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LIQUIDITY AND CAPITAL RESOURCES

The Company has made and is expected to make oil and gas capital expenditures in excess of its net cash flows provided by operating activities in order to complete the exploration and development of its existing properties.

The Company will require additional sources of financing to fund drilling expenditures on properties currently owned by the Company and to fund leasehold costs and geological and geophysical cost on its exploration projects.

While the Company believes that current cash balances and anticipated 2003 cash provided by operating activities will provide sufficient capital to carry out the Company's 2003 exploration plans, management of the Company continues to seek financing for its capital program from a variety of sources. No assurance can be given that the Company will be able to obtain additional financing on terms that would be acceptable to the Company. The Company's inability to obtain additional financing could have a material adverse effect on the Company. Without raising additional capital, the Company anticipates that it may be required to limit or defer its planned oil and natural gas exploration and development program, which could adversely affect the recoverability and ultimate value of the Company's oil and natural gas properties.

The Company's primary sources of liquidity have included proceeds from the 1997 initial public offering, the December 1999 sale of Subordinated Notes, Common Stock and Warrants, the 1998 sale of shares of Series A Preferred Stock and Warrants, the February 2002 sale of Series B Preferred Stock and Warrants, funds generated by operations, equity capital contributions, borrowings (primarily under revolving credit facilities) and funding under the Palace Agreement that provided a portion of the funding for the Company's 2000, 2001 and 2002 drilling program in return for participation in certain wells.

Cash flows provided by operating activities were $17.1 million, $24.0 million and $19.9 million for 2000, 2001 and 2002, respectively. The increase in cash flows provided by operating activities in 2001 as compared to 2000 was due primarily to the increase in trade accounts payable and the one-time gain on the sale of an investment in MPC. The decrease in cash flows provided by operating activities in 2002 as compared to 2001 was due primarily to the one-time gains on the sale of an investment in MPC in 2001.

The Company budgeted capital expenditures in 2003 of approximately $27.2 million of which $20.3 million of which is expected to be used for drilling activities in the Company's project areas and the balance is expected to be used to fund 3-D seismic surveys, land acquisitions and capitalized interest and overhead costs. The Company has budgeted to drill approximately 27 gross wells (10.7 net) in the Gulf Coast region and 50 gross (18 net) CCBM coalbed methane wells in 2003. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow, availability and cost of drilling rigs, land and partner issues and other factors.

The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $19.7 million, $38.2 million and $26.7 million for 2000, 2001 and 2002, respectively. The Company's drilling efforts resulted in the successful completion of 24 gross wells (6.6 net) in 2000 and 20 gross wells (5.9 net) in 2001 and 17 gross wells (6.0 net in 2002) in the Gulf Coast region. Of the 75 gross wells (28 net) drilled or acquired by CCBM, 24 gross wells (8 net) are currently producing and 51 gross wells (20 net) are awaiting evaluation before a determination can be made as to their success.

During November 2000, the Company entered into a one-year contract with Grey Wolf, Inc. for utilization of a 1,500 horsepower drilling rig capable of drilling wells to a depth of approximately 18,000 feet. The contract, which commenced in March 2001, provides for a dayrate of $12,000 per day. The rig was utilized primarily to drill wells in the Company's focus areas, including the Matagorda Project Area and the Cabeza Creek Project Area. The contract contained a provision which would allow the Company to terminate the contract early by tendering payment equal to one-half the dayrate for the number of days remaining under the term of the contract as of the date of termination. The contract expired in February 2002. Steven A. Webster, who is the Chairman of the Board of Directors of the Company, is a member of the Board of Directors of Grey Wolf, Inc.

CCBM plans to spend up to $5.0 million for drilling costs through December 2003, 50% of which would be spent pursuant to an obligation to fund $2.5 million of drilling costs on behalf of RMG. Through December 31, 2002, CCBM has satisfied $1.5 million of its drilling obligations on behalf of RMG.

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