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

• invest $29.1 million in CAPEX spending; and

• focus on operated properties.

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 increase and/or service costs decrease to support these projects. Under our current budget and with existing prices, we anticipate that all spending will be supported by operating cash flow generated by our expected production and by settlements of our derivative contracts. However, if we

determine that operating cash flow and derivative settlements will not support our spending, we will be able to alter our budget so that we retain our financial and operational flexibility in the existing 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. We also believe our expertise in utilizing this technology will create additional opportunities in our current projects as well as future opportunities in other resource plays. While we believe we can find oil and natural gas reserves more effectively using this technology, under the current economic environment, our capital resources can be better utilized elsewhere. We will continue to use this technology as natural gas prices and overall market conditions dictate.
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" below. 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, decreases in the average sales price of crude oil and natural gas is the most significant factor affecting operating performance. Our average price received for crude oil during the three months ended June 30, 2009 (the "Current Quarter") was $55.57/Bbl versus $119.42/Bbl in the three months ended June 30, 2008 (the "Comparable Quarter"). Our average price received for natural gas in the Current Quarter was $2.78/Mcf versus $9.95/Mcf for the Comparable Quarter. Oil and natural gas sales revenue is down 65% when comparing the Current Quarter to the Comparable Quarter. The reduction in pricing accounts for approximately 87% of this reduction while volume decreases accounted for the remaining 13%. During the same time, operating costs and expenses were down 38%. A substantial portion of this reduction was due to a decrease in our depreciation, depletion and amortization costs. This was a direct result of our impairments which we incurred at year end 2008 and at the end of the prior quarter. For more information regarding prices received and operating results, you should refer to the selected operating data table under "-Results of Operations" on page 28.
Our average price received for crude oil during the six months ended June 30, 2009 (the "Current Period") was $45.79/Bbl versus $106.32/Bbl in the six months ended June 30, 2008 (the "Comparable Period"). Our average price received for natural gas in the Current Period was $3.21/Mcf versus $8.90/Mcf for the Comparable Period. Oil and natural gas sales revenue was down 62% when comparing the Current Period to the Comparable Period. The reduction in pricing accounts for approximately 92% of this reduction while volume decreases accounted for just 8%. During the same time, operating costs and expenses were down 25%, excluding the impact of the $30.4 million impairment write down we made in the quarter ended March 31, 2009. A substantial portion of this reduction was due to a decrease in our depreciation, depletion and amortization costs. This was a direct result of our impairments which we incurred at year end 2008 and at the end of the prior quarter. For more information regarding prices received and operating results, you should 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 and six months ended June 30, 2009 and June 30, 2008.

                                                       Three Months Ended June 30,                Six Months Ended June 30,
                                                       2009                   2008                 2009                 2008
                                                                      (in thousands, except per unit data)

Production Volumes:
Oil (Bbls)                                                   248                    237                  500                484
Natural gas (Mcf)                                          2,196                  2,790                4,725              5,452
BOE(1)                                                       614                    702                1,288              1,393
BOE per day                                                  6.7                    7.7                  7.1                7.7

Sales Prices:
Oil (per Bbl)                                     $        55.57         $       119.42        $       45.79         $   106.32
Natural gas (per Mcf)                             $         2.78         $         9.95        $        3.21         $     8.90
BOE price                                         $        32.37         $        79.86        $       29.58         $    71.80

Operating Revenues:
Oil                                               $       13,758         $       28,322        $      22,905         $   51,491
Natural gas                                                6,103                 27,753               15,185             48,525

                                                  $       19,861         $       56,075        $      38,090         $  100,016

Operating Expenses:
Lease operating expense                           $        5,541         $        7,254        $      13,627         $   14,233
Production taxes                                             761                  2,996                1,334              5,285
General and administrative                                 3,281                  3,265                6,714              5,833
Depreciation, depletion and amortization                   5,398                 10,483               12,179             19,835
Impairment of oil and natural gas properties                   -                      -               30,426                  -

                                                  $       14,981         $       23,998        $      64,280         $   45,186


Operating income (loss)                           $        4,880         $       32,077        $     (26,190 )       $   54,830

(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 June 30, 2009 and 2008:
   Percentages of our oil and natural gas revenues and production, by product,
are displayed in the following table for the Current Quarter and Comparable
Quarter.
Oil and Gas Revenues

                                                                   Revenues                                         Production
                                                     For the Three Months Ended June 30,               For the Three Months Ended June 30,
                                                         2009                     2008                     2009                     2008
Oil (Bbls)                                                    69 %                      51 %                    40 %                      34 %
Natural gas (Mcf)                                             31 %                      49 %                    60 %                      66 %

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 June 30,                        Percentage
                              2009                 2008           Change          Change
                                 (in thousands except per unit data)
 Production Volumes:
 Oil (Bbls)                         248                  237            11                5 %
 Natural gas (Mcf)                2,196                2,790          (594 )            (21 )%
 BOE (1)                            614                  702           (88 )            (13 )%
 BOE/Day                            6.7                  7.7          (1.0 )            (13 )%

 Sales Price:
 Oil (per Bbl)           $        55.57       $       119.42     $  (63.85 )            (53 )%
 Natural gas (per Mcf)   $         2.78       $         9.95     $   (7.17 )            (72 )%
 BOE price               $        32.37       $        79.86     $  (47.49 )            (59 )%

 Operating Revenues:
 Oil                     $       13,758       $       28,322     $ (14,564 )            (51 )%
 Natural gas                      6,103               27,753       (21,650 )            (78 )%

 Total                   $       19,861       $       56,075     $ (36,214 )            (65 )%

(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 $63.85 per Bbl, or 53%, to $55.57 per Bbl in the Current Quarter, over the Comparable Quarter. This price decrease resulted in decreased revenues by approximately $15.8 million for the Current Quarter, as compared to the Comparable Quarter. Oil production increased by approximately 11,000 Bbls due primarily to new wells and the additional interest the Diamond M acquired in the second quarter of 2008, where volumes increased approximately 28,000 Bbls in the Current Quarter. This increase was partially offset with natural declines in the Andrews, Texas area. The increase in production partially offset the revenue decline due to sales price decreases by approximately $1.3 million in the Current Quarter over the Comparable Quarter.
Natural gas revenues
Average realized wellhead natural gas prices decreased $7.17 per Mcf, or 72%, to $2.78 per Mcf in the Current Quarter, over the Comparable Quarter. This price decrease accounted for a decrease in

revenue of approximately $15.7 million. Natural gas production decreased by approximately 594,000 Mcf primarily due to declines in the Barnett Shale area caused by a production pad shut-in along with natural declines in the New Mexico Wolfcamp and south Texas areas. These production declines were partially offset by new wells added in our Barnett Shale and New Mexico Wolfcamp areas and increased sales in the Diamond M area associated with the additional interest we acquired in 2008. In addition, the overall decrease in natural gas volumes decreased revenue approximately $5.9 million for the Current Quarter as compared to the Comparable Quarter.

Cost and Expenses

                                                   Three months ended June 30,                              Percentage
                                                   2009                   2008              Change            Change
                                                                ($ in thousands)

Lease operating expense                       $        5,541         $        7,254        $ (1,713 )               (24 )%
Production taxes                                         761                  2,996          (2,235 )               (75 )%
General and administrative                             3,281                  3,265              16                   0 %
Depreciation, depletion and amortization               5,398                 10,483          (5,085 )               (49 )%

Total                                         $       14,981         $       23,998        $ (9,017 )               (38 )%

Lease operating expense
Lease operating expense decreased approximately $1.7 million, or 24%, to $5.5 million during the Current Quarter, compared to $7.2 million for the Comparable Quarter. Lease operating expense per BOE decreased to $9.03 for the Current Quarter, compared to $10.33 per BOE in the Comparable Quarter. The decrease in costs is primarily due to an overall reduction in well and lease repairs as well as lower workover expenses. This cost reduction resulted from our efforts to reduce costs across the board in response to the market downturn and a decline in vendor pricing. In addition, water disposal costs associated with our Barnett Shale and New Mexico Wolfcamp areas are down approximately $326,000 due to a reduction of new wells coming on line in the Current Quarter versus the Comparable Quarter. Additionally, we realized an approximate $100,000 cost reduction in the gathering, transportation and treating costs associated with the Hagerman Gas Gathering System.
Production taxes
Production taxes decreased $2.2 million for the Current Quarter, as compared to the Comparable Quarter. Production taxes were 3.8% of revenue for the Current Quarter compared to 5.3% 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 refunds and 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 in the Current Quarter increased slightly by $16,000 over the Comparable Quarter. This increase was primarily caused by increases of non-cash items in stock based compensation expenses of $318,000 and a reduction in the amount of expenses we capitalized of $198,000. These increases were almost entirely offset with reductions across the board with our effort to reduce costs. On a BOE basis, general and administrative costs were $5.35 per BOE in the Current Quarter, as compared to $4.65 per BOE in the Comparable Quarter. The increase on a per BOE basis was due to the increases of non cash items as well as volumetric decreases.

Depreciation, depletion and amortization Depreciation depletion and amortization expense decreased 49%, or $5.1 million, in the Current Quarter, over the Comparable Quarter. Total depreciation, depletion and amortization per BOE was $8.79 for the Current Quarter and $14.93 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 and at the end of the quarter ended March 31, 2009. 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.

Other income (expense)

                                                   Three months ended June 30,                             Percentage
                                                   2009                   2008              Change           Change
                                                                 ($ in thousands)

Loss on derivatives not classified as
hedges                                        $      (13,286 )       $      (71,609 )      $ 58,323                 81 %
Interest and other income                                 30                     32              (2 )               (6 )%
Interest expense, net of capitalized
interest                                              (6,360 )               (5,368 )          (992 )              (18 )%
Other expense                                             (5 )                   (1 )            (4 )             (400 )%
Equity in gain of pipeline venture and
gathering system ventures                                  -                    165            (165 )             (100 )%

Total                                         $      (19,621 )       $      (76,781 )      $ 57,160                (74 )%

Loss on derivatives not classified as hedges We recorded a loss of $(13.3) million in the Current Quarter for derivatives not classified as hedges, as compared to a loss of $(71.6) million for the Comparable Quarter. Of these amounts, we had a gain of $457,000 in the Current Quarter for changes in fair market value in our interest rate swaps, versus a gain of $1.4 million in the Comparable Quarter. For our natural gas derivative contracts, we had a loss of $(865,000) in the Current Quarter, versus a loss of $(9.1) million for the Comparable Quarter. For our crude oil derivative contracts we had a loss of $(12.9) million in the Current Quarter, versus a loss of $(63.9) million in the Comparable Quarter. The primary reason for the differences in the performance in our commodity derivative contracts was the due to a smaller increase in oil prices from the beginning of the Current Quarter to the end of the Current Quarter versus the same time period in the Comparable Quarter. See Note 8-"Derivative Instruments". Interest expense
Interest expense increased approximately $992,000. 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 6.96% for the Current Quarter, from 8.33% for the Comparable Quarter. Additionally, capitalized interest for the Current Quarter was approximately $519,000 and $19,000 for the Comparable Quarter.
Equity in gain of pipelines and gathering system ventures For the Current Quarter we recorded a loss of less than $(1,000) compared to a gain of $165,000 in the Comparable Quarter for our equity investments. This change is primarily due to the acquisition in June 2008, of all the assets of the Hagerman Gas Gathering System Joint Venture. The results of operations of . . .