of $1.6 million on our unevaluated properties during the three months ended March 31, 2009. No interest was capitalized during the three months ended March 31, 2008.

Income tax expense related to continuing operations decreased by $19.3 million to a benefit of $2.1 million for the three months ended March 31, 2009 as compared to a provision of $17.2 million for the three months ended March 31, 2008. The operating loss incurred during the three months ended March 31, 2009 resulted in an income tax benefit.

We reported a net loss from continuing operations of $5.7 million for the three months ended March 31, 2009, as compared to net income of $29.4 million for the three months ended March 31, 2008. The loss was primarily related to lower natural gas and oil prices. The loss per share from continuing operations for the first quarter of 2009 was $0.12 on weighted average shares outstanding of 44.9 million as compared to income per share of $0.64 for the first quarter of 2008 on weighted average diluted shares outstanding of 44.6 million. Income from discontinued operations was $11.7 million in the three months ended March 31, 2008.

Liquidity and Capital Resources

Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions. For the three months ended March 31, 2009, our primary sources of funds were net cash flow from operations of $40.5 million and borrowings under our bank credit facility of $55.0 million. Our net cash flow from continuing operating activities decreased $13.9 million (26%) to $40.5 million in the first three months of 2009 from $54.4 million for the three months ended March 31, 2008. This decrease is primarily due to the lower revenues we had in the first three months of 2009 primarily driven by lower natural gas and oil prices.

Our primary needs for capital, in addition to funding our ongoing operations, relate to the acquisition, development and exploration of our oil and gas properties and the repayment of our debt. In the first three months of 2009, we incurred capital expenditures of $97.3 million primarily for our development and exploration activities. We funded our capital program with cash flow provided by operating activities and borrowings under the bank credit facility.

The following table summarizes our capital expenditure activity, on an accrual basis, for the three months ended March 31, 2009 and 2008:

                                        Three months ended March 31,
                                          2009                 2008
                                               (In thousands)

              Leasehold costs        $        3,672       $        4,034
              Development drilling           50,609               52,165
              Exploratory drilling           38,279                2,479
              Other development               4,696                3,363
                                             97,256               62,041
              Other                              25                  419
                                     $       97,281       $       62,460

We expect to spend approximately $360.0 million for development and exploration projects during 2009. We expect to fund our development and exploration activities with operating cash flow and with borrowings under our bank credit facility.

The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments except for commitments for contract drilling services. Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. As of March 31, 2009 we have contracted for the services of drilling rigs through October 2012 at an aggregate cost of $125.2 million and we have minimum commitments of $25.1 million to transport natural gas through May 2019. We have obligations to incur future payments for dismantlement, abandonment and restoration costs of oil and gas properties. These payments are currently estimated to be incurred primarily after 2014. We record a separate liability for the fair value of these asset retirement obligations which totaled $5.7 million as of March 31, 2009.

We have a $850.0 million bank credit facility with a group of banks, including the Bank of Montreal, as the administrative agent. The credit facility is a five-year revolving credit commitment that matures on December 15, 2011. The 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. The borrowing base may be affected by the performance of our properties and changes in oil and natural gas prices. As of March 31, 2009 the borrowing base was $590.0 million, $500.0 million of which was available. Effective May 1, 2009 the borrowing base was redetermined by our bank group at $550.0 million. Indebtedness under the bank credit facility is secured by substantially all of our and our subsidiaries' oil and gas properties and is guaranteed by all of our subsidiaries. Effective May 1, 2009 borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at our option of either LIBOR plus 2.0% to 2.75% or the base rate (which is the higher of the administrative agent's prime rate, the federal funds rate plus 0.5%, or 30 day LIBOR plus 1.5%) plus 0.5% to 1.25%. A commitment fee of 0.5% is payable on the unused borrowing base. The 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 current ratio and maintenance of a minimum tangible net worth. We were in compliance with these covenants as of March 31, 2009. We also have $175.0 million of 6?% senior notes due March 1, 2012, with interest payable semiannually on each March 1 and September 1. The 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 facilities 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 will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on terms acceptable to us.

Critical Accounting Policies

In March 2008, the Financial Accounting Standard Board (the "FASB") issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133" ("SFAS 161"). This standard applies to derivative instruments, nonderivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS
133. SFAS 161 does not change the accounting for derivatives and hedging activities, but requires enhanced disclosures concerning the effect on the financial statements from their use. Adoption of the provisions of SFAS 161 effective January 1, 2009 did not have a significant impact on our financial statements.