SOURCE: Venoco, Inc.

Venoco, Inc.

August 06, 2009 05:01 ET

Venoco, Inc. Announces Second Quarter 2009 Financial and Operational Results

DENVER, CO--(Marketwire - August 6, 2009) - Venoco, Inc. (NYSE: VQ)

--  2Q '09 vs. 2Q '08 Pro Forma Production up 12%
    
--  2Q '09 vs. 2Q '08 LOE/BOE Down 19% (9% Pro Forma)
    
--  Annual Guidance Reaffirmed
    

Venoco, Inc. today reported financial and operational results for the second quarter of 2009. Highlights include the following:

--  Production of 1.86 million barrels of oil equivalent (MMBOE) for the
    second quarter or 20,434 BOE per day (BOE/d). Pro forma for the sale of the
    Hastings Complex, production was 20,626 BOE/d in the first half of 2009, up
    12% from 18,337 BOE/d in the first half of 2008.
    
--  Lease operating expenses (LOE) of $12.46 per BOE for the second
    quarter -- down 19% from $15.40 per BOE in the second quarter 2008. First
    half 2009 LOE was $12.12 per BOE, down 19% from $15.04 per BOE in the first
    half of 2008.
    

The company reported a net loss of $59 million for the quarter on oil and gas revenues of $62 million and realized commodity derivative gains of $16 million. Adjusted EBITDA was $44 million in the second quarter of 2009, down 17% from $53 million in the first quarter of 2009 and down 47% from $83 million in the second quarter of 2008. Adjusted EBITDA includes $8 million in the first half of 2009 of realized gains resulting from the restructuring of derivative instruments.

Adjusted Earnings were $0.5 million, down from $7 million for the first quarter of 2009 and down from $22 million in the second quarter of 2008. Adjusted Earnings adjusts the net loss of $59 million in the second quarter of 2009, the net income of $25 million in first quarter of 2009 and the net loss of $173 million in the second quarter of 2008 for, among other things, the effects of unrealized commodity and interest derivatives gains / losses in the quarters. Please see the end of this release for definitions of Adjusted Earnings and Adjusted EBITDA and a reconciliation of those measures to net income (loss).

"Our production continues to be steady and expenses continue to remain well below 2008 levels," said Tim Marquez, Venoco's Chairman and CEO. "Stable oil prices, along with our robust hedging program, have given us solid cash flows to support our $150 million capex program that is forecast to increase our production 6% this year."

"We are reaffirming 2009 annual production guidance of 20,250 BOE per day as well as the expense metrics, including lower LOE, we announced on June 10th," Mr. Marquez explained.

Production

Production in the second quarter of 2009, as previously forecast, was down from first quarter of 2009. Excluding production from the Hastings Complex, which was sold to Denbury Resources in February, and the effect of lost production due to a PG&E pipeline repair in the Sacramento Basin, production would have been flat quarter to quarter. Those pipeline constraints in the Sacramento Basin, as well as the acquisition of properties from Aspen Exploration and related sellers, were factored into the company's revised annual guidance. Excluding production from Hastings, production in the second quarter of 2009 increased 12% over the second quarter of 2008.

The following table details the company's daily production by region (BOE/d):

                                   Quarter Ended
                              -----------------------
                                                      Full-year
                                                        2009
Region                        6/30/08 3/31/09 6/30/09 Guidance
                              ------- ------- ------- ---------
Sacramento Basin                9,159  10,208   9,988
Southern California             7,597   8,865   8,676
Texas (and other)               4,277   2,655   1,770
                              ------- ------- -------
   Total                       21,033  21,728  20,434    20,250
                              ======= ======= ======= =========

   Total excluding Hastings    18,289  20,818  20,434
                              ======= ======= =======

Capital Investment

Total capital costs incurred for the company's E&P operations were $74 million for the second quarter, including $33 million for drilling and rework activities, $7 million for facilities, $19 million for acquisitions and $15 million for seismic, leasehold, capitalized G&A costs and asset retirement obligations.

The company spent $27 million or 53% of its development and other capital expenditures in the Sacramento Basin. Drilling in the Basin consisted of a three-rig program during the quarter. The company spud 21 wells and completed 56 workovers / recompletions in the Basin in the second quarter.

"Our drilling and workover programs are getting more and more efficient as we focus on optimizing our capital expenditures. Our activity in the Sac Basin this year is front-end loaded, so we will be paring back activity in the second half," Mr. Marquez said. "We've focused almost 100% on 20-acre infill wells this year and are pleased to see a success rate of 78% as well as solid economics at the current NYMEX strip."

"We continue to put an emphasis on recompletions and workovers this year as the economics are even better than drilling," Mr. Marquez said.

The company closed the acquisition of assets from Aspen Exploration and other sellers on June 30th for $21.4 million. Net production at closing from the acquired assets was approximately 500 BOE per day (3 MMCF per day) with year-end 2008 reserves on the assets of over 3 million BOE (18 BCF). The acquired assets include approximately 28,600 gross acres.

"This acquisition fills in our substantial acreage position in the greater Grimes area. Our operating teams are already preparing workovers and recompletions projects and our geologists are identifying infill drilling locations," said Mr. Marquez.

The company spent $17 million or 34% of its second quarter 2009 capital expenditures in Southern California, focused on further infill development drilling in the West Montalvo field and substantial facility upgrades to improve offshore processing and operating efficiency. On Platform Gail in the Sockeye field, the company completed drilling activity that began late in the first quarter on a dual completion well. That well is now producing from an interval in the Monterey shale and injecting water into the Upper Topanga formation to enhance the sweep of the waterflood.

"We accelerated the drilling of our dual completion well into the second quarter which was about 3 months earlier than originally planned. While we are waiting on response from the new waterflood area, initial production from the Monterey shale interval is better than we anticipated," said Mr. Marquez.

In Texas, the company had minimal capital expenditures again this quarter.

Costs and Expenses

Venoco's second quarter 2009 lease operating expenses of $12.46 per BOE remained substantially lower than 2008, down 19% from $15.40 per BOE in the second quarter of 2008, and up slightly from $11.78 per BOE in the first quarter of 2009. Unit operating costs have been lower compared to 2008 due to the sale of the Hastings Complex (which was one of the company's highest operating cost fields), increased proportionate production from the Sacramento Basin (which has lower operating costs), and realized cost savings from vendors and service providers. In the second quarter of 2009, LOE was down 9% to $12.46 per BOE from the second quarter of 2008 LOE pro forma for the sale of Hastings, which was $13.66 per BOE.

                                                                  Full Year
                            Quarter Ended       Six Months Ended    2009
                        ----------------------- -----------------
UNAUDITED (per BOE)     6/30/08 3/31/09 6/30/09 6/30/08  6/30/09  Guidance
                        ------- ------- ------- -------  -------- ---------
Lease Operating
 Expenses               $ 15.40 $ 11.78 $ 12.46 $  15.04 $  12.12 $   13.50
Production/Property
 Taxes                     1.91    1.88    1.27     1.98     1.58      1.90
DD&A Expense              15.61   11.60   11.08    15.97    11.35     12.00
G&A Expense (1)            4.72    3.87    4.36     4.55     4.11      4.50
Interest Expense (2)       9.07    8.10    8.41     8.72     8.26      9.20
                        ------- ------- ------- -------- -------- ---------
   Total                $ 46.71 $ 37.23 $ 37.58 $  46.26 $  37.42 $   41.10
                        ======= ======= ======= ======== ======== =========

      (1) Net of amounts capitalized and excluding stock-based compensation
          and MLP write off costs. See the end of this release for a GAAP
          reconciliation of G&A per BOE.
      (2) Includes interest expense, realized (gain) loss on interest rate
          swap and amortization of deferred loan costs.

"What is important in the current economic environment is that we had another solid quarter. Though we have scaled back cap-ex from 2008 dramatically, production levels are strong and we have been able to greatly reduce expenses," Mr. Marquez explained.

Derivative Transactions

In June 2009, the company entered into a series of transactions to extend the term of its interest rate swap on $500.0 million of variable rate debt to September 2011 and to reduce the rate from 5.32% to 4.035%. As a result, amounts borrowed up to $500.0 million will effectively bear interest at a fixed rate of approximately 8.0% until September 2011. Only amounts borrowed in excess of $500.0 million are, therefore, subject to interest rate risk until that date.

"The net effect of the 'blend and extend' transaction on our overall debt was to lower interest by about one percentage point. As a result, we will realize annual savings of approximately $6.4 million," explained Tim Ficker, CFO.

In July 2009, the company entered into a series of transactions whereby it reduced the ceiling on existing natural gas contracts covering 16,900 MMBtu per day from an average ceiling of $11.02 to $9.00 for the period from January 2010 through December 2010, sold natural gas calls covering 10,000 MMBtu per day at $9.00 for the period from January 2010 through December 2010, and utilized the proceeds from these transactions to partially fund the purchase of natural gas puts covering 7,800 MMBtu per day at $6.00 and collars covering 15,500 MMBtu per day with limits of $6.00 and $9.10 for the period from January 2012 through December 2012.

Earnings Conference Call

Venoco will host a conference call to discuss results today, Thursday, August 6, 2009 at 11:00 a.m. Eastern time (9 a.m. Mountain). The conference call will be webcast and those wanting to listen may do so by using a link on the Investor Relations page of the company's website at http://www.venocoinc.com. Those wanting to participate in the Q & A portion can call (866) 383-8003 and use conference code 64815331. International participants can call (617) 597-5330 and use the same conference code.

A replay of the conference call will be available for one week by calling (888) 286-8010 or, for international callers, (617) 801-6888, and using passcode 63888631. The replay will also be available on the Venoco website for 30 days.

Conference and New Presentation

Venoco CEO, Tim Marquez will be speaking at The 2009 Oil & Gas Conference on Monday, August 10, 2009 at 11:40 a.m. Eastern time (9:40 a.m. Mountain). The presentation will be available after market-close on Friday, August 7th via the Investor Relations page of the company's website, www.venocoinc.com.

The presentation will be webcast live via the URL below or the link may be accessed on the company's website.

http://www.investorcalendar.com/CEPage.asp?ID=147929

Analyst Day

Venoco has set a final date of Tuesday, October 6, 2009 in New York City for its 2009 Analyst Day -- additional details will be provided.

About the Company

Venoco is an independent energy company primarily engaged in the acquisition, exploitation and development of oil and natural gas properties in California and Texas. Venoco operates three offshore platforms in the Santa Barbara Channel, has non-operated interests in three other platforms, operates four onshore properties in Southern California, has extensive operations in Northern California's Sacramento Basin and operates thirteen fields in Texas.

Forward-looking Statements

Statements made in this news release relating to Venoco's future production and expenses, and all other statements except statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on assumptions and estimates that management believes are reasonable based on currently available information; however, management's assumptions and the company's future performance are both subject to a wide range of business risks and uncertainties and there is no assurance that these goals and projections can or will be met. Any number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, the timing and extent of changes in oil and gas prices, the timing and results of drilling and other development activities, the availability and cost of obtaining drilling equipment and technical personnel, risks associated with the availability of acceptable transportation arrangements and the possibility of unanticipated operational problems, delays in completing production, treatment and transportation facilities, higher than expected production costs and other expenses, and pipeline curtailments by third parties. All forward-looking statements are made only as of the date hereof and the company undertakes no obligation to update any such statement. Further information on risks and uncertainties that may affect the Company's operations and financial performance, and the forward-looking statements made herein, is available in the company's filings with the Securities and Exchange Commission, which are incorporated by this reference as though fully set forth herein.

                        OIL AND NATURAL GAS PRODUCTION AND PRICES

                              Quarter Ended             Quarter Ended
                        ------------------------  ------------------------
                                            %                         %
UNAUDITED               3/31/09  6/30/09  Change  6/30/08  6/30/09  Change
                        -------  -------  ------  -------  -------  ------
Production Volume:
Oil (MBbls) (1)             934      848     -9%      975      848    -13%
Natural Gas (MMcf)        6,129    6,069     -1%    5,634    6,069      8%
                        -------  -------  ------  -------  -------  ------
MBOE                      1,956    1,860     -5%    1,914    1,860     -3%
                        =======  =======  ======  =======  =======  ======
Daily Average
 Production Volume:
Oil (Bbls/d)             10,378    9,319    -10%   10,714    9,319    -13%
Natural Gas (Mcf/d)      68,100   66,692     -2%   61,912   66,692      8%
                        -------  -------  ------  -------  -------  ------
BOE/d                    21,728   20,434     -6%   21,033   20,434     -3%
                        =======  =======  ======  =======  =======  ======
Oil Price per Barrel
 Produced (in dollars):
Realized price before
 hedging                $ 34.40  $ 49.67     44%  $114.37  $ 49.67    -57%
Realized hedging gain
 (loss)                    9.58    (0.30)  -103%   (38.44)   (0.30)   -99%
                        -------  -------  ------  -------  -------  ------
Net realized price      $ 43.98  $ 49.37     12%  $ 75.93  $ 49.37    -35%
                        =======  =======  ======  =======  =======  ======
Natural Gas Price per
 Mcf (in dollars):
Realized price before
 hedging                $  4.41  $  3.20    -27%  $ 10.39  $  3.20    -69%
Realized hedging gain
 (loss)                    1.87     3.16     69%    (0.07)    3.16      -
                        -------  -------  ------  -------  -------  ------
Net realized price      $  6.28  $  6.36      1%  $ 10.32  $  6.36    -38%
                        =======  =======  ======  =======  =======  ======

Expense per BOE
 (in dollars):
Lease operating
 expenses (2)           $ 11.78  $ 12.46      6%  $ 15.40  $ 12.46    -19%
Production and property
 taxes (2)              $  1.88  $  1.27    -32%  $  1.91  $  1.27    -34%
Transportation expenses $  0.53  $  0.41    -23%  $  0.72  $  0.41    -43%
Depreciation, depletion
 and amortization       $ 11.60  $ 11.08     -4%  $ 15.61  $ 11.08    -29%
General and
 administrative (3)     $  4.09  $  4.60     12%  $  6.36  $  4.60    -28%
Interest expense        $  5.71  $  5.26     -8%  $  6.88  $  5.26    -24%


                            Six Months Ended
                        ------------------------
                                            %
UNAUDITED               6/30/08  6/30/09  Change
                        -------  -------  ------
Production Volume:
Oil (MBbls) (1)           1,959    1,782     -9%
Natural Gas (MMcf)       11,210   12,198      9%
                        -------  -------  ------
MBOE                      3,827    3,815      0%
                        =======  =======  ======
Daily Average
 Production Volume:
Oil (Bbls/d)             10,764    9,845     -8%
Natural Gas (Mcf/d)      61,593   67,392      9%
                        -------  -------  ------
BOE/d                    21,030   21,077      0%
                        =======  =======  ======
Oil Price per Barrel
 Produced (in dollars):
Realized price before
 hedging                $102.55  $ 41.67    -59%
Realized hedging gain
 (loss)                  (28.42)    4.88   -117%
                        -------  -------  ------
Net realized price      $ 74.13  $ 46.55    -37%
                        =======  =======  ======
Natural Gas Price per
 Mcf (in dollars):
Realized price before
 hedging                $  9.14  $  3.81    -58%
Realized hedging gain
 (loss)                   (0.04)    2.51      -
                        -------  -------  ------
Net realized price      $  9.10  $  6.32    -31%
                        =======  =======  ======

Expense per BOE
 (in dollars):
Lease operating
 expenses (2)           $ 15.04  $ 12.12    -19%
Production and property
 taxes (2)              $  1.98  $  1.58    -20%
Transportation expenses $  0.70  $  0.47    -33%
Depreciation, depletion
 and amortization       $ 15.97  $ 11.35    -29%
General and
 administrative (3)     $  5.55  $  4.34    -22%
Interest expense        $  7.25  $  5.49    -24%


(1)  Amounts shown are oil production volumes for offshore properties and
     sales volumes for onshore properties (differences between onshore
     production and sales volumes are minimal). Revenue accruals are
     adjusted for actual sales volumes since offshore oil inventories can
     vary significantly from month to month based on the timing of barge
     deliveries, oil in tank and pipeline inventories, and oil pipeline
     sales nominations.

(2)  Lease operating expense and property and production taxes are combined
     to comprise oil and natural gas production expenses on the condensed
     consolidated statements of operations.

(3)  Net of amounts capitalized.



             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED
(In thousands,              Quarter Ended              Six Months Ended
 except per     ----------------------------------  ----------------------
 share amounts)   6/30/08     3/31/09     6/30/09     6/30/08     6/30/09
                ----------  ----------  ----------  ----------  ----------
REVENUES:
Oil and natural
 gas sales      $  167,132  $   57,431  $   62,011  $  303,797  $  119,442
Other                  915         885         803       1,700       1,688
                ----------  ----------  ----------  ----------  ----------
Total revenues     168,047      58,316      62,814     305,497     121,130
                ----------  ----------  ----------  ----------  ----------
EXPENSES:
Oil and natural
 gas production     33,138      26,726      25,539      65,147      52,265
Transportation
 expense             1,382       1,046         764       2,679       1,810
Depletion,
 depreciation
 and
 amortization       29,870      22,683      20,608      61,116      43,291
Impairment               -           -           -           -           -
Accretion of
 asset
 retirement
 obligation          1,028       1,357       1,388       2,021       2,745
General and
 administrative     12,165       7,998       8,559      21,231      16,557
                ----------  ----------  ----------  ----------  ----------
Total expenses      77,583      59,810      56,858     152,194     116,668
                ----------  ----------  ----------  ----------  ----------
Income from
 operations         90,464      (1,494)      5,956     153,303       4,462
FINANCING COSTS
 AND OTHER:
Interest
 expense            13,169      11,178       9,777      27,758      20,955
Interest rate
 derivative
 realized
 (gains) losses      3,307       3,940       5,130       3,724       9,070
Interest rate
 derivative
 unrealized
 (gains) losses    (13,215)     (2,993)      2,823         339        (170)
Amortization of
 deferred loan
 costs                 889         735         738       1,888       1,473
Loss on
 extinguishment
 of debt                 -           -         582           -         582
Commodity
 derivative
 realized
 (gains) losses     37,856     (30,785)    (16,288)     56,119     (47,073)
Commodity
 derivative
 unrealized
 (gains) losses
 and
 amortization
 of derivative
 premiums          326,927     (17,774)     66,771     383,300      48,997
                ----------  ----------  ----------  ----------  ----------
Total financing
 costs and
 other             368,933     (35,699)     69,533     473,128      33,834
                ----------  ----------  ----------  ----------  ----------
Income (loss)
 before taxes     (278,469)     34,205     (63,577)   (319,825)    (29,372)
Income tax
 provision
 (benefit)        (105,900)      9,000      (4,100)   (121,800)      4,900
                ----------  ----------  ----------  ----------  ----------
Net income
 (loss)         $ (172,569) $   25,205  $  (59,477) $ (198,025) $  (34,272)
                ==========  ==========  ==========  ==========  ==========

Weighted average
 common shares
 outstanding:
Basic               50,347      50,702      50,781      50,287      50,742
Diluted             50,347      50,702      50,781      50,287      50,742



        CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION

UNAUDITED ($ in thousands)                     12/31/08    6/30/09
                                               ---------  ---------
ASSETS
  Cash and cash equivalents                    $     191  $   1,584
  Accounts receivable                             41,306     31,291
  Inventories                                     12,361      4,446
  Prepaid expenses and other current assets        4,314      2,872
  Income tax receivable                              546          -
  Commodity derivatives                           57,247     48,542
                                               ---------  ---------
    Total current assets                         115,965     88,735
    Net property, plant and equipment            702,734    597,961
    Total other assets                            45,555     38,694
                                               ---------  ---------
TOTAL ASSETS                                   $ 864,254  $ 725,390
                                               =========  =========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Accounts payable and accrued liabilities     $  75,400  $  43,185
  Undistributed revenue payable                    8,277      5,544
  Interest payable                                 5,325      1,701
  Income taxes payable                                 -      3,794
  Current maturities of long-term debt             2,598          -
  Commodity and interest derivatives              21,284     37,912
                                               ---------  ---------
    Total current liabilities                    112,884     92,136
LONG-TERM DEBT                                   797,670    694,532
COMMODITY AND INTEREST DERIVATIVES                 9,363     18,872
ASSET RETIREMENT OBLIGATIONS                      79,504     85,393
                                               ---------  ---------
    Total liabilities                            999,421    890,933
    Total stockholders' equity                  (135,167)  (165,543)
                                               ---------  ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $ 864,254  $ 725,390
                                               =========  =========

GAAP RECONCILIATIONS

In addition to net income (loss) determined in accordance with GAAP, we have provided in this release our Adjusted Earnings and Adjusted EBITDA for recent periods. Both Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures that we use as supplemental measures of our performance.

We define Adjusted Earnings as net income (loss) before the items listed in the Adjusted Earnings reconciliation set forth in the table below. We believe that Adjusted Earnings facilitates comparisons to earnings forecasts prepared by stock analysts and other third parties. Such forecasts generally exclude the effects of items that are difficult to predict or to measure in advance and are not directly related to our ongoing operations.

We define Adjusted EBITDA as net income (loss) before the items listed in the Adjusted EBITDA reconciliation set forth in the table below. Because the use of Adjusted EBITDA facilitates comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning and analysis purposes, in assessing acquisition opportunities and in determining how potential external financing sources are likely to evaluate our business.

We present Adjusted Earnings and Adjusted EBITDA because we consider them to be important supplemental measures of our performance. Neither Adjusted Earnings nor Adjusted EBITDA is a measurement of our financial performance under GAAP and neither should be considered as an alternative to net income (loss), operating income or any other performance measure derived in accordance with GAAP, as an alternative to cash flow from operating activities or as a measure of our liquidity. You should not assume that the Adjusted Earnings or Adjusted EBITDA amounts shown are comparable to similarly named measures disclosed by other companies.

                                Quarter Ended            Six Months Ended
                        -----------------------------  -------------------
UNAUDITED ($ in
 thousands)              6/30/08   3/31/09   6/30/09    6/30/08   6/30/09
                        ---------  --------  --------  ---------  --------
Adjusted Earnings
 Reconciliation
  Net Income            $(172,569) $ 25,205  $(59,477) $(198,025) $(34,272)
  Plus:
  Unrealized commodity
   (gains) losses         325,162   (22,389)   60,723    379,771    38,334
  Unrealized interest
   rate derivative
   (gains) losses         (13,215)   (2,993)    2,823        339      (170)
  Write-off of MLP
   offering costs           2,695         -         -      2,695         -
  Early Extinguishment
   of debt                      -         -       582          -       582
  Tax effects            (119,656)    6,678    (4,136)  (145,862)    2,543
                        ---------  --------  --------  ---------  --------
  Adjusted Earnings     $  22,417  $  6,501  $    515  $  38,918  $  7,017
                        =========  ========  ========  =========  ========



                               Quarter Ended            Six Months Ended
                       -----------------------------  --------------------
UNAUDITED ($ in
 thousands)             6/30/08   3/31/09   6/30/09    6/30/08    6/30/09
                       ---------  -------  ---------  ---------  ---------
Adjusted EBITDA
 Reconciliations:
Net income             $(172,569) $25,205  $ (59,477) $(198,025) $ (34,272)
Interest expense          13,169   11,178      9,777     27,758     20,955
Interest rate
 derivative (gains)
 losses - realized         3,307    3,940      5,130      3,724      9,070
Income taxes            (105,900)   9,000     (4,100)  (121,800)     4,900
DD&A                      29,870   22,683     20,608     61,116     43,291
Amortization of
 deferred loan costs         889      735        738      1,888      1,473
Loss on extinguishment
 of debt                       -        -        582          -        582
Share-based payments         597      550        644      1,384      1,194
Amortization of
 derivative premiums
 and other
 comprehensive loss        2,086    5,238      6,628      4,143     11,866
Unrealized commodity
 derivative (gains)
 losses                  325,162  (22,389)    60,723    379,771     38,344
Unrealized interest
 rate derivative
 (gains) losses          (13,215)  (2,993)     2,823        339       (170)
                       ---------  -------  ---------  ---------  ---------
Adjusted EBITDA        $  83,396  $53,147  $  44,076  $ 160,298  $  97,233
                       =========  =======  =========  =========  =========

We also provide per BOE G&A expenses excluding costs associated with the terminated MLP offering and non-cash FAS 123R charges. We believe that these non-GAAP measures are useful in that the items excluded do not represent cash expenses directly related to our ongoing operations. These non-GAAP measures should not be viewed as an alternative to per BOE G&A expenses as determined in accordance with GAAP.

UNAUDITED ($ in
 thousands, except per
 BOE amounts)                     Quarter Ended          Six Months Ended
                          ----------------------------  ------------------
                          6/30/08   3/31/09   6/30/09   6/30/08   6/30/09
                          --------  --------  --------  --------  --------
G&A per BOE
 Reconciliation
G&A Expense               $ 12,165  $  7,998  $  8,559  $ 21,231  $ 16,557
  Less:
  SFAS 123R Expense           (437)     (420)     (454)   (1,124)     (874)
  MLP Write Off             (2,695)        -         -    (2,695)        -
                          --------  --------  --------  --------  --------
  G&A Expense Excluding
   SFAS 123R / MLP           9,033     7,578     8,105    17,412    15,683
  MBOE                       1,914     1,956     1,860     3,827     3,815
                          --------  --------  --------  --------  --------
G&A Expense per BOE
 Excluding SFAS 123R /
 MLP                      $   4.72  $   3.87  $   4.36  $   4.55  $   4.11
                          ========  ========  ========  ========  ========

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