As filed with the Securities and Exchange Commission on December 8, 2009

Registration No. 333-163277

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

CRIMSON EXPLORATION INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

E. Joseph Grady

Senior Vice President and Chief Financial Officer

717 Texas Avenue, Suite 2900

Houston, Texas 77002

(713) 236-7400

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices

and agent for service)

 

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practical after the effective date of this Registration Statement.

 

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

CALCULATION OF REGISTRATION FEE

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to Completion, dated December 8, 2009

 

PROSPECTUS

 

 

18,000,000 Shares

 

 

Common Stock

 

 

We are offering 18,000,000 shares of our common stock. We have applied to list our common stock on The NASDAQ Global Market under the symbol “CXPO.” We anticipate that the initial public offering price per share of common stock will be between $6.00 and $8.00. Our common stock is currently traded on the Over-the-Counter Bulletin Board under the symbol “CXPO.OB.”

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 16.

 

 

We have granted the underwriters a 30-day option to purchase up to an additional 2,700,000 shares from us on the same terms and conditions as set forth above if the underwriters sell more than 18,000,000 shares of common stock in this offering.

 

Affiliates of certain of the underwriters are lenders under our existing revolving credit facility and therefore will receive a portion of the net proceeds of this offering.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Barclays Capital, on behalf of the underwriters, expects to deliver the shares on or about          , 2009.

 

 

Morgan Keegan & Company, Inc.

RBS

    Pritchard Capital Partners, LLC

                          Johnson Rice & Company L.L.C.

                                     Rodman & Renshaw, LLC     

Stifel Nicolaus

 

Prospectus dated          , 2009

 

TABLE OF CONTENTS

 

 

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Crimson Exploration,” “Crimson,” the “Company,” “our company,” “we,” “our,” and “us” refer collectively to Crimson Exploration Inc., its predecessor GulfWest Energy Inc. and our subsidiaries.

 

Our natural gas and crude oil reserve information as of December 31, 2008 and September 30, 2009 included in this prospectus is based on reserve reports prepared by Netherland, Sewell & Associates, Inc., our independent reserve engineering firm. A summary of the December 31, 2008 report is attached as Appendix B.

 

Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares from us.

 

PROSPECTUS SUMMARY

	•	Develop our East Texas resource play.  We have approximately 12,000 net acres in San Augustine and Sabine Counties of East Texas, which we believe is prospective in the Haynesville Shale, Bossier Shale and James Lime formations. In November 2009, we announced the completion and initial production of our first well on this acreage, the Kardell #1H. The well tested at 30.7 MMcfe/d, which we believe to be the highest publicly reported 24-hour initial production rate for a Haynesville Shale well in Texas or Louisiana to date and is currently flowing to sales. We believe the Kardell #1H confirms the potential of our Bruin Prospect, which is comprised of 3,000 net acres in San Augustine County, resulting in over 100 potential drilling locations in multiple formations. We are currently in the planning stages of several wells in this area and intend to further evaluate and exploit these multiple formations beginning in early 2010. We have an additional 9,000 net acres outside this prospect within Sabine and San Augustine Counties, and we expect to drill our initial well on that acreage in early 2010. We intend to allocate a substantial portion of our capital budget over the next several years to develop the significant potential that we believe exists on our East Texas acreage. Based on our current capital budget, we expect to drill approximately 7 gross (3.0 net) wells in 2010 that will target the Haynesville and Bossier Shales, while retaining future development opportunities in shallower formations.
	•	Develop our South Texas resource play.  We have approximately 2,800 net acres in Bee County, Texas which we believe is prospective in the Austin Chalk and Eagle Ford Shale. In November 2009, we drilled our initial well on this acreage, the Dubose #1. This well is in the process of being completed with results expected prior to year end 2009. We intend to allocate a portion of our capital budget in 2010 to validate the potential we believe exists on our acreage.
	•	Exploit our existing producing property base to generate cash flows.  We believe our multi-year drilling inventory of high return exploitation opportunities on our existing producing properties provides us with a solid platform to continue growing our reserves and production for the next several years. We believe these projects, if successful, will allow us to fund a larger portion of our resource plays and exploration activities from cash flows from operations. In 2010, we intend to focus much of our exploitation drilling on our Liberty County acreage, located in Southeast Texas. We will be targeting the Yegua and Cook Mountain formations in which industry players have recently experienced success on wells in the area. We own 3D seismic data that covers substantially all of our Liberty County acreage, giving us a higher degree of confidence in the potential in this area. We have drilled 11 gross (6.8 net) wells in Liberty County since early 2008 and have successfully completed 82%. During 2010, we intend to drill 4 gross (2.6 net) wells in this area.
	•	Explore in defined producing trends.  Our exploration activities consist primarily of step-out drilling in known, producing formations in our legacy areas of South and Southeast Texas. In 2007, we began acquiring seismic data to use in identifying new exploration prospects. Currently, we have a library of over 4,200 square miles of 3D seismic data and over 2,500 linear miles of 2D seismic data.

	•	Make opportunistic acquisitions that meet our strategic and financial objectives.  We seek to acquire natural gas and crude oil properties, including both undeveloped and producing reserves in areas where we have specific operating expertise.
	•	Reduce commodity exposure through hedging.  We employ the use of swaps and costless collar derivative instruments to limit our exposure to commodity prices. As of September 30, 2009, we had 13.9 Bcfe of equivalent production hedged, representing 1.8 Bcf, 6.1 Bcf and 3.2 Bcf of natural gas hedges in place and 86 MBbl, 250 MBbl and 124 MBbl of crude oil hedges in place for the fourth quarter of 2009, the year 2010 and the year 2011, respectively. The average price of our natural gas and crude oil hedges in place is $8.19/MMBtu and $86.03/Bbl for the fourth quarter of 2009, $7.71/MMBtu and $83.02/Bbl in the year 2010 and $7.32/MMBtu and $66.50/Bbl in the year 2011.

	•	Geographically focused operations in basins with established production profiles.  The geographic concentration of our current operations along the onshore Texas Gulf Coast and in South Texas allows us to establish economies of scale with respect to drilling, production, operating and administrative costs, and enables us to leverage our base of technical expertise in these geographic areas. In addition, we believe the cash flows from our existing properties provide a stable foundation to support our ongoing exploitation and development efforts.
	•	Significant operational control.  As of September 30, 2009, we operated a majority of our producing wells. As a result, we exercise a significant level of control over the amount and timing of expenses, capital allocation and other aspects of development, exploitation and exploration. While operatorship of future wells on our East Texas acreage will be subject to negotiation as drilling units are formed, we expect to operate a significant number of the wells we drill on this acreage.
	•	Proven track record of reserve and production growth.  Since 2005, we have significantly grown proved reserves and production through a combination of continued drilling success and the successful acquisition of underdeveloped properties that have proven to be complementary to our existing asset base and technical expertise. We plan to continue this growth by focusing on a balanced combination of drilling longer life, multi-pay natural gas targets within our resource plays and exploitation of our producing properties and undeveloped acreage.
	•	Large inventory of identified projects.  We currently have an inventory of over 800 identified potential drilling locations, including 375 associated with our existing conventional properties, plus an estimated 422 locations on our East Texas resource play acreage and an estimated 25 locations on our South Texas resource play acreage. Since the beginning of 2008, we have drilled 16 gross (10.7 net) operated and 18 gross (4.5 net) non-operated wells and have experienced a 91% success rate (excluding one well which has not yet been completed). We expect to drill 12 gross (6.0 net) wells in 2010.
	•	Experienced management and technical teams.  Our senior management team averages over 25 years of experience in the energy industry and is led by Allan D. Keel, President and Chief Executive Officer, who has 25 years of experience in the oil and natural gas industry. Mr. E. Joseph Grady, our Senior Vice President and Chief Financial Officer, has over 30 years of financial management experience in the energy industry. Other members of our senior management include: Mr. Tracy Price, our Senior Vice President—Land Business/Development; Mr. Thomas H. Atkins, our Senior Vice President—Exploration; and Mr. Jay S. Mengle, our Senior Vice President—Engineering, each of whom has more than 25 years of

		experience in the oil and gas industry. Our experienced management team has an established track record of successfully exploiting and developing natural gas and crude oil properties.

	•	East Texas.  Our East Texas properties include approximately 17,000 gross (12,000 net) acres acquired in 2008 and early 2009 in the highly prospective and active resource play in San Augustine and Sabine Counties, where we will focus primarily on the pursuit of the Haynesville Shale, Bossier Shale and James Lime formations. In October 2009, we drilled and completed our first well in this area, the Kardell #1H. While drilling this well, we identified additional prospective formations, including the Pettet and Knowles Lime.
	•	Southeast Texas.  Our Southeast Texas properties primarily include the Felicia field area in Liberty County. We own approximately 27,300 gross (15,100 net) acres in Liberty, Madison and Grimes Counties. As of September 30, 2009, we owned and operated 35 gross (27.0 net) producing wells, representing approximately 38% of our average daily production for the first nine months of 2009.
	•	South Texas.  Our South Texas properties include approximately 2,800 gross (2,800 net) acres in Bee County, which we believe to be prospective in the Austin Chalk and Eagle Ford Shale. Our conventional operations include approximately 87,600 gross (50,700 net) acres predominately in Brooks, Lavaca, DeWitt, Zapata, Webb and Matagorda Counties.

	•	Colorado and Other.  Our Colorado and other properties include primarily producing assets and approximately 16,900 gross (11,900 net) acres in the Denver Julesburg Basin in Colorado (mostly in Adams County) and a minor crude oil property in Mississippi.

	•	Southwest Louisiana.  Our Southwest Louisiana properties include approximately 8,200 gross (3,600 net) acres, primarily in the Fenton field area of Calcasieu Parish and our legacy Grand Lake and Lacassine fields in Cameron Parish. In addition, we own a 15% working interest ownership in 2007 exploratory successes in Louisiana at Sabine Lake and West Cameron 432. On November 24, 2009, we entered into a purchase and sale agreement for the sale of substantially all of our Southwest Louisiana properties. See “—Recent Developments—Southwest Louisiana Disposition.”

														Average Daily								Identified
		Estimated												Production For								Potential Gross
		Proved												the Nine				Net Acreage				Drilling
		Reserves as of												Months Ended				at				Locations at
		December 31,				% Natural				% Proved				September 30,				September 30,				September 30,
Region		2008 (MMcfe)				Gas				Developed				2009 (Mcfe/d)				2009				2009(1)
Southeast Texas			29,393				60.1	%			85.8	%			16,521				15,100				26
South Texas			60,602				78.0	%			59.8	%			11,963				53,500				124
Colorado and Other			6,675				71.5	%			55.3	%			539				11,900				164
East Texas(2)			—				—				—				—				12,000				422
Southwest Louisiana(3)			10,398				62.4	%			57.3	%			3,139				3,600				4
Non-operated(3)(4)			24,879				80.2	%			79.8	%			10,817				—				82
Total			131,947				72.9	%			68.9	%			42,979				96,100				822

(1)		Includes multiple drilling locations on acreage with multiple target formations.

(2)		We recently completed our first well on our East Texas acreage, the Kardell #1H, as a horizontal Haynesville Shale producer, in which we own a 52% working interest. Drilling locations in this region were identified assuming an allocated 100 acres per potential horizontal East Texas well drilled to multiple target formations.

(3)		On November 24, 2009, we entered into a purchase and sale agreement for the sale of substantially all of our operated and certain non-operated Southwest Louisiana properties. See “—Recent Developments—Southwest Louisiana Disposition.”

(4)		Our non-operated properties consist primarily of our 25% working interest in the Samano field in Starr and Hidalgo Counties in South Texas, our 28% working interest in certain fields in Liberty County in Southeast Texas and our 15% and 15% respective working interests resulting from exploratory successes in 2007 at Sabine Lake and West Cameron 432 in Southwest Louisiana.

	•	Natural gas, crude oil and natural gas liquids prices are volatile, and a decline in prices can significantly affect our financial results and impede our growth.

	•	Initial production rates in shale plays, and particularly in the Haynesville Shale, tend to decline steeply in the first twelve months of production and are not necessarily indicative of sustained production rates.

	•	Our development and exploration operations, including on our East Texas resource play acreage, require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties and a decline in our natural gas, crude oil and natural gas liquids reserves.
	•	Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially reduce the estimated quantities and present value of our reserves.
	•	We have incurred net losses in the past and there can be no assurance that we will be profitable in the future.
	•	Unless we replace our natural gas and crude oil reserves, our reserves and production will decline, which would adversely affect our cash flows, our ability to raise capital and the value of our common stock.
	•	We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business.

Issuer		Crimson Exploration Inc.

Common stock offered by us		18,000,000 shares

Underwriters’ option to purchase additional shares		We have granted the underwriters a 30-day option to purchase up to an additional 2,700,000 shares of common stock.

Common stock outstanding immediately following this offering		33,134,607 shares of common stock (excluding 2,700,000 shares that will be sold to the underwriters if they exercise their option to purchase additional shares), including 8,718,206 shares that will be issued pursuant to the Preferred Stock Conversion, assuming an offering price of $7.00, which is the midpoint of the range provided on the cover page of this prospectus

Use of proceeds		We estimate that our net proceeds from this offering will be approximately $117.6 million after deducting underwriting discounts and commissions and estimated offering expenses, assuming an offering price of $7.00, which is the midpoint of the range provided on the cover page of this prospectus.

		We intend to use the net proceeds from this offering to repay approximately $107.6 million in aggregate principal amount of indebtedness outstanding under our revolving credit facility and to repay our $10 million unsecured promissory note in full.

		Affiliates of certain of the underwriters are lenders under our existing revolving credit facility and therefore will receive a portion of the net proceeds of this offering. See “Underwriting.”

Dividend policy		We have not declared or paid any cash dividends on our common stock or preferred stock, and we do not currently anticipate paying any cash dividends on our common stock or preferred stock in the foreseeable future. For more information, see “Dividend Policy.”

NASDAQ symbol		CXPO

Risk factors		An investment in our common stock involves a high degree of risk. See “Risk Factors” and other information included elsewhere in this prospectus for a discussion of factors you should consider before investing in our common stock.

														Nine Months Ended
		Year Ended December 31,												September 30,
		2006				2007				2008				2008				2009
		(In thousands)
														(unaudited)
Statement of Operations Data:
Operating revenues:
Natural gas sales		$	10,570			$	67,868			$	116,415			$	92,075			$	55,135
Crude oil sales			10,908				27,021				41,860				34,150				21,519
Natural gas liquids sales			—				14,273				27,405				24,687				9,089
Operating overhead and other income			181				381				1,088				889				508
Total operating revenues			21,659				109,543				186,768				151,801				86,251
Operating expenses:
Lease operating expenses			5,633				12,034				20,825				15,363				13,518
Production and ad valorem taxes			1,895				11,702				16,266				14,355				6,061
Exploration expenses			673				3,174				9,965				1,877				2,873
Depreciation, depletion and amortization			4,035				30,796				50,467				36,030				41,599
Impaired assets of oil and gas properties(1)			3,150				4,362				35,954				25,799				—
General and administrative			8,730				14,542				22,406				17,819				13,381
(Gain) loss on sale of assets(2)			2				(683	)			(15,210	)			(15,272	)			19
Total operating expenses			24,118				75,927				140,673				95,971				77,451
Income (loss) from operations(3)			(2,459	)			33,616				46,095				55,830				8,800
Other income (expense):
Interest expense, net of amount capitalized			(109	)			(14,949	)			(21,109	)			(15,871	)			(16,349	)
Other financing costs			(228	)			(1,322	)			(1,501	)			(1,174	)			(1,110	)
Loss from equity in investments			(2	)			—				—				—				—
Unrealized gain (loss) on derivative instruments			6,082				(18,186	)			49,409				1,665				(17,238	)
Total other income (expense)			5,743				(34,457	)			26,799				(15,380	)			(34,697	)
Income (loss) before income taxes			3,284				(841	)			72,894				40,450				(25,897	)
Income tax benefit (expense)			(1,425	)			410				(26,691	)			(15,105	)			9,080
Net income (loss)			1,859				(431	)			46,203				25,345				(16,817	)
Preferred stock dividends			(3,649	)			(4,453	)			(4,234	)			(3,164	)			(3,353	)
Net income (loss) available to common stockholders		$	(1,790	)		$	(4,884	)		$	41,969			$	22,181			$	(20,170	)

														Nine Months Ended
		Year Ended December 31,												September 30,
		2006				2007				2008				2008				2009
		(In thousands, except per share data)
														(unaudited)
Net Income (Loss) Per Share Information
Basic
Weighted average shares outstanding			3,231				4,330				5,371				5,225				6,301
Net income (loss) per share		$	(0.55	)		$	(1.13	)		$	7.81			$	4.25			$	(3.20	)
Diluted
Weighted average shares outstanding			3,231				4,330				10,360				10,289				6,301
Net income (loss) per share		$	(0.55	)		$	(1.13	)		$	4.46			$	2.46			$	(3.20	)
Other Financial Data
Adjusted EBITDAX(4)		$	9,219			$	76,003			$	132,707			$	108,715			$	55,160
Capital expenditures(5)
Acquisitions of oil and gas properties		$	—			$	253,434			$	58,482			$	58,032			$	(494	)
Other capital expenditures(6)			21,777				59,049				141,795				82,577				16,545
Total		$	21,777			$	312,483			$	200,277			$	140,609			$	16,051

						Pro Forma
						As Adjusted
		As of				as of
		September 30,				September 30,
		2009				2009(7)
Balance Sheet Data (end of period):
Property and equipment, net		$	425,236			$	425,236
Total assets			462,481				464,481
Long-term debt, including current portion			291,526				175,941
Stockholders’ equity			106,542				224,127
Total liabilities and stockholders’ equity			462,481				464,481

(1)		For the year ended December 31, 2008, includes (i) an impairment expense of $10.2 million in December 2008 with respect to our Grand Lake Field in Southwest Louisiana, resulting from negative reserve revisions resulting from year end low commodity prices, and (ii) $25.8 million in asset impairments in the nine months ended September 30, 2008 resulting from our capital investment in the Rodessa formation within the Madisonville Field.
(2)		For the year ended December 31, 2008 and the nine months ended September 30, 2008, includes a gain of $15.6 million resulting from the disposition of our interest in the Barnett Shale Play in January 2008.

(3)		Non-cash equity-based compensation charges were $5.4 million, $4.7 million and $3.8 million, in 2008, 2007 and 2006, respectively. Non-cash equity-based compensation charges were $1.9 million and $4.5 million for the nine months ended September 30, 2009 and 2008, respectively.

(4)		Adjusted EBITDAX is a non-GAAP financial measure. Our definition of Adjusted EBITDAX and a reconciliation of net income (loss) to Adjusted EBITDAX is provided under “—Non-GAAP Financial Measures and Reconciliations.”
(5)		Capital expenditures are derived from our consolidated statements of cash flows in our financial statements included elsewhere in this prospectus.
(6)		Other capital expenditures consists primarily of capital drilling and lease acquisitions.

(7)		On an adjusted pro forma basis to give effect to this offering (estimated based upon the midpoint of the range of the offering price on the cover of this prospectus), the application of the estimated net proceeds of this offering, the Preferred Stock Conversion, the issuance of $12 million in unsecured promissory notes and the repayment of loans under our revolving credit facility with proceeds of one of such promissory notes.

		Year Ended				Nine Months Ended
		December 31,				September 30,
		2008				2009
		(In thousands,
		except per share data)
Pro forma preferred stock dividends		$	—			$	—
Pro forma net income (loss) available to common stockholders			46,203				(16,817	)
Pro forma basic net income (loss) per share:
Weighted average shares outstanding			13,263				14,449
Net income (loss) per share		$	3.48			$	(1.16	)
Pro forma diluted net income (loss) per share:
Weighted average shares outstanding			13,468				14,449
Net income (loss) per share		$	3.43			$	(1.16	)

														Nine Months Ended
		Year Ended December 31,												September 30,
		2006				2007				2008				2008				2009
Production:
Natural gas (MMcf)			1,542				9,068				13,136				9,753				8,143
Crude oil (MBbl)			185				409				498				385				264
Natural gas liquids (MBbl)			—				286				516				422				334
Total (MMcfe)			2,652				13,236				19,222				14,598				11,733
Average Sales Prices (Before Hedging):
Natural gas (Mcf)		$	6.76			$	6.78			$	8.92			$	9.83			$	3.92
Crude oil (Bbl)		$	63.29			$	74.38			$	101.13			$	112.98			$	52.80
Natural gas liquids (Bbl)			—			$	49.92			$	53.07			$	58.49			$	27.19
Natural gas equivalents (Mcfe)		$	8.34			$	8.02			$	10.14			$	11.24			$	4.68
Average Sales Prices (After Hedging)(1):
Natural gas (Mcf)		$	6.85			$	7.48			$	8.86			$	9.44			$	6.77
Crude oil (Bbl)		$	59.00			$	66.09			$	84.03			$	88.60			$	81.46
Natural gas liquids (Bbl)			—			$	49.92			$	53.07			$	58.49			$	27.19
Natural gas equivalents (Mcfe)		$	8.10			$	8.25			$	9.66			$	10.34			$	7.31
Expenses: (Mcfe)
Lease operating expenses		$	2.12			$	0.91			$	1.08			$	1.05			$	1.15
Production and ad valorem taxes		$	0.71			$	0.88			$	0.85			$	0.98			$	0.52
Exploration expenses		$	0.25			$	0.24			$	0.52			$	0.13			$	0.24
General and administrative		$	3.29			$	1.10			$	1.17			$	1.22			$	1.14
Depreciation, depletion and amortization		$	1.52			$	2.33			$	2.63			$	2.47			$	3.55
Proved Reserves (end of period)(2)(3):
Natural gas (MMcf)			31,388				91,239				96,169								73,768
Crude oil (MBbl)			2,501				2,903				2,564								2,358
Natural gas liquids (MBbl)			—				3,590				3,399								2,823
Total proved reserves (MMcfe)			46,394				130,197				131,947								104,854
Percent proved developed reserves			88%				75%				69%								68%
PV-10 (in millions)(4)		$	102.4			$	531.4			$	291.0							$	190.8
Standardized measure (in millions)(5)			77.4				399.5				260.9								N.A.
Prices utilized in estimates(6):
Natural gas (MMBtu)		$	6.03			$	6.80			$	5.71							$	3.30
Crude oil (Bbl)		$	61.06			$	92.50			$	41.00							$	67.00

(1)		Amounts shown are based on natural gas and crude oil sales, net of realized commodity derivative gains (losses).

(2)		Does not give effect to the disposition of substantially all of our Southwest Louisiana properties, representing approximately 8.5 Bcfe of proved reserves at September 30, 2009, approximately $19.9 million of PV-10 as of September 30, 2009, and with an average daily production of approximately 3.8 MMcfe/d for the nine months ended September 30, 2009, or approximately 9% of our total daily production for such period. See “—Recent Developments—Southwest Louisiana Disposition.”

(3)		Our independent petroleum engineers did not prepare a reserve report for proved reserves and related data at September 30, 2008.

(4)		PV-10 is a non-GAAP financial measure. A reconciliation of our Standardized Measure of Discounted Net Cash Flows to PV-10 is provided under “—Non-GAAP Financial Measures and Reconciliations.”

(5)		The Standardized Measure of Discounted Net Cash Flows represents the present value of estimated future cash inflows from proved natural gas and crude oil reserves, less future development and production costs, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized Measure differs from PV-10 because Standardized Measure includes the effect of future income taxes.

(6)		Natural gas prices are based on Henry Hub spot prices at year end, except for 2006 which is based on NYMEX prices. Oil prices are based upon year end West Texas Intermediate posted prices. Under new SEC rules, prices used in determining our proved reserves as of December 31, 2009 will be based upon an unweighted 12-month first day of the month average price of $3.87 per MMBtu (Henry Hub spot) of natural gas and $57.65 per barrel of oil (West Texas Intermediate posted). These are adjusted for quality, energy content, transportation fees and regional price differentials.

	•	the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
	•	the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;
	•	our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and
	•	the feasibility of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

																						Nine Months Ended
		Year Ended December 31,																				September 30,
		2004				2005				2006				2007				2008				2008				2009
										(In thousands)
Net income (loss)		$	8,072			$	(3,543	)		$	1,859			$	(431	)		$	46,203			$	25,345			$	(16,817	)
Interest expense			4,154				1,302				109				14,949				21,109				15,871				16,349
Income tax expense (benefit)			(3,204	)			(792	)			1,425				(410	)			26,691				15,105				(9,080	)
Depreciation and amortization			2,257				3,209				4,035				30,796				50,467				36,030				41,599
Exploration expenses			433				750				673				3,174				9,965				1,877				2,873
EBITDAX		$	11,712			$	926			$	8,101			$	48,078			$	154,435			$	94,228			$	34,924
Unrealized (gain) loss on derivative instruments			1,506				1,642				(6,082	)			18,186				(49,409	)			(1,665	)			17,238
Non-cash equity-based compensation charges			—				44				3,820				4,738				5,436				4,451				1,869
Impaired assets			61				3,689				3,150				4,362				35,954				25,799				—
Other financing(1)			1,472				1,956				228				1,322				1,501				1,174				1,110
Forgiveness of debt			(12,476	)			—				—				—				—				—				—
(Gain) loss on the disposition of assets			2,034				39				2				(683	)			(15,210	)			(15,272	)			19
Adjusted EBITDAX		$	4,309			$	8,296			$	9,219			$	76,003			$	132,707			$	108,715			$	55,160

(1)		Includes amortization of deferred finance costs and other fees and expenses payable under our credit agreements.

		At December 31,
		2006				2007				2008
		(In millions)
Standardized measure of discounted net cash flows		$	77.4			$	399.5			$	260.9
Present value of future income tax and other discounted at 10%			25.0				131.9				30.1
PV-10		$	102.4			$	531.4			$	291.0

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors included below as well as the other information contained in this prospectus before investing in our common stock, or deciding whether you will or will not participate in this offering. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your investment.

 

Risks Related to Our Business

 

Natural gas, crude oil and natural gas liquids prices are volatile, and a decline in prices can significantly affect our financial results and impede our growth.

 

Our revenue, cash flow from operations and future growth depend upon the prices and demand for natural gas, crude oil and natural gas liquids. The markets for these commodities are very volatile. Even relatively modest drops in prices can significantly affect our financial results and impede our growth. Changes in natural gas, crude oil and natural gas liquids prices have a significant impact on the value of our reserves and on our cash flow. In addition, periods of sustained lower prices may compel us to reduce our capital expenditures and budget for drilling. Prices for natural gas, crude oil and natural gas liquids may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, crude oil and natural gas liquids and a variety of additional factors that are beyond our control, such as:

 

 

Lower natural gas and crude oil prices may not only decrease our revenues on a per share basis, but also may reduce the amount of natural gas and crude oil that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves.

 

Our East Texas leases must be drilled before expiration, generally within three years, in order to hold the leases by production. In the highly competitive market for Haynesville Shale acreage, failure to drill sufficient wells timely to hold this acreage will result in a substantial renewal cost, or if renewal is not feasible, loss of lease investment and prospective drilling opportunities in the Haynesville Shale, Bossier Shale and James Lime formations.

 

Our East Texas leases have three year terms which require that an initial producing well be drilled prior to expiration date or the lease will terminate. Most of our leases in this area were signed in

late 2008. Generally, once an initial well is drilled and completed as a producer, the lease is extended for the duration of production subject to payment of royalties and additional wells may be drilled on that lease. The leases in this area are extremely fragmented and much of the leased acreage is not contiguous. In many cases, contiguous leases owned by us are not large enough to accommodate horizontal drilling to the Haynesville Shale, which usually involves a horizontal lateral of between 4,000 to 5,000 feet within lease lines. In other cases, leases may be from fractional interest land owners and may not comprise a sufficient aggregate percentage working interest to make such a well economic. As a result, in order to realize the drilling opportunities in the Haynesville Shale, Bossier Shale and James Lime formations, we and other similarly situated major lease owners and operators in East Texas will need to cooperate and negotiate joint drilling operations in order to drill initial wells prior to lease expirations. These negotiations may include the right to act as operator for jointly owned wells. If we do not reach agreements with other major lease owners and operators to drill wells prior to lease expirations, or if we are unable to drill timely sufficient wells to hold our acreage, we will lose the drilling opportunities and investment in the expiring leases unless we can successfully negotiate to renew the leases. We may not be able to renew the expired leases, or if renewed, the cost of releasing could be substantial, particularly if development in this area proves successful.

 

Part of our strategy involves exploratory drilling, including drilling in new or emerging plays. As a result, our drilling results in these areas are uncertain.

 

The results of our exploratory drilling in new or emerging plays, such as in our East Texas resource play, are more uncertain than drilling results in areas that are developed and have established production. Since new or emerging plays and new formations have limited or no production history, we are less able to use past drilling results in those areas to help predict our future drilling results. Accordingly, our drilling results are subject to greater risks in these areas and could be unsuccessful. To the extent we are unable to execute our expected drilling program in these areas, because of disappointing drilling results, capital constraints, lease expirations, access to adequate gathering systems or pipeline take-away capacity, availability of drilling rigs and other services, or otherwise, and/or natural gas and crude oil prices decline, we may not realize a return on our investment in these areas or the return on investment may not be as attractive as we anticipate and our common stock price may decrease. We could incur material write-downs of unevaluated properties, and the value of our undeveloped acreage could decline in the future if our drilling results are unsuccessful.

 

The results of our planned exploratory drilling in our East Texas and South Texas resource plays, which are newly emerging plays with limited drilling and production history, are subject to more uncertainties than our drilling program in our more established areas of operation in the onshore South Texas and U.S. Gulf Coast regions and may not meet our expectations for reserves or production.

 

We have recently completed drilling our first well in the Haynesville Shale in East Texas, for which we were not operator, as well as a test well in Bee County, South Texas to the Eagle Ford Shale. The exploration of the Haynesville Shale in the East Texas area where we own leases has been limited. Part of our drilling strategy to maximize recoveries from the Haynesville Shale involves the drilling of horizontal wells using completion techniques that have proven to be successful in other shale formations. Our experience with horizontal drilling of these shale plays is limited. The ultimate success of these drilling and completion strategies and techniques in these formations will be better evaluated over time as more wells are drilled and production profiles are better established. Accordingly, the results of our future drilling in the emerging shale plays are more uncertain than drilling results in our more established areas of operation with established reserves and production history.

 

Initial production rates in shale plays, and particularly in the Haynesville Shale, tend to decline steeply in the first twelve months of production and are not necessarily indicative of sustained production rates.

 

The initial production rate for our first well in our Haynesville acreage was 30.7 MMcfe/d, which we believe to be the highest publicly reported 24-hour initial production rate for a Haynesville Shale well in Texas or Louisiana. However, initial production rates in shale plays, and particularly in the Haynesville Shale, tend to decline steeply in the first twelve months of production and are not necessarily indicative of sustained production rates.

 

Our development and exploration operations, including on our East Texas resource play acreage, require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties and a decline in our natural gas, crude oil and natural gas liquids reserves.

 

The oil and gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business and operations for the exploration, development, production and acquisition of natural gas, crude oil and natural gas liquids reserves. We intend to finance our future capital expenditures primarily with cash flow from operations and borrowings under our revolving credit facility. Our cash flow from operations and access to capital is subject to a number of variables, including:

 

 

If our revenues decrease as a result of lower natural gas, crude oil and natural gas liquids prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels or to further develop and exploit our current properties, or for exploratory activity. In order to fund our capital expenditures, we may need to seek additional financing. Our credit agreements contain covenants restricting our ability to incur additional indebtedness without the consent of the lenders. Our lenders may withhold this consent in their sole discretion. In addition, if our borrowing base is redetermined resulting in a lower borrowing base under our revolving credit facility, we may be unable to obtain financing otherwise available under our revolving credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital resources.”

 

Furthermore, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity on terms that are similar to existing debt, and reduced, or in some cases ceased, to provide funding to borrowers. The failure to obtain additional financing could result in a curtailment of our operations relating to exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our natural gas, crude oil and natural gas liquids reserves.

Recent changes in the financial and credit markets may impact economic growth and natural gas, crude oil and natural gas liquids prices may continue to be adversely affected by general economic conditions.

 

Based on a number of economic indicators, global economic activity has slowed substantially. At the present time, the rate at which the global economy will slow has become increasingly uncertain. A continued slowing of global economic growth, and, in particular, economic growth in the United States, will likely continue to reduce demand for natural gas, crude oil and natural gas liquids, which in turn could likely result in lower prices for natural gas, crude oil and natural gas liquids. Natural gas and crude oil prices dropped dramatically from record levels of approximately $13 per MMbtu and $145 per barrel, respectively, in July 2008 to below $3 per MMbtu in September 2009 and below $34 per barrel in December 2008. A reduction in demand for, and the resulting lower prices of, natural gas, crude oil and natural gas liquids could adversely affect our results of operations.

 

Recent market events and conditions, including disruptions in the U.S. and international credit markets and other financial systems and the deterioration of the U.S. and global economic conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on our ability to fund our working capital and other capital requirements.

 

Recent market events and conditions, including unprecedented disruptions in the current credit and financial markets and the deterioration of economic conditions in the U.S. and internationally have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Access to additional capital may not be available on terms acceptable to us or at all. Difficulties in obtaining capital and financing or increased costs for obtaining capital and financing for our operations would have an adverse effect on our ability to fund our working capital and other capital requirements.

 

We have incurred net losses in the past and there can be no assurance that we will be profitable in the future.

 

We have incurred net losses in two of the last five fiscal years. We cannot assure you that our current level of operating results will continue or improve. Our activities could require additional debt or equity financing. Our future operating results may fluctuate significantly depending upon a number of factors, including industry conditions, prices of natural gas, crude oil and natural gas liquids, rates of production, timing of capital expenditures and drilling success. Negative changes in these variables could have a material adverse effect on our business, financial condition, results of operations and the market value of our common stock.

 

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially reduce the estimated quantities and present value of our reserves.

 

The process of estimating natural gas and crude oil reserves is complex. It requires interpretations of available technical data and many estimates, including estimates based upon assumptions relating to economic factors. Any significant inaccuracies in these interpretations or estimates could materially reduce the estimated quantities and present value of reserves shown in this prospectus. See “Business” for information about our crude oil and natural gas reserves.

 

In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as crude oil and natural gas prices, drilling and operating expenses, the amount and timing of capital expenditures, taxes and the availability of funds.

Actual future production, crude oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and crude oil reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing natural gas and crude oil prices and other factors, many of which are beyond our control.

 

Approximately 31% of our total estimated proved reserves at December 31, 2008 were proved undeveloped reserves.

 

Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve engineer reports assumes that substantial capital expenditures are required to develop such reserves. Although cost and reserve estimates attributable to our natural gas and crude oil reserves have been prepared in accordance with industry standards, we cannot be sure that the estimated costs are accurate, that development will occur as scheduled or that the results of such development will be as estimated.

 

The present value of future net cash flows from our proved reserves will not necessarily be the same as the current market value of our estimated natural gas, crude oil and natural gas liquids reserves.

 

You should not assume that the present value of future net revenues from our proved reserves referred to in this prospectus is the current market value of our estimated natural gas, crude oil and natural gas liquids reserves. In accordance with the requirements of the Securities and Exchange Commission (“SEC”), the estimated discounted future net cash flows from our proved reserves are based on prices and costs on the date of the estimate, held flat for the life of the properties. Actual future prices and costs may differ materially from those used in the present value estimate. The present value of future net revenues from our proved reserves as of December 31, 2008 was based on a Henry Hub spot market price of $5.71 per MMbtu for natural gas and a West Texas Intermediate posted price of $41.00 per barrel for crude oil on December 31, 2008. If crude oil prices were $1.00 per Bbl lower than the price used, our PV-10 as of December 31, 2008 would have decreased from $290.95 million to $288.15 million. If natural gas prices were $0.10 per Mcf lower than the price used, our PV-10 as of December 31, 2008, would have decreased from $290.95 million to $285.47 million. Any adjustments to the estimates of proved reserves or decreases in the price of crude oil or natural gas may decrease the value of our common stock.

 

Actual future net cash flows will also be affected by increases or decreases in consumption by oil and gas purchasers and changes in governmental regulations or taxation. The timing of both the production and the incurrence of expenses in connection with the development and production of oil and gas properties affects the timing of actual future net cash flows from proved reserves. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor. The effective interest rate at various times and the risks associated with our business or the oil and gas industry in general will affect the accuracy of the 10% discount factor.

 

Our estimates of proved reserves and related PV-10 and standardized measure of discounted future net cash flows, which are prepared and presented under existing SEC rules, may change materially as a result of new SEC rules that will go into effect for fiscal years ending on or after December 31, 2009.

 

This prospectus presents estimates of our proved reserves and related PV-10 and standardized measure of discounted future net cash flows as of December 31, 2008 and as of September 30, 2009, which estimates have been prepared and presented under existing SEC rules. The SEC has adopted new rules that are effective for fiscal years ending on or after December 31, 2009, which will require SEC reporting companies to prepare their reserves estimates using revised reserve definitions and

revised pricing based on 12-month unweighted first-day-of-the-month average pricing. The pricing to be utilized for estimates of our reserves as of December 31, 2009 will be based on an unweighted average twelve month Henry Hub spot price of $3.87 per MMBtu for natural gas and an average West Texas Intermediate posted price of $57.65.

 

Another impact of the new SEC rules is a general requirement that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years of the date of booking. This new rule may limit our potential to book additional proved undeveloped reserves as we pursue our drilling program, particularly as we develop our significant acreage in East Texas.

 

The SEC has released only limited interpretive guidance regarding reporting of reserve estimates under the new rules and may not issue further interpretive guidance on the new rules prior to the end of 2009. We have not determined the impact the new rules may have on our estimates of our proved reserves and related PV-10 and standardized measure of discounted future net cash flows as of December 31, 2009 or as of September 30, 2009, but the impact of the new rules on such estimates, and in particular the estimates of proved undeveloped reserves, could be material.

 

Our use of 2D and 3D seismic data is subject to interpretation and may not accurately identify the presence of natural gas and crude oil. In addition, the use of such technology requires greater predrilling expenditures, which could adversely affect the results of our drilling operations.

 

Our decisions to purchase, explore, develop and exploit prospects or properties depend in part on data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are uncertain. For example, we have over 4,200 square miles of 3D data in the South Texas and Gulf Coast regions and 1,130 square miles of 3D data in the Lobo trend in South Texas that our internal prospect generation team uses to develop drilling opportunities in these areas. However, even when used and properly interpreted, 3D seismic data and visualization techniques only assist geoscientists and geologists in identifying subsurface structures and hydrocarbon indicators. They do not allow the interpreter to know if hydrocarbons are present or producible economically. Other geologists and petroleum professionals, when studying the same seismic data, may have significantly different interpretations than our professionals.

 

In addition, the use of 3D seismic and other advanced technologies require greater predrilling expenditures than traditional drilling strategies, and we could incur losses due to such expenditures. As a result, our drilling activities may not be geologically successful or economical, and our overall drilling success rate or our drilling success rate for activities in a particular area may not improve.

 

Drilling for and producing natural gas and crude oil are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.

 

Our drilling and operating activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for natural gas and crude oil can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other factors, including:

 

 

 

Any of these risks can cause substantial losses, including personal injury or loss of life; severe damage to or destruction of property, natural resources and equipment; pollution; environmental contamination; clean-up responsibilities; loss of wells; repairs to resume operations; and regulatory fines or penalties.

 

Insurance against all operational risks is not available to us. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. We carry limited environmental insurance, thus, losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not covered in full or in part by insurance could have a material adverse impact on our business activities, financial condition and results of operations.

 

Our acquisition strategy may subject us to greater risks.

 

The successful acquisition of properties requires an assessment of recoverable reserves, future natural gas and crude oil prices, operating costs, potential environmental and other liabilities, and other factors beyond our control. Such assessments are necessarily inexact and their accuracy uncertain. In connection with such an assessment, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Such a review, however, will not reveal all existing or potential problems, costs and liabilities, nor will it permit us, as the buyer, to become sufficiently familiar with the properties to fully assess their capabilities or deficiencies. We may not inspect every well and, even when an inspection is undertaken, structural and environmental problems may not necessarily be observable.

 

We may be unable to successfully integrate the properties and assets we acquire with our existing operations.

 

Integration of the properties and assets we acquire may be a complex, time consuming and costly process. Failure to timely and successfully integrate these assets and properties with our operations may have a material adverse effect on our business, financial condition and result of operations. The difficulties of integrating these assets and properties present numerous risks, including:

 

 

 

We are also exposed to risks that are commonly associated with acquisitions of this type, such as unanticipated liabilities and costs, some of which may be material. As a result, the anticipated benefits of acquiring assets and properties may not be fully realized, if at all.

 

When we acquire properties, in most cases, we are not entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities.

 

We generally acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties, and in these situations we cannot assure you that we will identify all areas of existing or potential exposure. In those circumstances in which we have contractual indemnification rights for pre-closing liabilities, we cannot assure you that the seller will be able to fulfill its contractual obligations. In addition, the competition to acquire producing natural gas and crude oil properties is intense and many of our larger competitors have financial and other resources substantially greater than ours. We cannot assure you that we will be able to acquire producing natural gas and crude oil properties that have economically recoverable reserves for acceptable prices.

 

We cannot control activities on properties that we do not operate and are unable to control their proper operation and profitability.

 

We do not operate a significant portion of the properties in which we own an interest. As a result, we have limited ability to exercise influence over, and control the risks associated with, the operations of these properties. The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others therefore depend upon a number of factors outside of our control, including:

 

 

If our access to markets is restricted, it could negatively impact our production, our income and ultimately our ability to retain our leases.

 

Market conditions or the unavailability of satisfactory natural gas and crude oil transportation arrangements may hinder our access to natural gas and crude oil markets or delay our production. The availability of a ready market for our crude oil and natural gas production depends on a number of factors, including the demand for and supply of natural gas and crude oil and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business. Our productive properties may be located in areas with limited or no access to pipelines, thereby necessitating delivery by other means, such as trucking, or requiring compression facilities. Such restrictions on our ability to sell our natural gas and crude oil may have several adverse effects, including higher transportation costs, fewer potential purchasers (thereby potentially resulting in a lower selling price) or, in the event we were unable to market and sustain production from a particular lease for an extended time, possible loss of a lease due to lack of production.

Unless we replace our natural gas and crude oil reserves, our reserves and production will decline, which would adversely affect our cash flows, our ability to raise capital and the value of our common stock.

 

Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing natural gas and crude oil reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future natural gas and crude oil reserves and production, and therefore our cash flow and results of operations, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. The value of our common stock and our ability to raise capital will be adversely impacted if we are not able to replace our reserves that are depleted by production. We may not be able to develop, exploit, find or acquire sufficient additional reserves to replace our current and future production.

 

The potential lack of availability or high cost of drilling rigs, equipment, supplies, personnel and crude oil field services could adversely affect our ability to execute on a timely basis our exploration and development plans within our budget.

 

When the prices of natural gas and crude oil increase, such as during 2008, we encounter an increase in the cost of securing drilling rigs, equipment and supplies. In addition, larger producers may be more likely to secure access to such equipment by offering more lucrative terms. If we are unable to acquire access to such resources, or can obtain access only at higher prices, our ability to convert our reserves into cash flow could be delayed and the cost of producing those reserves could increase significantly, which would adversely affect our results of operation and financial condition.

 

Our hedging activities could result in financial losses or reduce our income.

 

To achieve a more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of natural gas, crude oil and natural gas liquids, as well as interest rates, we currently, and may in the future, enter into derivative arrangements for a significant portion of our natural gas, crude oil and/or natural gas liquids production and our debt that could result in both realized and unrealized hedging losses. We utilize financial commodity price hedge instruments to minimize exposure to declining prices on our crude oil and natural gas liquids production. As of September 30, 2009, we had 13.9 Bcfe of equivalent production hedged representing 1.8 Bcf, 6.1 Bcf and 3.2 Bcf of natural gas hedges in place and 86 MBbl, 250 MBbl and 124 MBbl of crude oil hedges in place for the fourth quarter of 2009, 2010 and 2011, respectively. The average price of our natural gas and crude oil hedges in place is $8.19/MMBtu and $86.03/Bbl for the fourth quarter of 2009, $7.71/MMBtu and $83.02/Bbl in the year 2010 and $7.32/MMBtu and $66.50/Bbl in the year 2011. As of September 30, 2009, we had entered into interest rate swap agreements with a total notional amount of $200.0 million related to our indebtedness. Under our interest rate swap agreements, we receive interest at a floating rate equal to one-month LIBOR and pay interest at a fixed rate of 1.50% for $50.0 million and pay interest at 2.90% for $150.0 million.

 

Our actual future production may be significantly higher or lower than we estimate at the time we enter into hedging transactions for such period. If the actual amount is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount is lower than the nominal amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution of our liquidity. As a result of our interest rate swap agreements, we may fail to benefit when rates fall, to the extent we have agreed to pay interest at a fixed rate, or face a greater degree of exposure when rates increase, to the extent we have agreed to pay interest at a floating rate. As a result of these factors, our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows.

Competition in the oil and gas industry is intense, and many of our competitors have resources that are greater than ours.

 

We operate in a highly competitive environment for acquiring prospects and productive properties, marketing natural gas and crude oil, and securing equipment and trained personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial our personnel resources permit. Our ability to acquire additional prospects and discover reserves in the future will depend on our ability to evaluate and select suitable properties and consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and gas industry. Our larger competitors may be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations more easily than we can, which would adversely affect our competitive position. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.

 

We depend on our senior management team and other key personnel. Accordingly, the loss of any of these individuals could adversely affect our business, financial condition and the results of operations and future growth.

 

Our success is largely dependent on the skills, experience and efforts of our people. The loss of the services of one or more members of our senior management team or of our other employees with critical skills needed to operate our business could have a negative effect on our business, financial conditions and results of operations and future growth. These persons include the executive officers listed in “Management—Executive Officers and Directors.” Our ability to manage our growth, if any, will require us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified personnel. Competition for these types of personnel is intense and we may not be successful in attracting, assimilating and retaining the personnel required to grow and operate our business profitably.

 

We are subject to complex federal, state, local and other law and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.

 

Our operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. For instance, we may be unable to obtain all necessary permits, approvals and certificates for proposed projects. Alternatively, we may have to incur substantial expenditures to obtain, maintain or renew authorizations to conduct existing projects. If a project is unable to function as planned due to changing requirements or public opposition, we may suffer expensive delays, extended periods of non-operation or significant loss of value in a project. All such costs may have a negative effect on our business and results of operations.

 

Our business is subject to federal, state and local regulations as interpreted and enforced by governmental agencies and other bodies vested with much authority relating to the exploration for, and the development, production, transportation and marketing of, natural gas, crude oil and natural gas liquids. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on us.

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

 

Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Hydraulic fracturing is an important and commonly used process in the completion of unconventional natural gas wells in shale formations. This process involves the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production. Sponsors of these bills, which are currently pending in the Energy and Commerce Committee and the Environmental and Public Works Committee of the House of Representatives and Senate, respectively, have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, these bills, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.

 

Our operations expose us to potentially substantial costs and liabilities with respect to environmental, health and safety matters.

 

We may incur substantial costs and liabilities as a result of environmental, health and safety requirements applicable to our crude oil and natural gas operations and other activities. These costs and liabilities could arise under a wide range of federal, state and local environmental, health and safety laws and regulations that cover, among other things, emissions into the air and water, habitat and endangered species protection, the containment and disposal of hazardous substances, oil field waste and other waste materials, the use of underground injection wells, and wetlands protection. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with environmental, health and safety laws or regulations may result in assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and the issuance of orders enjoining or limiting our current or future operations. Compliance with these laws and regulations also increases the cost of our operations and may prevent or delay the commencement or continuance of a given operation.

 

Under certain environmental laws that impose strict, joint and several liability, we may be required to remediate our contaminated properties regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons, property or natural resources may result from environmental and other impacts of our operations. Moreover, new or modified environmental, health or safety laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. Therefore, the costs to comply with environmental, health, or safety laws or regulations or the liabilities incurred in connection with them could significantly and adversely affect our business, financial condition or results of operations. In addition, many countries, as well as more than one-third of the states have agreed to regulate emissions of “greenhouse gases,” including methane, a primary component of natural gas, and carbon dioxide, a byproduct of burning natural gas and oil. National greenhouse gas legislation and regulation is in early stages of development in the U.S., and we are currently unable to determine the impact of potential greenhouse gas emission control requirements. Mandatory greenhouse gas emissions reductions may impose increased costs on our business and could adversely impact some of our operations. It is possible that broader national or regional greenhouse gas reduction requirements may directly or indirectly have an adverse impact on natural

gas or other fuel markets, including future demand for the natural gas, crude oil and natural gas liquids that we produce. See “Business—Environmental Regulations.”

 

If we are unable to successfully prevent or address material weaknesses in our internal control over financial reporting, or any other control deficiencies, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other reporting requirements may be adversely affected.

 

While we have taken actions designed to address compliance with the internal control, disclosure control and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in our ability to control all circumstances. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. For example, for the quarter ended March 31, 2007, our management concluded that our historical documentation of related tax positions could have resulted in a material misstatement to our annual or interim financial statements and, accordingly, concluded that this deficiency was a material weakness. Although this material weakness was subsequently remedied, if we are unable to successfully prevent or address these and other material weaknesses in our internal control systems, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other reporting requirements may be adversely affected.

 

Derivatives regulation could restrict our ability to execute commodity derivative instruments as a hedge against fluctuating commodity prices.

 

Various measures are being proposed by committees of Congress, the U.S. Treasury Department, and other agencies to restrict the use of over-the-counter (“OTC”) derivative instruments. These proposals include, but are not limited to, requiring cash collateral on all OTC derivatives and requiring all OTC derivatives to be executed and settled through an exchange system.

 

Although we do not currently know the exact form any final legislation or rule-making activity will take, any restriction on the use of OTC instruments could have a significant impact on our business. Limits on the use of OTC instruments could significantly reduce our ability to execute strategic price hedges against commodity price volatility. In addition, cash collateral requirements could create significant liquidity issues and exchange system trades may restrict our ability to execute derivative instruments to fit our strategic needs.

 

Risks Related to an Investment in Our Common Stock and this Offering

 

One stockholder will, after the completion of this offering, hold a significant number of our shares, which will limit your ability to influence corporate activities and may adversely affect the market price of our common stock, and that stockholder’s interests may conflict with the interests of our other stockholders.

 

After completion of the Preferred Stock Conversion and the issuance of shares of common stock in this offering, we expect, based on the midpoint of the range provided on the cover of this prospectus, there will be approximately 33.1 million shares of our common stock outstanding. Of that amount, we expect that 10.3 million shares of our common stock will be held by Oaktree Holdings. As a result, Oaktree Holdings will own or control outstanding common stock representing, in the aggregate, an approximate 31% voting interest in us. As a result of this stock ownership, Oaktree Holdings will possess significant influence over matters requiring approval by our stockholders, including the adoption of amendments to our certificate of incorporation and bylaws and significant corporate transactions. Such ownership and control may also have the effect of delaying or preventing

a future change of control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

 

Oaktree Holdings and its affiliates engage, from time to time in the ordinary course of their respective businesses, in the trading securities of, and investing in, energy companies. As a result, conflicts may arise between the interests of Oaktree Holdings, on the one hand, and the interests of our other stockholders, on the other hand. Oaktree Holdings may, from time to time, compete directly or indirectly with us or prevent us from taking advantage of corporate opportunities. Oaktree Holdings may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

 

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

 

Volatility in the market price of our common stock price may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:

 

 

See “—Risks Related to Our Business.”

 

In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.

We have no plans to pay regular dividends on our common stock, so you may not receive funds without selling your common stock.

 

Our board of directors presently intends to retain all of our earnings for the expansion of our business; therefore, we have no plans to pay regular dividends on our common stock. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that our board of directors deems relevant. Also, the provisions of our revolving credit facility and second lien term loan agreement restrict the payment of dividends. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment.

 

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

 

Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities.

 

Upon consummation of this offering and the Preferred Stock Conversion, based on the midpoint of the range provided on the cover of this prospectus, there will be 33,134,607 shares of our common stock outstanding. All shares of our common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act.

 

We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

 

As of December 4, 2009, we had 2.0 million options to purchase shares of our common stock outstanding, 1.2 million of which were vested.

 

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

 

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

 

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions:

 

 

 

The foregoing factors, as well as the significant common stock ownership by Oaktree Holdings, could discourage potential acquisition proposals and could delay or prevent a change of control. See “Description of Capital Stock.”

 

After this offering, we will be subject to the Delaware business combination law.

 

After this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

 

Section 203 defines a “business combination” as a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholders. Section 203 defines an “interested stockholder” as a person who, together with affiliates and associates, owns, or, in some cases, within three years prior, did own, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between us and an interested stockholder is prohibited unless:

 

 

This provision has an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock. With approval of our stockholders, we could amend our certificate of incorporation in the future to elect not to be governed by the anti-takeover law. Section 203 of the Delaware General Corporation Law will not apply to Oaktree Holdings.

We have “blank check” preferred stock.

 

Our certificate of incorporation authorizes the board of directors to issue preferred stock without further stockholder action in one or more series and to designate the dividend rate, voting rights and other rights preferences and restrictions. The issuance of preferred stock could have an adverse impact on holders of common stock. Preferred stock is senior to common stock. Additionally, preferred stock could be issued with dividend rights senior to the rights of holders of common stock. Finally, preferred stock could be issued as part of a “poison pill,” which could have the effect of deterring offers to acquire our company. See “Description of Capital Stock—Anti-Takeover Effects of Delaware Laws and Our Charter and Bylaws Provisions.”

 

The holders of our common stock do not have cumulative voting rights, preemptive rights or rights to convert their common stock to other securities.

 

We are authorized to issue 200.0 million shares of common stock, $0.001 par value per share. As of December 4, 2009, there were 6.4 million shares of common stock issued and outstanding. After giving effect to this offering and the Preferred Stock Conversion, based on the midpoint of the range provided on the cover of this prospectus, there will be 33.1 million shares of common stock issued and outstanding. Since the holders of our common stock do not have cumulative voting rights, the holders of a majority of the shares of common stock present, in person or by proxy, will be able to elect all of the members of our board of directors. The holders of shares of our common stock do not have preemptive rights or rights to convert their common stock into other securities.

 

Prior to this offering, our common stock has been thinly traded and there has been no active trading market for our common stock and an active trading market may not develop.

 

The trading volume of our common stock has historically been low and reliable market quotations for our common stock have not been available, partially due to the fact that we are not listed on an exchange and our common stock is only traded over-the-counter. An active trading market for our common stock may not develop or, if developed, may not continue, and a holder of any of our securities may find it difficult to dispose of, or to obtain accurate quotations as to the market value of such securities.

 

The impairment of financial institutions could adversely affect us.

 

We have exposure to different counterparties, and we have entered into transactions with counterparties in the financial services industry specifically, with members of our bank group. These transactions could expose us to credit risk in the event of default of our counterparty. We have exposure to these financial institutions in the form of derivative transactions in connection with our hedges. We also maintain insurance policies with insurance companies to protect us against certain risks inherent in our business. In addition, if any lender under our credit facility is unable to fund its commitment, our liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitment under our credit facility.

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business.

 

As of September 30, 2009, pro forma for the application of net proceeds from this offering (estimated based upon the midpoint of the range of the offering price on the cover of this prospectus) we had outstanding debt of $175.9 million under our credit agreements. Our substantial level of indebtedness increases the possibility that we may be unable to pay, when due, the principal of, interest on, or other amounts due in respect of our indebtedness. Our substantial indebtedness,

combined with our other financial obligations and contractual commitments, could have other important consequences, including the following:

 

 

In addition, our revolving credit facility and second lien term loan agreement contain a number of significant covenants that place limitations on our activities and operations, including those relating to:

 

 

Our credit agreements require us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. Our ability to comply with these ratios and financial condition tests may be affected by events beyond our control, and we cannot assure you that we will meet these ratios and financial condition tests. These financial ratio restrictions and financial condition tests could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct necessary or desirable corporate activities.

 

A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could also result in a default under our credit agreements. A default, if not cured or waived, could result in all of our indebtedness becoming immediately due and payable. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital resources” for further information regarding future compliance with these covenants. Even if new financing were then available, it may not be on terms that are acceptable to us. See “—Recent market events and conditions, including disruptions in the U.S. and international credit markets and other financial systems and the deterioration of the U.S. and global economic conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on our ability to fund our working capital and other capital requirements” and “—Our development and exploration operations, including on our East Texas resource play acreage, require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties and a decline in our natural gas, crude oil and natural gas liquids reserves.”

Changes to current laws may affect our ability to take certain deductions.

 

Substantive changes to the existing federal income tax laws have been proposed that, if adopted, would affect, among other things, our ability to take certain deductions related to our operations, including depletion deductions, deductions for intangible drilling and development costs and deductions for United States production activities. These changes, if enacted into law, could negatively affect our financial condition and results of operations.

 

Our ability to use our net operating loss carryforwards may be subject to limitation and may result in increased future tax liability to us.

 

Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. The number of shares of common stock that we issue in connection with this offering may be sufficient, taking into account prior or future shifts in our ownership over a three-year period, to cause us to undergo an ownership change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us. In addition, the carrying value of any tax asset related to our net operating loss carryforwards could be significantly reduced.

 

We make forward-looking statements throughout this prospectus within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

These forward-looking statements include, but are not limited to, statements regarding:

 

 

 

 

Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “expect” or “anticipate” will occur, and other similar statements), you must remember that our expectations may not be correct, even though we believe they are reasonable. We caution that a number of factors could cause future production, revenues and expenses to differ materially from our expectations. We do not guarantee that the transactions and events described in this prospectus will happen as described (or that they will happen at all). The forward-looking information contained in this prospectus is generally located in the material provided under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management’s reasonable estimates of future results and trends. For a discussion of risk factors affecting our business, see “Risk Factors.”

 

We estimate that our net proceeds from the sale of shares of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $117.6 million, assuming an offering price of $7.00 per share, which is the midpoint of the range provided on the cover page of this prospectus.

 

We intend to use the net proceeds from this offering to repay approximately $107.6 million in aggregate principal amount of loans outstanding under our revolving credit facility and $10 million in aggregate principal amount of indebtedness under our $10 million unsecured promissory note due to Wells Fargo Bank, National Association. At December 4, 2009 and after application of proceeds from our $10 million unsecured promissory note, we had $129.5 million of indebtedness outstanding under our revolving credit facility. This indebtedness matures on May 8, 2011, and at December 4, 2009 had a weighted average interest rate of 3.76% per annum. The indebtedness under our $10 million unsecured promissory note bears interest at a rate per annum equal to two-month LIBOR plus 2% and matures on January 15, 2010. For a description of our revolving credit facility and our $10 million unsecured promissory note, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital resources.”

 

Affiliates of certain of the underwriters are lenders under our existing revolving credit facility and therefore will receive a portion of the net proceeds of this offering. See “Underwriting.”

 

A $1.00 increase (decrease) in the assumed initial public offering price of $7.00 per share would increase (decrease) the net proceeds from this offering by approximately $16.9 million, assuming no change in the number of shares offered by us as included on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We have never declared or paid cash dividends on our common stock or our preferred stock. Each share of our Series G Preferred Stock is entitled to a quarterly cash dividend, if, as and when declared, that cumulates and compounds quarterly whether or not dividends in a quarter are declared or paid, equal to 8% per annum based on the then-current liquidation preference. Dividends on our Series G Preferred Stock have accumulated since 2005, but have not been declared or paid. As of September 30, 2009, accumulated dividends on the Series G Preferred Stock equaled approximately $17.7 million. We expect to convert all shares of our Series G Preferred Stock and the accumulated dividends on such shares in connection with the closing of this offering. See “Prospectus Summary—Preferred Stock Conversion.” Although we have not, and are not required to, pay a cash dividend on our Series H Preferred Stock, we have paid a quarterly dividend of one share of our common stock (as adjusted for our 1-for-10 reverse stock split in September 2006) on our outstanding shares of Series H Preferred Stock, as required by its Certificate of Designations, since 2005. The provisions of our revolving credit facility, second lien term loan agreement and preferred stock restrict the payment of dividends. We currently intend to retain all available funds and any future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

The following table sets forth cash and cash equivalents and capitalization as of September 30, 2009:

 

 

 

 

This table should be read together with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to those statements, in each case, included elsewhere in this prospectus.

 

 

 

 

Our common stock is traded on the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “CXPO.OB.” We have applied to list our common stock on the NASDAQ Global Market under the symbol “CXPO.”

 

As of December 4, 2009, the last reported sales price of our common stock on the OTCBB was $6.60 per share of common stock and there were 6,416,401 shares of our common stock outstanding held by approximately 275 holders of record. The following table sets forth the range of high and low bid quotation prices per share of our common stock as reported by the OTCBB. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

 

 

 

 

The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of December 31, 2004, 2005, 2006, 2007 and 2008 and for each of the five years in the period ended December 31, 2008 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The historical consolidated financial data for the nine months ended September 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements and, in the opinion of our management, have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented. The consolidated results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data provided below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.