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profile from the typical productive wells we drill in the Barnett Shale area is
noteably longer-lived compared to the typical reserve profile from our wells drilled
in our onshore Gulf Coast area. We are drilling primarily
horizontal wells in the Barnett Shale area. Typical costs to drill and complete
are approximately $2.4 million for horizontal wells. We also drill vertical wells
with typical costs of approximately $0.9 million. Our Barnett horizontal wells
generally have target depths of 8,500 to 10,500 feet including the lateral section.
During 2005, we held an average 60 percent working interest participation in the
Barnett wells drilled as we shifted to a primarily Carrizo-operated program and
operated a majority of the wells drilled. For wells drilled in 2006, we plan to
increase our average working interests to between 70 and 80 percent. Accordingly,
we believe that continued development of producing reserves in the Barnett Shale
play will have the potential to lengthen our overall average reserve life and,
on balance, add a long-lived cash flow stream to help fund our future capital
exploration and development program. In our Barnett Shale area through December
31, 2005, we had acquired approximately 80,000 net acres, drilled 76 gross (37.8
net) wells and increased our total proved reserves in the Barnett Shale area to
82.1 Bcfe. As of March 1, 2006, our current net production in the Barnett Shale
area was estimated at 14 MMcfe/d. As of December 31,
2005, we operated 106 producing oil and gas wells, which accounted for 48% of
the onshore Gulf Coast area producing wells and 15% of the Barnett Shale producing
wells in which we had an interest. During 2001, through
our wholly-owned subsidiary, CCBM, Inc. (“CCBM”), we acquired 50% of the working
interests held by Rocky Mountain Gas, Inc. (“RMG”) in approximately 107,000 net
mineral acres prospective for coalbed methane located in the Powder River Basin
in Wyoming and Montana. Subsequently, we participated in the acquisition and/or
drilling of 77 gross wells (21 net) before jointly contributing with RMG a majority
of our coalbed methane property interests and operations into a newly formed company,
Pinnacle Gas Resources, Inc. (“Pinnacle”). In exchange for the assets contributed,
CCBM and RMG each received a 37.5% common stock ownership in Pinnacle and options
to purchase additional common stock, or on a fully diluted basis, CCBM and RMG
each received a 26.9% interest in Pinnacle. RMG subsequently transferred its interest
in Pinnacle to U.S. Energy Corp. Simultaneously with the contribution of these
assets, Credit Suisse First Boston Private Equity entities (the “CSFB Parties”)
contributed $17.6 million cash along with a future cash commitment to Pinnacle
in exchange for common stock, warrants and preferred stock equal to a 46.2% interest
on a fully diluted basis. In February 2004, the CSFB Parties contributed additional
funds of $11.8 million into Pinnacle to continue funding the 2004 development
program which increased their ownership to 66.7% on a fully diluted basis should
we and U.S. Energy Corp. each elect not to exercise our available options. In
2005, the CSFB Parties contributed $15.0 million to Pinnacle to finance an acquisition
of additional undeveloped acreage. CCBM and U.S. Energy Corp. elected not to participate
in the equity contribution. In November 2005, the CSFB Parties and a former Pinnacle
employee received 30,000 and 2,000 shares of Pinnacle common stock, respectively,
after exercising certain warrants and options. Accordingly, CCBM’s ownership in
Pinnacle is 32.3% as of December 31, 2005 (15.8% on a fully diluted basis). See
“The Pinnacle Transaction” for more information on this transaction. Historically,
the business operations and development program of Pinnacle has not required us
to provide any further capital infusion. We understand that Pinnacle is in the
process of raising additional capital to expand its operations, which may result
in a further dilution of our interest. In addition
to our interest in Pinnacle, CCBM has maintained interests in approximately 159,000
gross acres at the end of 2005 in the Castle Rock coalbed methane project area
in Montana and the Oyster Ridge project area in Wyoming. During 2004, we opted
to exercise our right to cancel one-half of the remaining note payable to RMG,
or approximately $300,000, in exchange for assigning one-half of our mineral interest
in the Oyster Ridge leases to RMG. Certain terms used
herein relating to the oil and natural gas industry are defined in “Glossary of
Certain Industry Terms” below. Business Strategy Growth
Through the Drillbit Our objective is to create
shareholder value through the execution of a business strategy designed to capitalize
on our strengths. Key elements of our business strategy include: - Grow
Primarily Through Drilling. We are pursuing an
active technology-driven exploration drilling program. We generate exploration
prospects through geological and geophysical analysis of 3-D seismic and other
data. Our ability to successfully define and drill exploratory prospects is demonstrated
by our exploratory drilling success rate in the onshore
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