This report contains forward-looking statements that involve risks and uncertainties that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated in our forward-looking statements due to many factors. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report and in our annual report filed on Form 10-K for the year ended December 31, 2008.

Discontinued Operations

Our offshore operations were conducted through our subsidiary, Bois d'Arc
Energy, Inc. ("Bois d'Arc Energy"). Bois d'Arc Energy was acquired by Stone
Energy Corporation ("Stone") in exchange for a combination of cash and shares of
Stone common stock on August 28, 2008. Accordingly, the offshore operations are
presented as discontinued operations in our financial statements for all periods
presented. Unless indicated otherwise, the amounts in the accompanying tables
and discussion relate to our continuing operations.

Results of Operations

                                       Three Months Ended June 30,           Six Months Ended June 30,
                                       2009                 2008               2009               2008
                                                  (In thousands, except per unit amounts)
Net Production Data:
Natural Gas (Mmcf)                        14,108                13,682            26,901           26,812
Oil (Mbbls)                                  205                   268               421              511
Natural Gas equivalent (Mmcfe)            15,337                15,292            29,425           29,878

Revenues:
Natural Gas sales                  $      47,679       $       148,180     $     102,557       $  256,373
Hedging gains (losses)                     7,114                (4,384 )          13,026           (4,628 )
Total natural gas sales
including hedging                         54,793               143,796           115,583          251,745
Oil sales                                 10,082                28,226            17,643           47,998
Total oil and gas sales            $      64,875       $       172,022     $     133,226       $  299,743

Expenses:
Oil and gas operating
expenses(1)                        $      17,485       $        23,362     $      34,444       $   44,564
Exploration expense                $         131       $             -     $         144       $    2,238
Depreciation, depletion and
amortization                       $      50,796       $        44,422     $      98,068       $   85,927

Average Sales Price:
Natural gas (per Mcf)              $        3.38       $         10.83     $        3.81       $     9.56
Natural gas including hedging
(per Mcf)                          $        3.88       $         10.51     $        4.30       $     9.39
Oil (per Bbl)                      $       49.24       $        105.16     $       41.95       $    93.92
Average equivalent (Mcfe)          $        3.77       $         11.54     $        4.08       $    10.19
Average equivalent including
hedging (Mcfe)                     $        4.23       $         11.25     $        4.53       $    10.03

Expenses ($ per Mcfe):
Oil and gas operating(1)           $        1.14       $          1.53     $        1.17       $     1.49
Depreciation, depletion and
amortization(2)                    $        3.30       $          2.89     $        3.32       $     2.87

(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas properties only.

Revenues -

Our oil and gas sales decreased $107.1 million (62%) to $64.9 million for the three months ended June 30, 2009 from $172.0 million for the second quarter of 2008. This decrease is primarily related to a substantial decline in natural gas and crude oil prices. Our average realized natural gas price decreased by 69% and our average realized crude oil price decreased by 53% in the second quarter of 2009 as compared to the second quarter of 2008. Our natural gas sales for the three months ended June 30, 2009 benefited from a gain of $7.1 million from our hedging activities, while the three months ended June 30, 2008 included a realized hedging loss of $4.4 million. Our production in the second quarter of 2009 of 15.3 Bcfe was comparable to production for the second quarter of 2008. New production from our drilling activity offset the 0.8 Bcfe of production related to certain oil and gas properties we sold in 2008.

Our oil and gas sales decreased $166.5 million (56%) to $133.2 million for the six months ended June 30, 2009 from $299.7 million for the first six months of 2008. This decrease is also attributable to the substantial decline in natural gas and crude oil prices. Our average realized natural gas price decreased by 60% and our average realized crude oil price decreased by 55% in the first half of 2009 as compared to the first half of 2008. Our natural gas sales for the six months ended June 30, 2009 benefited from a gain of $13.0 million from our hedging activities. The six months ended June 30, 2008 included a realized hedging loss of $4.6 million. Our production in the first six months of 2009 decreased by 2% to 29.4 Bcfe, as compared to 29.9 Bcfe in the first six months of 2008. The decrease was attributable to 1.7 Bcfe of production related to certain oil and gas properties we sold in 2008. Excluding the divestitures, production increased 4% in 2009 as compared to 2008.

Costs and Expenses -

Our oil and gas operating expenses, including production taxes, decreased $5.9 million (25%) to $17.5 million in the second quarter of 2009 from $23.4 million in the second quarter of 2008. Oil and gas operating expenses per equivalent Mcf produced decreased $0.39 (25%) to $1.14 in the second quarter of 2009 from $1.53 in the second quarter of 2008. Oil and gas operating expenses also decreased $10.1 million (23%) to $34.4 million in the first six months of 2009 from $44.6 million in the first six months of 2008. Oil and gas operating expenses per Mcfe produced decreased $0.32 (21%) to $1.17 for the six months ended June 30, 2009 from $1.49 for the same period in 2008. The decrease in operating expenses is primarily due to lower production taxes resulting from lower natural gas and oil prices.

Exploration expense of $0.1 million for the six months ended June 30, 2009 relates to geological and geophysical costs incurred. Exploration expense in the first six months of 2008 of $2.2 million related primarily to an exploratory dry hole drilled in South Texas.

Depreciation, depletion and amortization ("DD&A") increased $6.4 million (14%) to $50.8 million in the second quarter of 2009 from $44.4 million in the second quarter of 2008. Our DD&A per equivalent Mcf produced increased $0.41 (14%) to $3.30 for the three months ended June 30, 2009 from $2.89 for the three months ended June 30, 2008. DD&A for the first six months of 2009 increased $12.2 million (14%) to $98.1 million from $85.9 million for the six months ended June 30, 2008. Our DD&A rate per Mcfe for the first six months of 2009 of $3.32 increased $0.45 (16%) above the DD&A rate of $2.87 for the first six months of 2008. The higher DD&A rates per Mcfe primarily reflect higher drilling costs and downward revisions to our proved oil and gas reserves at the end of 2008 attributable to lower natural gas and oil prices.

General and administrative expense, which is reported net of overhead reimbursements, increased by $2.2 million to $9.1 million for the second quarter of 2009 as compared to general and administrative expense of $6.9 million for the second quarter of 2008. Included in general and administrative expense is stock-based compensation of $3.8 million and $3.1 million for the three months ended June 30, 2009 and 2008, respectively. For the first six months of 2009, general and administrative expense increased to $18.9 million from $13.1 million for the six months ended June 30, 2008. Included in general and administrative expense is stock-based compensation of $7.5 million and $5.7 million for the six months ended June 30, 2009 and 2008, respectively. The increases in general and administrative costs in 2009 due to additional professional staff that we added throughout 2008 and the higher costs of our stock-based compensation.

Interest expense decreased $5.6 million (66%) to $2.9 million for the second quarter of 2009 from interest expense of $8.5 million in the second quarter of 2008. The decrease was primarily due to lower borrowings under our bank credit facility, lower interest rates and interest that was capitalized on our unevaluated properties. Our average borrowings outstanding decreased to $123.4 million during the second quarter of 2009 as compared to $494.3 million in the second quarter of 2008. The average interest rate we were charged on borrowings outstanding under our credit facility decreased to 2.1% in the second quarter of 2009 as compared to 4.2% in the second quarter of 2008. We capitalized interest of $1.4 million on our unevaluated properties during the three months ended June 30, 2009. No interest was capitalized during the three months ended June 30, 2008. Interest expense for the six months ended June 30, 2009 decreased $13.4 million (73%) to $5.1 million from interest expense of $18.5 million in the first six months of 2008. The decrease was also due to lower borrowings under our bank credit facility, lower interest rates and capitalized interest. Our average borrowings outstanding decreased to $94.3 million during the first six months of 2009 as compared to $504.0 million in the first six months of 2008, and the average interest rate we were charged on borrowings outstanding under our credit facility decreased to 1.9% in the first six months of 2009 as compared to 4.7% in the first six months of 2008. We capitalized interest of $3.0 million on our unevaluated properties during the six months ended June 30, 2009. No interest was capitalized during the six months ended June 30, 2008.

Income tax expense related to continuing operations decreased by $44.0 million to a benefit of $4.0 million for the three months ended June 30, 2009 as compared to a provision of $40.0 million for the three months ended June 30, 2008. The operating loss incurred during the three months ended June 30, 2009 resulted in an income tax benefit. Income tax expense related to continuing operations decreased by $63.3 million to a benefit of $6.1 million for the six months ended June 30, 2009 as compared to a provision of $57.2 million for the six months ended June 30, 2008. The operating loss incurred during the six months ended June 30, 2009 resulted in an income tax benefit. The effective income tax rate was 26% in 2009 as compared to 36% in 2008 due to the effect of nondeductible compensation.

We reported a net loss of $11.5 million for the three months ended June 30, 2009, as compared to net income from continuing operations of $70.4 million for the three months ended June 30, 2008. The loss was primarily related to lower natural gas and oil prices. The loss per share for the second quarter of 2009 was $0.26 as compared to income per share from continuing operations of $1.53 for the second quarter of 2008. Income from discontinued operations was $12.2 million ($0.27 per share) in the three months ended June 30, 2008.

We reported a net loss of $17.1 million for the six months ended June 30, 2009, as compared to net income from continuing operations of $99.8 million for the six months ended June 30, 2008. The loss was also primarily related to lower natural gas and oil prices. The loss per share for the first six months of 2009 was $0.38 as compared to income per share from continuing operations of $2.17 for the first six months of 2008. Income from discontinued operations was $23.9 million ($0.52 per share) for the six months ended June 30, 2008.

Liquidity and Capital Resources

Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions. For the six months ended June 30, 2009, our primary sources of funds were net cash flow from operations of $69.4 million and borrowings under our bank credit facility of $105.0 million. Our net cash flow from operating activities decreased $131.3 million (65%) in the first six months of 2009 from $200.7 million for the six months ended June 30, 2008. This decrease is primarily due to the lower revenues we had in the first six months of 2009 resulting from the substantial decline in natural gas and oil prices.

Our primary needs for capital, in addition to funding our ongoing operations, relate to the acquisition, development and exploration of our oil and gas properties and the repayment of our debt. In the first six months of 2009, we incurred capital expenditures of $174.6 million primarily for our development and exploration activities. We funded our capital program with cash flow provided by operating activities and borrowings under the bank credit facility.

The following table summarizes our capital expenditure activity, on an accrual basis, for the six months ended June 30, 2009 and 2008:

                                         Six months ended June 30,
                                           2009               2008
                                               (In thousands)

                Leasehold costs        $       7,602       $   21,474
                Development drilling          91,749          110,369
                Exploratory drilling          68,394            2,708
                Other development              6,786           11,302
                                             174,531          145,853
                Other                             50              491
                                       $     174,581       $  146,344

We expect to spend approximately $360.0 million for development and exploration projects during 2009 and to fund our development and exploration activities with operating cash flow and with borrowings under our bank credit facility.

The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments except for commitments for contract drilling services. Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. As of June 30, 2009 we have contracted for the services of drilling rigs through October 2012 at an aggregate cost of $113.5 million and we have maximum commitments of $38.8 million to transport natural gas through July 2019. We have obligations to incur future payments for dismantlement, abandonment and restoration costs of oil and gas properties. These payments are currently estimated to be incurred primarily after 2014. We record a separate liability for the fair value of these asset retirement obligations which totaled $5.8 million as of June 30, 2009.

We have a $850.0 million bank credit facility with a group of banks, including the Bank of Montreal, as the administrative agent. The credit facility is a five-year revolving credit commitment that matures on December 15, 2011. The credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of our oil and natural gas properties. The borrowing base may be affected by the performance of our properties and changes in oil and natural gas prices. As of June 30, 2009 the borrowing base was $550.0 million, $410.0 million of which was available. Indebtedness under the bank credit facility is secured by substantially all of our and our subsidiaries' oil and gas properties and is guaranteed by all of our subsidiaries. Borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at our option of either LIBOR plus 2.0% to 2.75% or the base rate (which is the higher of the administrative agent's prime rate, the federal funds rate plus 0.5%, or 30 day LIBOR plus 1.5%) plus 0.5% to 1.25%. A commitment fee of 0.5% is payable on the unused borrowing base. The credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $40.0 million, limit the amount of consolidated debt that we may incur and limit our ability to make certain loans and investments. The only financial covenants are the maintenance of a current ratio and maintenance of a minimum tangible net worth. We were in compliance with these covenants as of June 30, 2009. We also have $175.0 million of 6?% senior notes due March 1, 2012, with interest payable semiannually on each March 1 and September 1. The notes are unsecured obligations and are guaranteed by all of our subsidiaries.

We believe that our cash flow from operations and available borrowings under our bank credit facilities will be sufficient to fund our operations and future growth as contemplated under our current business plan. However, if our plans or assumptions change or if our assumptions prove to be inaccurate, we may be required to seek additional capital. We cannot provide any assurance that we will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on terms acceptable to us.