to write down the carrying value of our natural gas and oil properties increases when natural gas and oil prices are low or volatile. In addition, write-downs would occur if we were to experience sufficient downward adjustments to our estimated proved reserves or the present value of estimated future net revenues, as further discussed in "Risk Factors--Our reserve data and estimated discount future net cash flows are estimates based upon assumptions that may be inaccurate and are based on existing economic and operating conditions that may change in the future." Once incurred, a write-down of natural gas and oil properties is not reversible at a later date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies and Estimates" for additional information on these matters.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY RISK. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas. The effects of such pricing volatility have been discussed above, and such volatility is expected to continue. A 10% fluctuation in the price received for oil and gas production would have an approximate $3.9 million impact on our annual revenues and operating income.

To mitigate some of this risk, we engage periodically in certain limited hedging activities but only to the extent of buying protection price floors. Costs and any benefits derived from these price floors are accordingly recorded as a reduction or increase, as applicable, in oil and gas sales revenue and were not significant for any year presented. The costs to purchase put options are amortized over the option period. We do not hold or issue derivative instruments for trading purposes. Income and (losses) realized by us related to these instruments were $2.0 million, $(0.9 million) and $(1.8 million) or $0.63, $(0.12) and $(0.46) per MMBtu for the years ended December 31, 2001, 2002, and 2003, respectively.

INTEREST RATE RISK. Our exposure to changes in interest rates results from our floating rate debt. In regards to our Hibernia Facility, the result of a 10% fluctuation in short-term interest rates would have impacted 2003 cash flow by approximately $25,000.

FINANCIAL INSTRUMENTS & DEBT MATURITIES. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowing, Subordinated Notes payable and Series B Redeemable Preferred Stock. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair values of the bank and vendor borrowings approximate the carrying amounts as of December 31, 2003 and 2002, and were determined based upon interest rates currently available to us for borrowings with similar terms. Maturities of the debt are $1.0 million in 2004, $7.1 million in 2005 and the balance in 2007.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included elsewhere in this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING                AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that except as provided below our disclosure controls and procedures were effective as of December 31, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

In performing its audit of our Consolidated Financial Statements for the year ended December 31, 2003, our independent auditors, Ernst & Young LLP (Ernst & Young), noted certain matters involving our internal controls that it considered to be a reportable condition under the standards established by the American Institute of Certified Public Accountants. A reportable condition involves matters relating to significant deficiencies in the design or operation of internal controls that, in Ernst & Young's judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management on the financial statements. The reportable conditions noted related to (1) the presence of underlying errors in the tax basis utilized in our

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