Due to our drilling success, we produced a record 7.5 Bcfe in 2003 compared to 7.2 Bcfe in 2002. At the end of 2003, we also reached a record estimated proved reserves level of 70.4 Bcfe with our 15.1 Bcfe net additions for the year, replacing 196% of our 2003 production.

In 2003, we drilled 39 wells (10.2 net), including 33 wells in the onshore Gulf Coast and six wells in the Barnett Shale play, with a success rate of 90% compared to a success rate of 85% in 2002, in which we drilled 20 wells (7.1 net), in the onshore Gulf Coast. Between January 1, 2001 and December 31, 2003, 95% of our wells drilled were exploratory and 5% were developmental.

In 2003, 97% of these wells were exploratory and 3% were developmental. In 2003, our natural gas and oil revenues reached a record level at $38.5 million, and our net income available to common shareholders was $7.2 million, or $0.50 and $0.43 per basic and fully diluted share, respectively. In 2002, our natural gas and oil revenues were $26.8 million, and our net income available to common shareholders was $4.8 million, or $0.30 and $0.26 per basic and fully diluted share, respectively. These increases in natural gas and oil revenues and net income were attributable in part to the record levels of production discussed above and to higher commodity prices.

Our financial results are largely dependent on a number of factors, including commodity prices. Commodity prices are outside of our control and historically have been and are expected to remain volatile. Natural gas prices in particular have remained volatile during the last few years. Commodity prices are affected by changes in market demands, overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future natural gas, natural gas liquids and crude oil prices, and therefore, cannot accurately predict revenues. Including the effects of hedging activities, our realized natural gas price was 53% higher and our realized oil price was 16% higher in 2003 than in 2002.

Because natural gas and oil prices are unstable, we periodically enter into price-risk-management transactions such as swaps, collars, futures and options to reduce our exposure to price fluctuations associated with a portion of our natural gas and oil production and to achieve a more predictable cash flow. The use of these arrangements limits our ability to benefit from increases in the prices of natural gas and oil. Our hedging arrangements may apply to only a portion of our production and provide only partial protection against declines in natural gas and oil prices.

We have continued to reinvest a substantial portion of our operating cash flows into funding our drilling program and increasing the amount of 3-D seismic data available to us. In 2004, we expect capital expenditures to be approximately $40 to $45 million, as compared to $33.4 million in 2003.

At December 31, 2003, our debt-to-total book capitalization ratio was 30.4%, a 16.7% improvement from the 36.5% ratio at the end of 2002. This improvement was primarily the result of the increased shareholders' equity from net income, a decrease in the outstanding debt on the Hibernia credit facility and a reduction in our nonrecourse note to Rocky Mountain Gas, Inc. The debt reductions are described under "--Liquidity and Capital Resources--Financing Arrangements."

During the second quarter of 2001, we acquired interests in natural gas and oil leases in Wyoming and Montana in areas prospective for coalbed methane and subsequently began to drill wells on those leases. During the second quarter of 2003, we contributed our interests in certain of these leases to a newly formed company, Pinnacle Gas Resources, Inc. ("Pinnacle"). In exchange for this contribution, we received 37.5% of the common stock of Pinnacle and options to purchase additional Pinnacle common stock. We account for our interest in Pinnacle using the equity method. As a result, our contributed operations and reserves are no longer directly reflected in our financial statements. We retained our interests in approximately 189,000 gross acres in the Castle Rock project area in Montana and the Oyster Ridge project area in Wyoming. See "Business and Properties--Pinnacle Transaction" for a description of this transaction. Our discussion of future drilling and capital expenditures does not reflect operations conducted through Pinnacle.

Since our initial public offering, we have grown primarily through the exploration of properties within our project areas although we consider acquisitions from time to time and may in the future complete acquisitions that we find attractive.

Secondary Common Stock Offering

In the first quarter of 2004, we completed the public offering of 6,485,000 shares of our common stock at $7.00 per share. The offering included 3,655,500 newly issued shares offered by us and 2,829,500 shares offered by certain existing stockholders. We expect to use our estimated net proceeds of $23.5 million from this offering to accelerate our drilling program and to retain larger interests in portions of our drilling prospects that we otherwise would sell down or for which we would seek joint partners and for general corporate purposes. In the meantime, we used a portion of the net proceeds to repay the $7 million outstanding principal

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