Contract Drilling Segment Information

Average drilling rig utilization for the first quarter of 2009 was 52.8 drilling rigs, or 40%, a decrease of 48% from the first quarter of 2008, and a decrease of 45% from the fourth quarter of 2008. Contract drilling rig rates for the first quarter of 2009 averaged $18,638 per day, an increase of 4%, or $641 per day, from the first quarter of 2008, and a decrease of 4%, or $692 per day, from the fourth quarter of 2008. Average operating margins for the first quarter were $8,213 per day (before elimination of inter company drilling rig profit of $0.6 million; as compared to $8,772 per day (before elimination of intercompany drilling rig profit of $7.5 million; for 2008, a decrease of 6%.

During the quarter, the company sold one 750 horsepower drilling rig for $3.1 million, bringing the total fleet to 131 drilling rigs. Currently, 39 of the 131 drilling rigs are under contract.

Larry Pinkston, chief executive officer and president of the company, said: “The substantial reduction in commodity prices along with reduced capital spending by exploration and production companies has had a significant negative impact to the utilization rates in the contract drilling industry and to our rig fleet. We have and are responding to these changes by taking substantial cost cutting measures throughout the segment, while being careful to protect the core organization. We strongly believe that the available supply of natural gas will decline as a result of the reduction in the number of wells being drilled and that as the impact of declining production becomes evident, demand for natural gas drilling rig utilization will begin to grow.”

Exploration And Production Segment Information

— Completed 21 gross wells in the first quarter of 2009 with a 90% success rate.

— Increased first quarter 2009 equivalent production over first quarter 2008 production by 10%.

— About 72% of anticipated natural gas production and 76% of anticipated crude oil production is hedged for 2009.

— Revised estimate of gross wells to be drilled for 2009 from 175 to 140 wells.

First quarter 2009 production was 343,000 barrels of oil, in comparison to 292,000 barrels of oil in the first quarter of 2008, an 18% increase. Natural gas liquids (NGLs) production was 393,000 barrels in comparison to 306,000 barrels in the first quarter of 2008, a 29% increase. First quarter 2009 natural gas production increased to 11.9 Bcf from 11.2 Bcf during the comparable quarter of 2008, a 6% increase. First quarter 2009 production totaled 16.3 Bcfe, a 10% increase over first quarter 2008.

Average oil price for the first quarter of 2009 was $50.51 per barrel compared to $93.32 per barrel for the first quarter of 2008, a 46% decrease. The average natural gas price for the first quarter of 2009 decreased 29% to $5.44 per thousand cubic feet (Mcf) as compared to $7.65 per Mcf for the first quarter of 2008. Average NGLs price for the first quarter of 2009 was $18.69 per barrel compared to $52.04 per barrel for the first quarter of 2008, a 64% decrease.

For 2009, about 72% of this segment’s anticipated average daily natural gas production is hedged through NYMEX plus basis at several delivery points and about 76% of its anticipated oil production is hedged. Of the natural gas hedges, 89% are under swap contracts at a comparable NYMEX average price of $7.20 and 11% are under a collar contract with a comparable NYMEX floor of $8.22 and a ceiling of $10.80. The average basis differentials for these swaps are ($0.85). Of the oil hedges, 80% are under swap contracts at an average price of $51.87 and 20% under a collar contract with a floor of $100.00 and a ceiling of $156.25. For 2010, about 64% of the company’s anticipated average daily natural gas production is hedged and 46% of its anticipated daily oil production is hedged. The natural gas production is hedged under swap contracts at a comparable average NYMEX price of $6.95. The average basis differentials for the swaps are ($0.66). The oil hedges are all swap contracts at an average price of $61.36.

During the first quarter of 2009, this segment completed the drilling of 21 wells with a success rate of 90% compared to the completion of 57 wells with an 86% success rate during the first quarter of 2008.

Pinkston said: “Due to weak commodity prices, we have started the year with a conservative drilling program for our exploration and production operations. Our current drilling efforts are focused in prospects that have a combination of natural gas and oil or where the natural gas has a high BTU content from which we receive an upgrade in price to better correlate to crude pricing. We plan to drill about 140 gross wells during 2009, a reduction of our previous estimate of 175 wells. Our estimated production and capital expenditures for 2009 remains unchanged from previous estimates of 63 to 64 Bcfe and $200 million, respectively.”

Mid-Stream Segment Information

— Increased first quarter 2009 liquids sold per day volumes 11% from fourth quarter 2008 and 19% from first quarter 2008.

— 14 new wells connect to existing systems during the first quarter of 2009.

First quarter 2009 processing volumes of 72,650 MMBtu per day and liquids sold volumes of 218,762 gallons per day increased 21% and 19%, respectively, over first quarter of 2008 results. First quarter 2009 gathering volumes were 192,320 MMBtu per day, a 4% decrease from the first quarter of 2008. Operating profit for the first quarter was $1.5 million or 84% lower than 2008’s first quarter, due primarily to decreases in commodity prices, which resulted in decreased processing margins.

This segment operates three natural gas treatment plants, owns nine processing plants, 37 active gathering systems and about 800 miles of pipeline.

Pinkston said: “We are pleased with the volume growth this segment has achieved to date. Processing and liquids sold volumes continue to remain strong although with the reduction in commodity prices the frac margins have decreased significantly from the prior year.”

Financial Information

The company ended the first quarter of 2009 with working capital of $103 million, long-term debt of $163.5 million, and a debt to capitalization ratio of 10%. Under the company’s credit facility, the amount available to the company is the lesser of the amount elected by the company as the commitment amount (currently $325 million) or the value of the borrowing base as determined by the lenders under the credit facility, but not to exceed the maximum credit facility amount of $400 million. As of April 1, 2009, the borrowing base was determined to be $475 million. The company is currently in compliance with all of the covenants contained in its credit facility.

Management Comment

Larry Pinkston said: “Our first quarter 2009 operating results were solid in a very challenging industry and economic environment. Going forward, we will continue to focus on maintaining our capital expenditures within our anticipated cash flows.

While the current industry environment is difficult, the outlook for growth opportunities, from a business development perspective, may be attractive in the latter half of the year. Under the present circumstances, our focus will continue to be on maintaining our liquidity, managing costs and drilling in prospects with higher returns, all of which will also position us to take advantage of growth opportunities should they arise.”