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 or (3) 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, we have relied almost exclusively on the interpretation of 3-D seismic data in our exploration strategy. We generally do not invest any substantial portion of the drilling 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.

Even in the relatively lower-risk, reserve-proven trends, such as the Barnett Shale trend, 3-D seismic data interpretation is instrumental in our exploration approach, significantly reducing geologic risk and allowing optimized reserve development.

Historically, we sought to obtain large volumes of 3-D seismic data 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 we shared the costs and results of seismic surveys. By participating in joint ventures and group shoots, we were able to share the up-front costs of seismic data acquisition and interpretation, thereby enabling us to participate in a larger number of projects and diversify exploration costs and risks. Most of our operations are conducted through joint operations with industry participants.

We have also participated in 3-D data licensing swaps, whereby we transfer license rights to certain proprietary 3-D data we own in exchange for license rights to other 3-D data within our areas, thus allowing us to obtain access to additional 3-D data within our onshore Gulf Coast area at either minimal or no out-of-pocket cash cost. Since 2001, we also have made significant purchases of 3-D data from the libraries of seismic companies at favorable pricing.

In more recent years, we have focused less on conducting proprietary 3-D surveys and have focused instead on (1) the continual interpretation and evaluation of our existing 3-D seismic database and the drilling of identified prospects on such acreage and (2) the acquisition of existing non-proprietary 3-D data at reduced prices, in many cases contiguous to or near existing project areas where we have extensive knowledge and subsequent acquisition of related acreage as we deem to be prospective based upon our interpretation of such 3-D data.

In late 2002, we acquired (or obtained the right to acquire) an additional 2,750 square miles of 3-D seismic data in our onshore Gulf Coast area. This data was primarily either recently merged and reprocessed data sets or former proprietary data sets newly released to industry. Specific 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 we believe to be attractive pricing.

In late 2004, we entered into a 3-D seismic data acquisition program, which includes a joint venture partner that shares in a portion of the costs and results of the seismic shoot, covering an approximate 95 square mile area in our onshore Gulf Coast area located in Liberty County, Texas. This seismic survey project and the related processed data were completed in the second quarter of 2005. We also entered into a 3-D seismic data acquisition program in 2004 and 2005 to complete seismic shoots over significant acreage positions in our Barnett Shale area, covering an estimated 299 square miles.

We maintain a flexible and diversified approach to project identification by focusing on the estimated financial results of a project area rather than limiting our focus to any one method or source for obtaining leads for new project areas. Our current project areas result from leads developed primarily by our internal staff. Additionally, we monitor competitor activity and review outside prospect generation by small, independent “prospect generators,” or our joint venture partners. We complement our exploratory drilling portfolio through the use of these outside sources of project generation and typically retain operation rights. Specific drill-sites are typically chosen by our own geoscientists.

Operating Approach

Our management team has extensive experience in the development and management of exploration projects along the Texas and Louisiana Gulf Coast. We believe that the experience of our management in the development, processing and analysis of 3-D projects and data in the onshore Gulf Coast area is a core competency to our continued success. Additionally, we believe that the experience we have gained in the Barnett Shale area, along with our extensive experience in fracturing and horizontal drilling technologies, will play a significant part in our future success.

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