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 September 30,          Nine Months Ended September 30,
                                                         2009                2008               2009                   2008
                                                                      (In thousands, except per unit amounts)
Net Production Data:
Natural gas (Mmcf)                                           15,976            13,395               42,877                 40,207
Oil (Mbbls)                                                     163               264                  584                    775
Natural gas equivalent (Mmcfe)                               16,955            14,977               46,380                 44,855

Revenues:
Natural gas sales                                  $         50,675       $   138,861     $        153,232       $        395,234
Hedging gains (losses)                                        7,306            (2,730 )             20,332                 (7,358 )
Total natural gas sales including hedging                    57,981           136,131              173,564                387,876
Oil sales                                                     9,455            27,721               27,098                 75,719
Total oil and gas sales                            $         67,436       $   163,852     $        200,662       $        463,595

Expenses:
Oil and gas operating expenses(1)                  $         16,019       $    21,556     $         50,463       $         66,120
Exploration expense                                $            227       $     2,794     $            371       $          5,032
Depreciation, depletion and amortization           $         53,933       $    45,943     $        152,001       $        131,870

Average Sales Price:
Natural gas (per Mcf)                              $           3.17       $     10.37     $           3.57       $           9.83
Natural gas including hedging (per Mcf)            $           3.63       $     10.16     $           4.05       $           9.65
Oil (per Bbl)                                      $          57.96       $    105.15     $          46.42       $          97.74
Average equivalent (Mcfe)                          $           3.55       $     11.12     $           3.89       $          10.50
Average equivalent including hedging (Mcfe)        $           3.98       $     10.94     $           4.33       $          10.34

Expenses ($ per Mcfe):
Oil and gas operating(1)                           $           0.94       $      1.44     $           1.09       $           1.47
Depreciation, depletion and amortization(2)        $           3.17       $      3.06     $           3.27       $           2.93

(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 $96.5 million (59%) to $67.4 million for the three months ended September 30, 2009 from $163.9 million for the third quarter of 2008. This decrease is primarily related to a substantial decline in natural gas and crude oil prices. Our average realized natural gas price decreased by 64% and our average realized crude oil price decreased by 45% in the third quarter of 2009 as compared to the third quarter of 2008. Our natural gas sales for the three months ended September 30, 2009 benefitted from a realized gain of $7.3 million from our hedging activities, while the three months ended September 30, 2008 included a realized hedging loss of $2.7 million. Our production in the third quarter of 2009 of 17.0 Bcfe increased 13% as compared to the 15.0 Bcfe we produced in the third quarter of 2008. The production increase is primarily attributable to our drilling activity in the Haynesville shale formation in East Texas and North Louisiana.

Our oil and gas sales decreased $262.9 million (57%) to $200.7 million for the nine months ended September 30, 2009 from $463.6 million for the first nine months of 2008. This decrease is also primarily attributable to the substantial decline in natural gas and crude oil prices. Our average realized natural gas price decreased by 58% and our average realized crude oil price decreased by 53% in the first nine months of 2009 as compared to the first nine months of 2008. Our natural gas sales for the nine months ended September 30, 2009 benefitted from a realized gain of $20.3 million from our hedging activities. The nine months ended September 30, 2008 included a realized hedging loss of $7.4 million. Our production in the first nine months of 2009 increased by 3% to 46.4 Bcfe, as compared to 44.9 Bcfe in the first nine months of 2008. The increase was attributable to new production from our drilling activity.

Costs and Expenses -

Our oil and gas operating expenses, including production taxes, decreased $5.6 million (26%) to $16.0 million in the third quarter of 2009 from $21.6 million in the third quarter of 2008. Oil and gas operating expenses per equivalent Mcf produced decreased $0.50 (34%) to $0.94 in the third quarter of 2009 from $1.44 in the third quarter of 2008. Oil and gas operating expenses also decreased $15.6 million (24%) to $50.5 million in the first nine months of 2009 from $66.1 million in the first nine months of 2008. Oil and gas operating expenses per Mcfe produced decreased $0.38 (26%) to $1.09 for the nine months ended September 30, 2009 from $1.47 for the same period in 2008. The decrease in operating expenses is primarily due to lower production taxes resulting from lower natural gas and oil prices and the properties which we sold during 2008.

Exploration expense of $0.2 million for the three months ended September 30, 2009 related to geological and geophysical costs incurred. Exploration expense in the three months ended September 30, 2008 of $2.8 million related primarily to an exploratory dry hole drilled in South Texas. Exploration expense of $0.4 million for the nine months ended September 30, 2009 also related to geological and geophysical costs incurred. Exploration expense of $5.0 million for the nine months ended September 30, 2008 related to an exploratory dry hole in South Texas and impairment of unevaluated leasehold costs.

Depreciation, depletion and amortization ("DD&A") increased $8.0 million (17%) to $53.9 million in the third quarter of 2009 from $45.9 million in the third quarter of 2008. Our DD&A per equivalent Mcf produced increased $0.11 (4%) to $3.17 for the three months ended September 30, 2009 from $3.06 for the three months ended September 30, 2008. DD&A for the first nine months of 2009 increased $20.1 million (15%) to $152.0 million from $131.9 million for the nine months ended September 30, 2008. Our DD&A rate per Mcfe for the first nine months of 2009 of $3.27 increased $0.34 (12%) above the DD&A rate of $2.93 for the first nine months of 2008. The higher DD&A rates per Mcfe primarily reflect higher drilling costs and downward revisions to our proved oil and gas reserves at the end of 2008 attributable to lower natural gas and oil prices.

General and administrative expense, which is reported net of overhead reimbursements, increased by $1.5 million to $8.7 million for the third quarter of 2009 as compared to general and administrative expense of $7.2 million for the third quarter of 2008. Included in general and administrative expense is stock-based compensation of $4.0 million and $3.3 million for the three months ended September 30, 2009 and 2008, respectively. For the first nine months of 2009, general and administrative expense increased to $27.6 million from $20.3 million for the nine months ended September 30, 2008. Included in general and administrative expense is stock-based compensation of $11.5 million and $9.0 million for the nine months ended September 30, 2009 and 2008, respectively. The increases in general and administrative costs in 2009 are due to additional professional staff that we added throughout 2008 and the higher costs of our stock-based compensation.

Interest expense decreased $1.6 million (33%) to $3.2 million for the third quarter of 2009 from interest expense of $4.8 million in the third quarter of 2008. The decrease was primarily due to lower borrowings under our bank credit facility, lower interest rates and interest that was capitalized on our unevaluated properties. Our average borrowings outstanding under our bank credit facility decreased to $154.6 million during the third quarter of 2009 as compared to $300.7 million in the third quarter of 2008. The average interest rate we were charged on borrowings outstanding under our credit facility decreased to 2.3% in the third quarter of 2009 as compared to 3.7% in the third quarter of 2008. We capitalized interest of $1.3 million and $0.6 million on our unevaluated properties during the three months ended September 30, 2009 and 2008, respectively. Interest expense for the nine months ended September 30, 2009 decreased $14.9 million (64%) to $8.3 million from interest expense of $23.2 million in the first nine months of 2008. The decrease was also due to lower borrowings under our bank credit facility, lower interest rates and capitalized interest. Our average borrowings outstanding under our bank credit facility decreased to $115.3 million during the first nine months of 2009 as compared to $461.6 million in the first nine months of 2008, and the average interest rate we were charged on borrowings outstanding under our credit facility decreased to 2.1% in the first nine months of 2009 as compared to 4.5% in the first nine months of 2008. We capitalized interest of $4.3 million and $0.6 million on our unevaluated properties during the nine months ended September 30, 2009 and 2008, respectively.

Income tax expense related to continuing operations decreased by $35.0 million to a benefit of $2.2 million for the three months ended September 30, 2009 as compared to a provision of $32.8 million for the three months ended September 30, 2008. The operating loss incurred during the three months ended September 30, 2009 resulted in an income tax benefit. Income tax expense related to continuing operations decreased by $98.3 million to a benefit of $8.3 million for the nine months ended September 30, 2009 as compared to a provision of $90.0 million for the nine months ended September 30, 2008. The operating loss incurred during the nine months ended September 30, 2009 resulted in an income tax benefit. The effective income tax rate was 22% in 2009 as compared to 37% in 2008 due to the effect of nondeductible compensation.

We reported a net loss of $12.6 million for the three months ended September 30, 2009, as compared to net income from continuing operations of $54.8 million for the three months ended September 30, 2008. The loss was primarily attributable to lower natural gas and oil prices. The loss per share for the third quarter of 2009 was $0.28 as compared to income per share from continuing operations of $1.18 for the third quarter of 2008. Income from discontinued operations was $169.9 million ($3.67 per share) in the three months ended September 30, 2008.

We reported a net loss of $29.7 million for the nine months ended September 30, 2009, as compared to net income from continuing operations of $154.6 million for the nine months ended September 30, 2008. The loss was also primarily attributable to lower natural gas and oil prices. The loss per share for the first nine months of 2009 was $0.66 as compared to income per share from continuing operations of $3.36 for the first nine months of 2008. Income from discontinued operations was $193.7 million ($4.21 per share) for the nine months ended September 30, 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 nine months ended September 30, 2009, our primary sources of funds were net cash flow from operations of $117.9 million and borrowings under our bank credit facility of $130.0 million. Our net cash flow from operating activities decreased $213.1 million (64%) in the first nine months of 2009 from $331.0 million for the nine months ended September 30, 2008. This decrease is primarily due to the lower revenues we had in the first nine months of 2009 resulting from the substantial decline in 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 nine months of 2009, we incurred capital expenditures of $253.6 million primarily for our development and exploration activities. We funded our capital program with cash flow provided by operating activities and borrowings under our bank credit facility.

The following table summarizes our capital expenditure activity, on an accrual basis, for the nine months ended September 30, 2009 and 2008:

                                       Nine Months Ended September 30,
                                         2009                   2008
                                               (In thousands)

            Leasehold costs        $         10,343       $        110,940
            Development drilling            143,741                182,382
            Exploratory drilling             90,849                  3,178
            Other development                 8,594                 12,828
                                            253,527                309,328
            Other                                69                    507
                                   $        253,596       $        309,835

We expect to spend approximately $355.0 million for development and exploration projects during 2009 and to fund our development and exploration activities with operating cash flow, cash on hand and additional 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 September 30, 2009 we have contracted for the services of drilling rigs through October 2012 at an aggregate cost of $101.8 million and we have maximum commitments of $37.5 million to transport natural gas through July 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 $6.0 million as of September 30, 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 September 30, 2009 the borrowing base was $550.0 million, $385.0 million of which was available. 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. 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 September 30, 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.

On October 9, 2009, we issued $300.0 million in principal amount of 8?% senior notes due 2017. The 8?% senior notes will mature on October 15, 2017, and interest is paid semi-annually on April 15 and October 15 beginning April 15, 2010. The net proceeds from the offering, after deducting underwriting discounts and estimated expenses of the offering, were approximately $289.2 million. The net proceeds were used to repay in full borrowings outstanding under our bank credit facility and the remainder is being held for general corporate purposes. The new senior notes are senior unsecured obligations and rank equal in right of payment with all of our other existing and future senior unsecured indebtedness. The new senior notes are guaranteed by each of our operating subsidiaries and will be guaranteed by each of our future restricted subsidiaries that guarantee or otherwise become liable with respect to our other indebtedness. The new senior notes include certain covenants that limit our ability to incur additional indebtedness, pay dividends, make restricted payments, create liens, and sell assets.

The new senior notes are redeemable, at our option, at 104.188% of the principal amount after October 15, 2013, declining to 100% in 2015. We may redeem up to 35% of the aggregate principal amount of the 8?% senior notes at a price of 108.375% of the principal amount plus accrued interest upon the issuance of equity securities until October 15, 2012. If a specified change of control occurs, we must make an offer to purchase the notes at 101% of the principal amount plus any accrued interest.

In connection with the issuance of the 8?% senior notes, the borrowing base under our bank credit facility was redetermined on November 2, 2009 to be $500.0 million.