EAST TEXAS AREA

The East Texas area encompasses multiple objectives, including the Wilcox and Cotton Valley intervals. We are focused on the Camp Hill Field, a Wilcox steam flood project in Anderson County, and the Tortuga Grande Prospect, a Cotton Valley sand opportunity. We have licenses for over 500 square miles of 3-D seismic data in the East Texas area and 1,449 net acres under lease.

We expect to invest $1.6 million to drill nine (7.7 net) wells in this region in 2005.

Camp Hill Project. We own interests in approximately 600 gross acres in the Camp Hill field in Anderson County, Texas. We currently operate all of these leases. During the year ended December 31, 2004, the project produced an average of 56 Bbls/d of 19 API gravity oil. The wells produce from a depth of 500 feet and utilize a tertiary steam drive as an enhanced oil recovery process. Although efficient at maximizing oil recovery, the steam drive process is relatively expensive to operate because natural gas or produced crude is burned to create the steam injectant. Lifting costs during the year ended December 31, 2004 averaged $19.87 per barrel ($3.31 per Mcfe). In response to high fuel gas prices, steam injection was reduced in mid-2000. Because profitability increases when natural gas prices drop relative to oil prices, the project is a natural hedge against decreases in natural gas prices relative to oil prices. The oil produced, although viscous, commands a higher price (an average premium of $1.00 per Bbl during the year ended December 31, 2004) than West Texas intermediate crude due to its suitability as a lube oil feedstock. As of December 31, 2004, we had 8.6 MMBbls of proved oil reserves in this project, with 969 MBbls of oil reserves currently developed. We have from time to time chosen to delay development of our proved undeveloped reserves in the Camp Hill Field in East Texas in favor of (1) pursuing shorter-term exploration projects with potentially higher rates of return, (2) adding to our lease position in this field and (3) further evaluating additional economic enhancements for this field's development. "See Risk Factors - Our reserve data and estimated discounted future net cash flows are estimates based on assumptions that may be inaccurate and are based on existing economic and operating conditions that may change in the future." The proved undeveloped reserves at the Camp Hill Field constitute 41.8% of our proved reserves and account for 27.7% of our present value of net future revenues from proved reserves as of December 31, 2004. We anticipate drilling additional wells and increasing steam injection to develop the proved undeveloped reserves in this project, with the timing and amount of expenditures dependent on the relative prices of oil and natural gas. We are currently drilling with one rig and plan to spend approximately $0.6 million drilling eight gross (7.2 net) wells in 2005. The planned Camp Hill development expenditures represent a relatively small portion of the Company's total capital expenditures budgeted in 2005. We continue to invest the majority of our 2005 budgeted capital expenditures in our Barnett Shale and onshore Gulf Coast areas where the rates of return are traditionally higher. This is due in large measure to significantly higher lifting costs associated with Camp Hill oil production. We have an average working interest of approximately 90% in this field and an approximate net revenue interest of 73%.

Tortuga Grande Prospect. In March 2004 we finalized an agreement to operate the re-entry of an abandoned Cotton Valley test well that calculates on logs to have over 230 feet of sands with possible production. At the time the well was originally drilled, the predecessor owner/operator perforated the objective interval and tested gas but in uneconomic volumes. This well was drilled before newer fracturing technologies were developed that could have increased flow rates and during a period when gas prices were significantly lower. Although this attempted completion flowed gas at uneconomic rates, we expect to drill another exploratory well in 2005 in a better structural position. We believe there are over ten potential extension development locations on our acreage that may be prospective.

WYOMING/MONTANA COALBED METHANE PROJECT AREA

Rocky Mountain Region

As discussed below under "--Pinnacle Transaction," in the second quarter of 2003, we contributed to Pinnacle our Powder River Basin properties in the Clearmont, Kirby, Arvada and Bobcat project areas located in Wyoming and Montana. At the end of 2004, we also own direct interests in approximately 162,489 gross acres of coalbed methane properties in the Castle Rock project area in Montana and the Oyster Ridge project area in Wyoming that were not contributed to Pinnacle, but we currently have no proved reserves of, and are no longer receiving revenue from, coalbed methane gas other than through Pinnacle.

In February 2004, the CSFB Parties contributed additional funds of $11.8 million into Pinnacle to continue funding the 2004 development program which will increase their ownership to 66.7% on a fully diluted basis should we and RMG each elect not to exercise our available options. See "-The Pinnacle Transaction" for more information on this transaction.

By 2004 year end, Pinnacle had completed the acquisition and/or drilling of 486 wells (or approximately 276 net). All of the wells encountered coal accumulations and are apparent successes in various stages of development and/or stages of production. Coalbed

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