263 gross wells (82.2 net) with a commercial well success rate of approximately 66%, excluding the 75 gross (28 net) coalbed methane wells drilled by CCBM. This drilling success contributed to the Company's total proved reserves as of December 31, 2002 of 63.2 Bcfe with a PV-10 Value of $83.6 million. See "Oil and Natural Gas Properties". During 2002, the Company added a net 11.4 Bcfe to proved reserves, offset by 7.2 Bcfe of production. The Company has financed the majority of its drilling activity through internal cash flow generated primarily from oil and natural gas production sales revenue.

Certain terms used herein relating to the oil and natural gas industry are defined in "Glossary of Certain Industry Terms" below.

EXPLORATION APPROACH

The Company's strategy has been to rapidly accumulate large amounts of 3-D seismic data along primarily prolific, producing trends of the onshore Gulf Coast, after obtaining options to lease areas covered by the data. The Company then uses 3-D seismic data to identify or evaluate prospects before drilling the prospects that fit its risk/reward criteria. The Company typically seeks to explore in locations within its core areas of expertise that it believes have (i) numerous accumulations of normally pressured reserves at shallow depths and in geologic traps that are difficult to define without the interpretation of 3-D seismic data and (ii) the potential for large accumulations of deeper, over-pressured reserves.

As a result of the increased availability of economic onshore 3-D seismic surveys and the improvement and increased affordability of data interpretation technologies, the Company has relied almost exclusively on the interpretation of 3-D seismic data in its exploration strategy. The Company generally does not invest any substantial portion of the costs for an exploration well without first interpreting 3-D seismic data. The principal advantage of 3-D seismic data over traditional 2-D seismic analysis is that it affords the geoscientist the ability to interpret a three dimensional cube of data as compared to interpreting between widely separated two dimensional vertical profiles. Consequently, the geoscientist is able to more fully and accurately evaluate prospective areas, improving the probability of drilling commercially successful wells in both exploratory and development drilling. The use of 3-D seismic allows the geoscientist to identify and use areas of irregular sand geometry to augment or replace structural interpretation in the identification of potential hydrocarbon accumulations. Additionally, detailed analysis and correlation of the 3-D seismic response to lithology and contained fluids assist geoscientists in identifying and prioritizing drilling targets. Because 3-D analysis is completed over an entire target area cube, shallow, intermediate and deep objectives are analyzed. Additionally, the more precise structural definition allowed by 3-D seismic data combined with integration of available well and production data assists in the positioning of new development wells.

Historically, the Company sought to obtain large volumes of 3-D seismic data either by participating in large seismic data acquisition programs either alone or pursuant to joint venture arrangements with other energy companies, or through "group shoots" in which the Company shared the costs and results of seismic surveys. By participating in joint ventures and group shoots, the Company was able to share the up-front costs of seismic data acquisition and interpretation, thereby enabling it to participate in a larger number of projects and diversify exploration costs and risks. Most of the Company's operations are conducted through joint operations with industry participants.

The Company has also participated in 3-D data licensing swaps, whereby the Company transfers license rights to certain proprietary 3-D data it owns in exchange for license rights to other 3-D data within its core areas, thus allowing the Company to obtain access to additional 3-D data within its Gulf Coast Core Areas at either minimal or no out-of-pocket cash cost.

In late 2002, the Company acquired (or obtained the right to acquire) an additional 2,750 square miles of 3-D seismic data in its Gulf Coast Core Areas. These new data are primarily either recently merged and reprocessed data sets or former proprietary data sets newly released to industry. Specific Company operating areas to which new data were added as a result of the late 2002 data acquisition include (1) 450 square miles of newly reprocessed 3-D data to the Matagorda project area, (2) 167 square miles of newly released 3-D data to the Liberty Project area, (3) 239 square miles to the Wilcox project area, and (4) 826 square miles of newly reprocessed 3-D data to the South Louisiana project area. These data acquisitions consist of existing nonproprietary data sets obtained from seismic companies at what the Company believes to be attractive pricing.

The Company's primary strategy for acreage acquisition in prior years was to obtain leasing options covering large geographic areas in connection with 3-D seismic surveys. Prior to conducting proprietary surveys, the Company typically sought to acquire seismic permits that included options to lease the acreage, thereby ensuring the price and availability of leases on drilling prospects that may result upon completing a successful seismic data acquisition program over a project area. The Company generally attempted to obtain these options covering at least 80% of the project area for proprietary surveys. The size of these surveys ranged from 10 to 80 square miles. When the Company participated in 3-D group shoots, it generally sought prospective leases as quickly as possible following interpretation of the survey. In connection with some group shoots in which the Company believed that competition for acreage was especially

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