UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-13305

PARALLEL PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		75-1971716
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1004 N. Big Spring, Suite 400,
Midland, Texas		79701
(Address of Principal Executive Offices)		(Zip Code)

(432) 684-3727

Not Applicable

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No 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):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o     No o

     As of November 3, 2009, the registrant had 41,646,445 shares of common stock outstanding.

 

 

INDEX

		Page No.
PART I. — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following financial statements:
- Unaudited Balance Sheets at September 30, 2009 and December 31, 2008			1
- Unaudited Statements of Operations for the three months and nine months ended September 30, 2009 and 2008			3
- Unaudited Statements of Stockholders’ Equity as of December 31, 2008 and for the nine months ended September 30, 2009			4
- Unaudited Statements of Cash Flows for the nine months ended September 30, 2009 and 2008			5
- Notes to Financial Statements			7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			56
ITEM 4. CONTROLS AND PROCEDURES			61
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			61
ITEM 1A. RISK FACTORS			64
ITEM 6. EXHIBITS			70
SIGNATURES
EX-10.29
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.2

 (i)

PART 1 — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

PARALLEL PETROLEUM CORPORATION

Assets

		September 30,				December 31,
		2009				2008
Current assets:
Cash and cash equivalents		$	36,921			$	36,303
Short-term investments			—				5,002
Accounts receivable:
Oil and natural gas sales			9,459				13,399
Joint interest owners and other, net of allowance for doubtful accounts of $50			1,586				2,805
Affiliates and joint ventures			4				12
			11,049				16,216
Other current assets			484				430
Derivatives			5,059				22,665
Deferred tax asset			938				—
Total current assets			54,451				80,616
Property and equipment, at cost:
Oil and natural gas properties, full cost method (including $139,063 and $137,202 not subject to depletion)			893,101				878,722
Other			3,350				3,172
			896,451				881,894
Less accumulated depreciation, depletion and amortization			(538,309	)			(490,566	)
Net property and equipment			358,142				391,328
Restricted cash			83				81
Investment in pipeline venture			355				337
Other assets, net of accumulated amortization of $1,919 and $1,443			3,148				3,566
Deferred tax asset			69,907				60,567
Derivatives			8,833				14,081
		$	494,919			$	550,576

The accompanying notes are an integral part of these Financial Statements.

PARALLEL PETROLEUM CORPORATION
Balance Sheets (continued)
(unaudited)
($ in thousands)

Liabilities and Stockholders’ Equity

		September 30,				December 31,
		2009				2008
Current liabilities:
Accounts payable trade		$	1,430			$	13,522
Accrued liabilities			15,592				21,780
Accrued interest on senior notes			2,563				6,407
Asset retirement obligations			912				158
Derivative obligations			6,666				3,004
Put premium obligations			1,098				628
Deferred tax liability			—				6,597
Total current liabilities			28,261				52,096
Long-term liabilities:
Revolving credit facility			225,000				225,000
Senior notes (principal amount $150,000)			146,309				145,890
Asset retirement obligations			9,673				11,221
Derivative obligations			4,771				5,136
Put premium obligations			2,856				3,655
Termination obligation			535				532
Total long-term liabilities			389,144				391,434
Commitments and contingencies
Stockholders’ equity:
Series A preferred stock — par value $0.10 per share, authorized 50,000 shares			—				—
Common stock — par value $0.01 per share, authorized 60,000,000 shares, issued and outstanding 41,646,445 for 2009 and 41,597,161 for 2008			416				415
Additional paid-in capital			201,657				200,132
Retained deficit			(124,559	)			(93,501	)
Total stockholders’ equity			77,514				107,046
		$	494,919			$	550,576

The accompanying notes are an integral part of these Financial Statements.

PARALLEL PETROLEUM CORPORATION

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Oil and natural gas revenues:
Oil and natural gas sales		$	21,192			$	56,201			$	59,282			$	156,217
Costs and expenses:
Lease operating expense			5,040				7,539				18,667				21,772
Production taxes			495				2,836				1,829				8,121
General and administrative			4,452				3,125				11,166				8,958
Depreciation, depletion and amortization			5,155				11,551				17,334				31,386
Impairment of oil and natural gas properties			—				—				30,426				—
Total costs and expenses			15,142				25,051				79,422				70,237
Operating income (loss)			6,050				31,150				(20,140	)			85,980
Other income (expense), net:
Gain (loss) on derivatives not classified as hedges			(1,335	)			65,661				(8,856	)			(27,834	)
Interest and other income			42				20				141				85
Interest expense, net of capitalized interest			(6,384	)			(6,139	)			(19,074	)			(17,025	)
Cost of debt retirement			—				(102	)			—				(102	)
Other expense			—				(11	)			(5	)			(12	)
Equity in gain (loss) of pipelines and gathering system ventures			—				(2	)			1				380
Total other income (expense), net			(7,677	)			59,427				(27,793	)			(44,508	)
Income (loss) before income taxes			(1,627	)			90,577				(47,933	)			41,472
Income tax benefit (expense)			570				(31,900	)			16,875				(14,740	)
Net income (loss)		$	(1,057	)		$	58,677			$	(31,058	)		$	26,732
Net income (loss) per common share:
Basic		$	(0.03	)		$	1.41			$	(0.75	)		$	0.65
Diluted		$	(0.03	)		$	1.41			$	(0.75	)		$	0.64
Weighted average common shares outstanding:
Basic			41,646				41,566				41,614				41,429
Diluted			41,646				41,733				41,614				41,803

The accompanying notes are an integral part of these Financial Statements.

PARALLEL PETROLEUM CORPORATION

		Common stock								Additional								Total
		Number of								paid-in				Retained				stockholders’
		shares				Amount				capital				deficit				equity
Balance, December 31, 2008			41,597			$	415			$	200,132			$	(93,501	)		$	107,046
Common stock issued to directors			49				1				96				—				97
Restricted stock expense			—				—				56				—				56
Stock option expense			—				—				1,373				—				1,373
Net loss			—				—				—				(31,058	)			(31,058	)
Balance, September 30, 2009			41,646			$	416			$	201,657			$	(124,559	)		$	77,514

The accompanying notes are an integral part of these Financial Statements.

PARALLEL PETROLEUM CORPORATION

		2009				2008
Cash flows from operating activities:
Net income (loss)		$	( 31,058	)		$	26,732
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization			17,334				31,386
Gain on sale of automobiles			(5	)			—
Impairment of oil and natural gas properties			30,426				—
Accretion of asset retirement obligation			609				275
Accretion of senior notes discount			419				375
Deferred income tax expense (benefit)			(16,875	)			14,740
Loss on derivatives not classified as hedges			8,856				27,834
Amortization of deferred financing cost			476				509
Cost of debt retirement			—				102
Accretion of interest on put obligations			155				45
Common stock issued to directors			97				253
Restricted stock expense			56				82
Stock option expense			1,373				772
Equity in gain of pipelines and gathering system ventures			(1	)			(380	)
Changes in assets and liabilities:
Other assets, net			632				(1,409	)
Restricted cash			(2	)			(2	)
Accounts receivable			5,167				(4,001	)
Other current assets			(54	)			92
Accounts payable and accrued liabilities			(14,124	)			9,320
Net cash provided by operating activities			3,481				106,725
Cash flows from investing activities:
Additions to oil and natural gas properties			(23,779	)			(170,681	)
Additions to other property and equipment			(190	)			(577	)
Settlements on derivative instruments			13,783				(36,306	)
Short-term investments			(5,002	)			—
Maturity of short-term investments			10,004				—
Net investment in pipelines and gathering system ventures			(17	)			(21	)
Net cash used in investing activities			(5,201	)			(207,585	)
Cash flows from financing activities:
Borrowings from bank line of credit			—				102,500
Deferred financing cost			(690	)			(270	)
Proceeds from exercise of stock options			—				1,531
Settlements on derivative instruments with financing elements			3,028				—
Net cash provided by financing activities			2,338				103,761
Net increase in cash and cash equivalents			618				2,901
Cash and cash equivalents at beginning of period			36,303				7,816
Cash and cash equivalents at end of period		$	36,921			$	10,717

The accompanying notes are an integral part of these Financial Statements.

PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows (continued)
Nine Months Ended September 30, 2009 and 2008
(unaudited)
($ in thousands)

		2009				2008
Non-cash financing and investing activities:
Deferred purchase of derivative puts		$	—			$	3,325
Oil and natural gas properties asset retirement obligations		$	(1,403	)		$	626
Additions to oil and natural gas properties accrued		$	(8,000	)		$	1,700
Termination obligation capitalized to oil and natural gas properties		$	(3	)		$	—
Property transfer:
Transfer to oil and natural gas properties		$	—			$	8,707
Transfer from equity investment		$	—			$	(8,707	)
Other transactions:
Interest paid		$	23,426			$	19,385
Taxes paid		$	75			$	—

The accompanying notes are an integral part of these Financial Statements.

NOTES TO FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     Parallel Petroleum Corporation, or “Parallel”, was incorporated in Texas on November 26, 1979, and reincorporated in the State of Delaware on December 18, 1984.

     Parallel is engaged in the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploring for new oil and natural gas reserves. The majority of our producing properties are in the:

	•		Permian Basin of west Texas and New Mexico; and
	•		Fort Worth Basin of north Texas.

     The financial information included herein is unaudited. The balance sheet as of December 31, 2008 has been derived from our audited Financial Statements as of December 31, 2008. The unaudited financial information includes all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods. The results of operations for the interim period are not necessarily indicative of the results to be expected for an entire year. Certain 2008 amounts have been conformed to the 2009 financial statement presentation.

     On September 15, 2009, we entered into an Agreement and Plan of Merger, as subsequently amended (the “Merger Agreement”), with PLLL Holdings, LLC, a Delaware limited liability company (“Parent”), and PLLL Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Subsidiary”), pursuant to which, among other things, Merger Subsidiary commenced a cash tender offer (the “Tender Offer”) on September 24, 2009 for all of our issued and outstanding shares of common stock, par value $0.01 per share, together with the associated preferred stock purchase rights thereto (the “Shares”), for $3.15 per share payable to the seller in cash, without interest thereon and less any applicable withholding taxes (the “Offer Price”). The Merger Agreement also provides that following completion of the Tender Offer, Merger Subsidiary will be merged with and into us (the “Merger”), and we will survive as a wholly-owned subsidiary of Parent. At the effective time of the Merger, all of our remaining outstanding Shares not tendered in the Tender Offer (other than Shares (i) owned by Parent, Merger Subsidiary and any of their respective subsidiaries or (ii) for which appraisal has been properly demanded and perfected under Delaware law), will be acquired for cash at the Offer Price and on the terms and conditions set forth in the Merger Agreement. The respective obligations of Parent, Merger Subsidiary and Parallel to consummate the Merger and the transactions contemplated are subject to the satisfaction or waiver of certain conditions, including: (a) the stockholders of Parallel shall have duly adopted the Merger Agreement and (b) no provision of any applicable law or order of any governmental authority of competent jurisdiction which has the effect of making the Merger illegal or shall otherwise restrain or prohibit the consummation of the Merger shall be in effect. For further information, including the entire Merger Agreement, please see Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 15, 2009 and our Form 8-K filed with the SEC on October 15, 2009. Please see Note 13 — Subsequent Events for events occurring subsequent to the date of the financial statements related to the Tender Offer and Merger Agreement.

     Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Quarterly Report on Form 10-Q under certain rules and regulations of the Securities and Exchange Commission. The financial statements included in this report should be read in conjunction with the audited Financial Statements and notes included in our Annual

Report on Form 10-K for the year ended December 31, 2008.

     Unless otherwise indicated or unless the context otherwise requires, all references to “we”, “us”, “our”, “Parallel”, or “Company” mean the registrant, Parallel Petroleum Corporation.

NOTE 2. STOCKHOLDERS’ EQUITY

     Parallel accounts for stock based compensation for non-employees and employees in accordance with provisions of FASB ASC 505-50 and 718-10, respectively. (Prior authoritative literature: Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R))).

     Parallel awards incentive stock options, nonqualified stock options, restricted stock and stock awards to selected key employees, officers, and directors. Stock options are awarded at exercise prices equal to the closing price of our common stock on the date of grant. Generally, these options vest over a period of two to ten years with a ten-year exercise period. However, on October 23, 2009, we experienced a change of control, at which time vesting of certain options and restricted stock were accelerated and certain other options with an exercise price in excess of the Offer Price were cancelled. As of September 30, 2009, and before giving effect to our change of control as a result of the Tender Offer, options were scheduled to expire beginning in 2011 and extending through 2019. The stock options and restricted stock awards’ fair values are described below for each grant. Stock based compensation expense is classified as a general and administrative expense in the Statements of Operations. Please see Note 13 — Subsequent Events concerning vesting acceleration of stock based compensation as a result of the Tender Offer described in Note 1 — Description of Business — Nature of Operations and Basis of Presentation.

     Options

     For the three months ended September 30, 2009 and 2008, we recognized compensation expense of approximately $352,000 and $545,000, respectively, with a tax benefit of approximately $120,000 and $185,000, respectively. For the nine months ended September 30, 2009 and 2008, we recognized compensation expense of approximately $1.4 million and $772,000, respectively, with a tax benefit of approximately $467,000 and $263,000, respectively, associated with our stock option grants.

     At September 30, 2009, options to purchase 427,750 shares of common stock were outstanding and vested. At that same date, options to purchase 775,450 shares were outstanding and unvested. During the nine months ended September 30, 2009, options to purchase 464,200 shares were granted to officers and employees, and none of the options expired or were forfeited.

     The fair value of each option award is estimated on the date of grant. The fair values of stock options granted prior to and outstanding at September 30, 2009 and that covered shares subject to future vesting at that date were determined using the Black-Scholes option valuation method from traded options and historical volatility of our stock. The expected term of the options used in the Black-Scholes model represents the period of time that options granted are expected to be outstanding. Risk free rates are based on the U.S. Treasury, Daily Treasury Yield Curve Rate.

		2009				2008				2005				2001
Expected volatility			63.94	%			46.50	%			54.20	%			57.95	%
Expected dividends			0.00				0.00				0.00				0.00
Expected term (in years)			6.25				6.25				6.5				7.5
Risk-free rate			3.19	%			3.81%-3.86	%			4.20	%			5.05	%

     A summary of the stock option activity for the nine months ended September 30, 2009 is presented below:

										Weighted
										Average
		Number of Shares of				Weighted				Remaining
		Common Stock				Average Exercise				Contractual				Aggregate
		Underlying Options				Price				Term				Intrinsic Value
		(in thousands)								(years)				($ in thousands)
Outstanding December 31, 2008			739			$	14.41
Granted			464			$	2.00
Exercised			—			$	—
Surrendered			—			$	—
Outstanding September 30, 2009			1,203			$	9.62				8.76			$	576
Exercisable at September 30, 2009			428			$	10.77				6.96			$	33

		($ in thousands)
Grant date fair value of options issued and unvested, September 30, 2009		$	3,666
Grant date fair value of options issued and outstanding, September 30, 2009		$	6,190

     Restricted Stock

     For the three months ended September 30, 2009 and 2008, we recognized compensation expense of approximately $11,000 and $24,000, with a tax benefit of approximately $4,000 and $8,000, respectively, for restricted stock. For the nine months ended September 30, 2009 and 2008, we recognized compensation expense of approximately $56,000 and $81,000, respectively, with a tax benefit of approximately $19,000 and $28,000, respectively, for restricted stock.

     The fair values of restricted stock awards granted are based on the last sales price of our common stock on the Nasdaq Global Select Market on the date of the grant.

     Stock Awards

     On July 1, 2009, each of our four non-employee directors were awarded 12,321 shares of common stock under our 2004 Non-Employee Director Stock Grant Plan. The fair value of common stock awarded of $1.95 per share was based on the average of the high and low sales price of our common stock on the Nasdaq Global Select Market on the date of grant. The shares vested 100% on the date of the grant.

     Stock Rights Agreement Amendment

     In connection with the Merger Agreement, we and Computershare Trust Company, N.A, successor-in-interest to Computershare Trust Company, Inc., entered into the First Amendment to Rights Agreement, dated September 14, 2009 (the “Rights Amendment”). We authorized entry into the Rights Amendment to render the Rights Agreement inapplicable to (i) the approval, execution and delivery of the Merger Agreement, (ii) the making or consummation of the Tender Offer by Merger Subsidiary (including the acquisition of shares pursuant to the Tender Offer) and (iii) the consummation of the Merger or any other transaction contemplated by the Merger Agreement.

NOTE 3. CREDIT ARRANGEMENTS

     We maintain one credit facility, our Fourth Amended and Restated Credit Agreement, or the “Revolving Credit Agreement”, dated May 16, 2008, as amended on April 30, 2009, which we describe below.

     Revolving Credit Facility

     Our Revolving Credit Agreement with a group of bank lenders provides us with a revolving line of credit having a “borrowing base” limitation of $230.0 million at September 30, 2009. The total amount that we can borrow and have outstanding at any one time is limited to the lesser of $600.0 million or the borrowing base established by the lenders. At September 30, 2009, the principal amount outstanding under our revolving credit facility was $225.0 million, excluding $445,000 reserved for our letters of credit. The Revolving Credit Agreement allows us to borrow, repay and reborrow amounts available under the facility. The amount of the borrowing base is based primarily upon the estimated value of our oil and natural gas reserves. The borrowing base is redetermined by the lenders semi-annually on or about April 1 and October 1 of each year or at other times required by the lenders or at our request. The April 30, 2009 amendment reaffirmed our borrowing base of $230.0 million and changed the funded debt ratio we are required to maintain as described below. If the outstanding principal amount of our loans ever exceeds the borrowing base, we must either provide additional collateral to the lenders or repay the outstanding principal of our loans in an amount equal to the excess. Except for principal payments that may be required because of our outstanding loans being in excess of the borrowing base, interest only is payable monthly. On September 28, 2009 our bank lenders postponed the scheduled borrowing base redetermination from on or about October 1, 2009 to on or about November 15, 2009.

     As of September 30, 2009, our group of bank lenders included Citibank, N.A., BNP Paribas, Compass Bank, Bank of Scotland plc, Bank of America, N.A., Texas Capital Bank, N.A., Western National Bank and West Texas National Bank. None of the bank lenders held more than 21% of the facility at September 30, 2009.

     Loans made to us under this revolving credit facility bear interest at the base rate of Citibank, N.A. or the “LIBOR” rate, at our election.

     The base rate is generally equal to the sum of (a) Citibank’s “prime rate” as announced by it from time to time plus (b) a margin ranging from zero to 0.50%, the amount of which depends upon the outstanding principal amount of our loan. If the principal amount outstanding is equal to or greater than 75% of the borrowing base, the margin is 0.50%. If the principal amount outstanding is equal to or greater than 50% but less than 75% of the borrowing base, the margin is 0.25%. If the borrowing base usage is less than 50%, there is no margin percent.

     The LIBOR rate is generally equal to the sum of (a) the rate designated as “British Bankers Association Interest Settlement Rates” and offered in one, two, three, six or twelve month interest periods for deposits of $1.0 million, and (b) a margin ranging from 2.75% to 3.25%, depending upon the outstanding principal amount of our loan. As amended on April 30, 2009, LIBOR margin means if the principal amount outstanding is equal to or greater than 75% of the borrowing base, the margin is 3.25%. If the principal amount outstanding is equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 3.00%. If the principal amount outstanding is less than 50% of the borrowing base, the margin is 2.75%.

     The interest rate we are required to pay on our borrowings, including the applicable margin, may never be less than 4.75%. At September 30, 2009, our base rate, plus the applicable margin, was 4.75% on $225.0 million, the outstanding principal amount of our revolving loan on that same date.

     In the case of base rate loans, interest is payable on the last day of each month. In the case of LIBOR loans, interest is payable on the last day of each applicable interest period.

     If the total outstanding borrowings under the revolving credit facility are less than the borrowing base, we are required to pay an unused commitment fee to the lenders in an amount equal to 0.25% of the daily average of the unadvanced portion of the borrowing base. The fee is payable quarterly.

     If the borrowing base is increased, we are also required to pay a fee of 0.375% on the amount of any increase.

     All outstanding principal and accrued and unpaid interest under the revolving credit facility is due and payable on December 31, 2013. The maturity date of our outstanding loans may be accelerated by the lenders upon the occurrence of an event of default under the Revolving Credit Agreement.

     The Revolving Credit Agreement contains customary restrictive covenants, including (i) maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded indebtedness to earnings before interest, income taxes, depreciation, depletion and amortization (“EBITDA”), (iii) maintenance of a minimum net worth, (iv) prohibition of payment of dividends, (v) restrictions on incurrence of additional debt, (vi) limitation of hedges extending beyond the loan maturity date and (vii) requirements for a counterparty’s credit rating. As amended on April 30, 2009, our ratio of Consolidated Funded Debt to Consolidated EBITDA may not exceed 5.00 to 1.00 during 2009, 4.25 to 1.00 during 2010 or 4.00 to 1.00 during 2011 and thereafter.

     On September 15, 2009, we requested and received from our bank lenders a commitment to waive certain provisions of the Revolving Credit Agreement in order to permit the consummation of the Merger Agreement. This commitment to waive was granted subject to Merger Subsidiary acquiring at least a majority of the outstanding Shares and the purchase of Shares tendered pursuant to the Merger Agreement.

     Please see Note 1 - Description of Business — Nature of Operations and Basis of Presentation and Note 13 - Subsequent Events for additional information regarding the Merger Agreement and granting of the waiver.

     We have pledged substantially all of our producing oil and natural gas properties to secure the repayment of our indebtedness under the revolving credit facility. If we breach any of the provisions of the credit agreement, including the financial covenants, and are unable to obtain waivers from our lenders, they would be entitled to declare an event of default, at which point the entire unpaid principal balance of the loans, together with all accrued and unpaid interest, would become immediately due and payable. Because substantially all of our assets are pledged as collateral under the revolving facility, if our lenders declare an event of default, they would be entitled to foreclose on and take possession of our assets.

     In addition to the restrictive covenants contained in the Revolving Credit Agreement, our lenders have the unilateral authority to redetermine the borrowing base at any time they desire to do so. Any such unscheduled redetermination could result in the requirement for us to provide additional collateral or repay any borrowing base deficiency as described above. Although our lenders have not, in the past, initiated an unscheduled borrowing base determination, current economic conditions could cause the lenders to initiate such an unscheduled redetermination.

     As of September 30, 2009 we were in compliance with the covenants in our Revolving Credit Agreement, but only after giving effect to the banks’ waiver on October 21, 2009 of our failure to meet the required ratio of Consolidated Fund Debt to Consolidated EBITDA.

     On November 9, 2009, we entered into a Fourth Amendment to our Revolving Credit Agreement. See Note 13 – Subsequent Events.

     Senior Notes

     At September 30, 2009, the carrying value of our $150.0 million 10¹/4 % senior notes due 2014, or “senior notes”, was $146.3 million and their estimated fair value is approximately $150.8 million based on market trades at or near September 30, 2009. The senior notes mature on August 1, 2014 and bear interest at 10.25%, per annum on the principal amount. Interest is payable semi-annually on February 1

and August 1 of each year to holders of record at the close of business on the preceding January 15 and July 15, respectively, and payments commenced on February 1, 2008. Prior to August 1, 2010, we may redeem up to 35% of the senior notes for a price equal to 110.250% of the original principal amount of the senior notes with the proceeds of certain equity offerings. On or after August 1, 2011 we may redeem all or some of the senior notes at a redemption price that will decrease from 105.125% of the principal amount of the senior notes to 100% of the principal amount on August 1, 2013. In addition, prior to August 1, 2011, we may redeem some or all of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus a make-whole premium, plus any accrued and unpaid interest. Generally, the “make-whole” premium is an amount equal to the greater of (a) 1% of the principal amount of the senior notes being redeemed or (b) the excess of the present value of the redemption price of such notes as of August 1, 2011 plus all required interest payments due through August 1, 2011 (computed at a discount rate equal to a specified U.S. “Treasury Rate” plus 50 basis points), over the principal amount of the senior notes being redeemed. Because we experienced a change of control, and as required by the indenture governing the senior notes, we have commenced an offer to repurchase the senior notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase.

     Simultaneously with the execution of the Merger Agreement and as a further condition to the bank lenders committing to waive certain provisions of the Revolving Credit Agreement as discussed above, Apollo Management VII, L.P. (“Apollo Management”), in its capacity as manager of Apollo Investment Fund VII, L.P., Apollo Overseas Partners VII, L.P., Apollo Overseas Partners (Delaware) VII, L.P., Apollo Overseas Partners (Delaware 892) VII, L.P. and Apollo Investment Fund (PB) VII, L.P. (collectively, the “Apollo Equity Funds”), and the Apollo Equity Funds executed and delivered a commitment letter (the “Equity Commitment Letter”) to Parent, which expressly provides for us to be a third party beneficiary thereto, obligating the Apollo Equity Funds to provide funds to Parent sufficient to permit the Parent and Merger Subsidiary to pay the consideration in the Tender Offer and the Merger, to pay (or cause us to pay) our “Change of Control” repurchase obligations with respect to the senior notes and to pay certain other monetary obligations that may be owed by Parent or Merger Subsidiary pursuant to the Merger Agreement. The funds provided to meet the commitment to repurchase the senior notes were deposited by Parent into an escrow account on October 23, 2009. This commitment and the escrow provisions discussed in Note 13 — Subsequent Events — “Waiver of Certain Provisions in Revolving Credit Agreement” meet the conditions in ASC 470-10-45-14 — Intent and ability to Refinance on a Long Term Basis (Prior literature: FAS 6 — Classification of Short Term Obligations Expected to be Refinanced (as amended) paragraph 11.b) and ASC 855-10-25- Recognized Subsequent Events (Prior authoritative literature: SFAS No. 165, “Subsequent Events”), providing for the senior notes to be classified as non-current. Please see Note 13 — Subsequent Events that describes activity related to the senior notes occurring subsequent to the date of the financial statements.

     The Indenture governing the senior notes restricts our ability to: (i) borrow money; (ii) issue redeemable and preferred stock; (iii) pay distributions or dividends; (iv) make investments; (v) create liens without securing the senior notes; (vi) enter into agreements that restrict dividends from subsidiaries; (vii) sell certain assets or merge with or into other companies; (viii) enter into transactions with affiliates; (ix) guarantee indebtedness; and (x) enter into new lines of business.

     As of September 30, 2009 we were in compliance with the covenants in the Indenture.

     Interest Incurred

     For the nine months ended September 30, 2009 and 2008, the aggregate interest incurred under our revolving credit facility and our senior notes was approximately $19.5 million and $16.2 million, respectively. Deferred financing costs and note discount amortization were approximately $895,000 and $986,000 and capitalized interest was approximately $1.6 million and $67,000 for the nine months ended September 30, 2009 and 2008, respectively.

NOTE 4. OIL AND NATURAL GAS PROPERTIES

     On February 11, 2009, we entered into a farmout agreement with Chesapeake Energy Corporation, or “Chesapeake”, related to our approximate 35% interest in the Barnett Shale gas project. Under the farmout agreement, for all wells drilled on our Barnett Shale leasehold from November 1, 2008 through December 31, 2016, we have agreed to assign to Chesapeake 100% of our leasehold in the Barnett Shale, subject to the following terms:

	•		all wells drilled from November 1, 2008 through December 31, 2009, and all wells drilled during each succeeding calendar year through 2016 will be treated as a separate project or payout period, creating eight separate projects or payout periods;
	•		at the time Chesapeake commences the drilling of a well during one of the payout periods, we will assign to Chesapeake 100% of our leasehold interest within the subject unit or lease, reserving and retaining a 50% reversionary interest that will vest after Chesapeake recovers 150% of its costs for a particular payout period. Until 150% payout has been reached, Chesapeake will fund 100% of our costs for drilling, completing and operating wells during the payout period;
	•		on each project, Chesapeake is entitled to receive all revenues from our reversionary interest until Chesapeake receives revenues totaling 150% of the drilling, completion and operating costs Chesapeake incurs in funding our reversionary interest;
	•		upon reaching the 150% payout level for a given project, 50% of the interest assigned to Chesapeake will revert back to us;
	•		after 150% project payout, we will pay all costs and receive all revenues attributable to our 50% reversionary interest in each project;
	•		for wells drilled after January 1, 2017, we will pay all costs and receive all revenues attributable to our 50% reversionary interest; and
	•		we retained all of our interest in wells commenced prior to November 1, 2008, except for 3 wells commenced in late October 2008. We also retained all of our interest in approximately 90 gross (22.4 net) producing wells and 31 gross (9.49 net) wells in progress.

     As non-operator, we do not control the timing of investment in the Barnett Shale gas project. For this reason, we entered into the farmout agreement. The farmout agreement had minimal effect on our proved reserves and on our financial statements as of September 30, 2009 and December 31, 2008.

     We estimate that our Barnett Shale leasehold acreage operated by Chesapeake and subject to the farmout agreement is approximately 25,600 gross (9,300 net) acres. We anticipate that approximately 61 gross (10.0 net) wells will be drilled and included in the 2009 payout period from November 1, 2008 through December 31, 2009. Payout of each project will depend on drilling and completion costs, timing of completion and pipeline connection to sales, and natural gas prices, among other things.

     We use the full cost method to account for our oil and natural gas producing activities. Under the full cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and natural gas properties. The net book value of oil and natural gas properties, less related deferred income taxes, is compared to the ceiling on a quarterly and annual basis. Any excess of the net book value, less related deferred income taxes, is generally written off as an expense.

     Under the full cost method of accounting, all costs incurred in the acquisition, exploration and

development of oil and natural gas properties, including a portion of our overhead, are capitalized. In the nine months ended September 30, 2009 and 2008, overhead costs capitalized were approximately $952,000 and $1.3 million, respectively.

     We have recognized an impairment of approximately $30.4 million during the nine months ended September 30, 2009. We did not recognize an impairment in the quarter ended September 30, 2009 or in the nine months ended September 30, 2008. We cannot assure you that we will not experience further impairments in the future.

     The following table reflects capitalized costs related to the oil and natural gas properties as of September 30, 2009 and December 31, 2008.

		September 30,				December 31,
		2009				2008
		($ in thousands)
Proved properties		$	754,038			$	741,520
Unproved properties, not subject to depletion			139,063				137,202
			893,101				878,722
Accumulated depletion (1)			(535,663	)			(488,168	)
		$	357,438			$	390,554

NOTE 5. OTHER ASSETS

     Below are the components of other assets as of September 30, 2009 and December 31, 2008.

		September 30,				December 31,
		2009				2008
		($ in thousands)
Revolving credit facility deferred financing costs, net		$	1,712			$	1,306
Senior notes deferred financing costs, net			1,239				1,432
Other			197				828
		$	3,148			$	3,566

NOTE 6. ACCRUED LIABILITIES

     Below are the components of accrued liabilities as of September 30, 2009 and December 31, 2008.

		September 30,				December 31,
		2009				2008
		($ in thousands)
Revenue payable to joint interest and royalty owners		$	6,070			$	8,004
Accrued capital expenditures			950				9,275
Accrued lease operating expense			1,440				2,223
Accrued ad valorem taxes			3,073				150
Professional services			1,750				277
Other			2,309				1,851
		$	15,592			$	21,780

NOTE 7. ASSET RETIREMENT OBLIGATIONS

     The following table summarizes our asset retirement obligation transactions for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		($ in thousands)								($ in thousands)
Beginning asset retirement obligation		$	10,004			$	5,606			$	11,379			$	4,937
Additions related to new properties			12				211				133				917
Revisions in estimated cash flows			411				(58	)			(1,304	)			(267	)
Deletions related to property disposals			(26	)			(9	)			(232	)			(24	)
Accretion expense			184				88				609				275
Ending asset retirement obligation		$	10,585			$	5,838			$	10,585			$	5,838

     Beginning January 1, 2009 we adopted FASB ASC 820-10 (“ASC 820-10”) (Prior authoritative literature SFAS No. 157, Fair Value Measurements), for our nonfinancial assets or liabilities that are recognized or disclosed at fair value on a nonrecurring basis. Because we use fair value measurements on a nonrecurring basis in our asset retirement obligations, the provisions of ASC 820-10 were applied beginning January 1, 2009. Asset retirement obligations are recorded at fair value initially and assessed for revisions periodically thereafter. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs and well life. The inputs are calculated based on historical data as well as current estimated costs. The adoption of FASB ASC 820-10 did not significantly impact our measurement of asset retirement obligation.

     In the third quarter of 2009 we revised our estimate for the planned plugging and abandonment of one well in our Fullerton area. The asset retirement obligation for this well was $754,000 at September 30, 2009. We anticipate plugging this well within the next twelve months. This amount is included in the “Revisions in estimated cash flows” line in the above table.

NOTE 8. DERIVATIVE INSTRUMENTS

     General

     We enter into derivative contracts to provide a measure of stability in the cash flows associated with our oil and natural gas production and interest rate payments and to manage exposure to commodity price volatility and interest rate risk. Our objective is to lock in a range of oil and natural gas prices and to limit variability in our cash interest payments. In addition, our revolving credit facility requires us to maintain derivative financial instruments which limit our exposure to fluctuating commodity prices covering at least 50% of our estimated monthly production of oil and natural gas extending 24 months into the future.

     We have entered into deferred premium put contracts, whereby premium payments are deferred until the settlement dates of the contracts. Accordingly, we have recorded the put premium obligations on our balance sheet as of September 30, 2009. These put contracts contain a financing element, which management believes is other than insignificant, resulting in related cash settlements being classified as cash from financing activities within the Statement of Cash Flows. These settlements are disclosed as net settlements to reflect the amount of the gross settlement less the amount of the original put premium for the specific contracts being settled.

     All derivative contracts are marked to market at each period end and the increases or decreases in fair values recorded to earnings.

     We are exposed to credit risk in the event of nonperformance by the counterparties to these contracts, BNP Paribas and Citibank, N.A. We actively monitor our credit risks related to financial institutions and counterparties including monitoring credit agency ratings, financial position and current news to mitigate this credit risk. We minimize credit risk in derivative instruments by entering into transactions with counterparties that are parties to our credit facility. See “Item 1A. Risk Factors” for additional discussion concerning the risk with counterparties of the derivative instruments.

     Please see Note 13 — Subsequent Events for information about a consent granted by our bank lenders in connection with our derivative transactions.

     Adoption of FASB ASC 815-10-65

     We adopted FASB ASC 815-10-65 (“ASC 815-10-65”) (Prior authoritative literature: SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 13), effective January 1, 2009 for all financial assets and liabilities. ASC 815-10-65 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves transparency of financial reporting. Entities are required to provide enhanced disclosure about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB ASC 815-10 (“ASC 815-10”) (Prior authoritative literature: SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (as amended) and its related interpretations), and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flow.

     The tables below provide the fair values of the derivative instruments and their gains and losses located on the Balance Sheet and Statement of Operations as of September 30, 2009.

Fair Values of Derivative Instruments on the Balance Sheet
Derivatives not Designated as Hedging Instruments under ASC 815-10

		As of
		September 30, 2009				December 31, 2008
		($ in thousands)
Derivative Asset
Gas collars		$	2,162			$	6,611
Oil collars			1,774				13,480
Oil puts			9,956				16,655
Derviative Obligation
Interest rate swaps			(6,883	)			(8,051	)
Gas swaps			(300	)			—
Gas collars			(2,970	)			—
Oil collars			(1,284	)			(89	)
Net derivative asset		$	2,455			$	28,606

The Effect of Derivative Instruments on the Statement of Operations
Derivatives not Designated as Hedging Instruments under ASC 815-10⁽¹⁾

		For the three months ended								For the nine months ended
		September 30, 2009				September 30, 2008				September 30, 2009				September 30, 2008
		($ in thousands)								($ in thousands)
Interest rate swaps		$	(1,192	)		$	(802	)		$	(1,215	)		$	(1,497	)
Gas collars			(1,478	)			15,666				2,004				1,954
Gas swaps			(138	)			—				399				—
Oil swaps			—				6,847				—				(8,039	)
Oil collars			796				40,983				(6,856	)			(22,794	)
Oil puts			677				2,967				(3,188	)			2,542
Total gain (loss) on derivatives		$	(1,335	)		$	65,661			$	(8,856	)		$	(27,834	)

     Adoption of FASB ASC 820-10

     We adopted FASB ASC 820-10 (“ASC 820-10”) (Prior authoritative literature SFAS No. 157, Fair Value Measurements), effective January 1, 2008 for all financial assets and liabilities. Beginning January 1, 2009, we also applied ASC 820-10 to non-financial assets and liabilities. As defined in FASB ASC 820-10-35, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining the fair value of its derivative contracts the Company evaluates its counterparty and third party service provider valuations and adjusts for credit risk when appropriate. We use historical prices for volatility assumptions, future market prices and treasury rates as inputs to value the oil, natural gas and interest rate derivatives. FASB ASC 820-10-50 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires that fair value measurements be classified and disclosed in one of the following categories:

	Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
	Level 2:		Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps and interest rate swaps.
	Level 3:		Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our valuation models are primarily industry-standard models that consider various inputs including: (a) quoted forward prices for commodities,

			(b) time value, (c) volatility factors and (d) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 3 instruments primarily include derivative instruments, such as commodity price collars and puts. These instruments are considered Level 3 because we do not have sufficient corroborating market evidence for volatility to support classifying these assets and liabilities as Level 2.

     As required by FASB ASC 820-10-35-37, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

     The following table summarizes the valuation of our derivative financial assets (liabilities) by FASB ASC 820-10-35-37 valuation levels as of September 30, 2009 (in thousands):

		Quoted Prices in
		Active Markets
		for Identical				Other Observable				Unobservable				Fair Value at
		Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)				September 30, 2009
Interest swaps		$	—			$	(6,883	)		$	—			$	(6,883	)
Gas swaps		$	—			$	(300	)		$	—			$	(300	)
Oil puts		$	—			$	—			$	9,956			$	9,956
Oil & gas collars		$	—			$	—			$	(318	)		$	(318	)
		$	—			$	(7,183	)		$	9,638			$	2,455

     The determination of the fair values above incorporates various factors required under FASB ASC 820-10-35. These factors include the impact of our nonperformance risk and the credit standing of the counterparties involved in our derivative contracts. The risk of nonperformance by our counterparties is mitigated by the fact that such counterparties (or their affiliates) are also bank lenders under our Revolving Credit Agreement and the derivative instruments with these counterparties allow us to setoff amounts owed by the counterparty to it against any obligation we owe the counterparty under our Revolving Credit Agreement.

     The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy (in thousands).

		Three Months Ended								Nine Months Ended
		September 30, 2009								September 30, 2009
		Derivative				Derivative				Derivative				Derivative
		Collars				Puts				Collars				Puts
Beginning balance		$	3,916			$	10,153			$	20,002			$	16,656
Total losses			(682	)			678				(4,852	)			(3,189	)
Settlements(1)			(3,552	)			(875	)			(15,468	)			(3,511	)
Purchases			—				—				—				—
Transfers in and/or out of level 3			—				—				—				—
Balance at end of period		$	(318	)		$	9,956			$	(318	)		$	9,956
Change in unrealized losses included in earnings relating to derivatives still held as of September 30, 2009(2)		$	(4,234	)		$	(197	)		$	(20,320	)		$	(6,700	)

     In addition to the above financial assets and liabilities, we initially classify our additions related to new properties and certain revisions in estimated cash flows associated with our asset retirement obligations as Level 3 measurements. For the three and nine months ended September 30, 2009 the Level 3 fair value measure of our additions related to new properties and certain revisions in estimated cash flows found in our asset retirement obligation was $767,000 and $887,000, respectively.

     During periods of market disruption, including periods of volatile oil and gas prices, rapid credit contraction or illiquidity, it may be difficult to value certain of our derivative instruments if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with observable data that become illiquid due to the current financial environment. In such cases, more derivative instruments may fall to Level 3 and thus require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation thereby resulting in valuations with less certainty. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of derivative instruments as reported within our financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.

Interest Rate Sensitivity

     We have entered into interest rate swap contracts with BNP Paribas and Citibank, N.A. (the “counterparties”) which are intended to have the effect of converting variable rate interest payments required to be made on our Revolving Credit Agreement to fixed interest rates for the periods covered by the swaps. Under terms of these swap contracts, in periods during which the fixed interest rate stated in the swap contract exceeds the variable rate (which is based on a 90-day LIBOR rate) we pay to the counterparties an amount determined by applying this excess fixed rate to the notional amount of the contract. In periods when the variable rate exceeds the fixed rate stated in the swap contracts, the counterparties pay an amount to us determined by applying the excess of the variable rate over the stated fixed rate to the notional amount of the contract. These contracts are accounted for by “mark-to-market” accounting as prescribed in FASB ASC 815-10-35-2. We have historically viewed these contracts as additional protection against future interest rate volatility. As of September 30, 2009, the fair market value of these interest rate swaps was a liability of approximately $6.9 million.

     The table below recaps the terms of these interest rate swaps and the fair market value of these contracts as of September 30, 2009.

		Notional				Weighted Average				Estimated
Period of Time		Amounts				Fixed Interest Rates				Fair Market Value
		($ in millions)								($ in thousands)
October 1, 2009 through December 31, 2009		$	100				4.22	%		$	(994	)
January 1, 2010 through October 31, 2010		$	100				4.71	%			(3,230	)
November 1, 2010 through December 31, 2010		$	50				4.26	%			(284	)
January 1, 2011 through December 31, 2011		$	100				4.67	%			(2,375	)
Total Fair Market Value										$	(6,883	)

Commodity Price Sensitivity

     All of our commodity derivatives are accounted for using “mark-to-market” accounting as prescribed in FASB ASC 815-10-35-2.

     Put Options. Puts are options to sell an asset at a specified price. For any put transaction, the counterparty is required to make a payment to the Company if the reference floating price for any settlement period is less than the put or floor price for such contract.

     In June 2008, we entered into multiple put contracts with BNP Paribas and in October 2008 we entered into a put contract with Citibank, N.A. In lieu of making premium payments for the puts at the time of entering into our put contracts, we deferred payment until the settlement dates of the contracts. Future premium payments will be netted against any payments that the counterparty may owe to us based on the floating price. Due to the deferral of the premium payments, we will pay a total amount of premiums of $4.68 million which is $491,000 greater than if the premiums had been paid at the time of entering into the contracts. The $491,000 difference is recorded as a discount to the put premium obligations and recognized as interest expense over the terms of the contracts using the effective interest method. Through September 30, 2009, we had accrued approximately $223,000 of interest expense and settled premiums of approximately $483,000. Accordingly, the recorded balance of the put premium obligations at September 30, 2009 is approximately $4.0 million.

     A summary of our put positions at September 30, 2009 is as follows:

						Weighted				Estimated
		Barrels of				Average				Fair Market
Period of Time		Oil				Floor				Value
										($ in thousands)
October 1, 2009 through December 31, 2009			27,600			$	100.00			$	802
January 1, 2010 through December 31, 2010			280,100			$	84.36				5,008
January 1, 2011 through December 31, 2011			146,000			$	100.00				4,146
Total Fair Market Value										$	9,956

     Collars. Collars are contracts which combine both a put option or “floor” and a call option or “ceiling”. These contracts may or may not involve payment or receipt of cash at inception, depending on the “ceiling” and “floor” pricing.

     On April 8, 2009, we executed a natural gas costless collar trade for 2,000 MMBtu/day (WAHA) for calendar year 2010 with a floor of $4.70 and a ceiling of $5.65 with a total volume of 730,000 MMBtu. We also executed a second natural gas costless collar trade for 5,000 MMBtu/day (WAHA) for the three months of October, November and December 2009 with a floor of $3.60 and a ceiling of $4.10 with a total volume of 460,000 MMBtu.

     On June 15, 2009, we executed an oil costless collar trade for 700 Bbl/day oil (WTI-NYMEX) for calendar year 2011 with a floor of $70.00 and a ceiling of $94.25 with a total volume of 255,500 Bbl. We also executed a second oil costless collar trade for 1,000 Bbl/day oil (WTI-NYMEX) for calendar 2012 with a floor of $70.00 and a ceiling of $101.50 with a total volume of 366,000 Bbl.

     On September 25, 2009, we executed three trades. A trade for 1,400 MMBtu/day natural gas for calendar 2011 (WAHA) costless collars with a floor of $6.00 and a ceiling of $6.55 with a total volume of 511,000 MMBtu; a trade for 1,200 MMBtu/day natural gas for calendar 2012 (WAHA) costless collars with a floor of $6.00 and a ceiling of $7.00 with a total volume of 439,200 MMBtu; and a trade for 1,100 MMBtu/day natural gas for calendar 2013 (WAHA) costless collars with a floor of $6.00 and a ceiling of $7.10 with a total volume of 401,500 MMBtu.

     A summary of our collar positions at September 30, 2009 is as follows:

						Weighted Average								Estimated
		Barrels of				NYMEX Oil Prices								Fair Market
Period of Time		Oil				Floor				Ceiling				Value
														($ in thousands)
October 1, 2009 through December 31, 2009			193,200			$	65.71			$	82.93			$	276
January 1, 2010 through October 31, 2010			486,400			$	63.44			$	78.26				(1,219	)
January 1, 2011 through December 31, 2011			255,500			$	70.00			$	94.25				579
January 1, 2012 through December 31, 2012			366,000			$	70.00			$	101.50				854
						Weighted Average
		MMBtu of				WAHA Gas Prices
		Natural Gas				Floor				Ceiling
October 1, 2009 through December 31, 2009			1,288,000			$	5.82			$	7.85				1,869
January 1, 2010 through December 31, 2010			4,380,000			$	4.74			$	5.86				(2,422	)
January 1, 2011 through December 31, 2011			511,000			$	6.00			$	6.55				(120	)
January 1, 2012 through December 31, 2012			439,200			$	6.00			$	7.00				(71	)
January 1, 2013 through December 31, 2013			401,500			$	6.00			$	7.10				(64	)
Total Fair Market Value														$	(318	)

     Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified commodity for delivery in the future, at an agreed fixed price. Swap transactions convert a floating or market price into a fixed price. For any particular swap transaction, the counterparty is required to make a payment to the Company if the reference price for any settlement period is less than the swap or fixed price for such contract, and the Company is required to make a payment to the counterparty if the reference price for any settlement period is greater than the swap or fixed price for such contract.

     On September 25, 2009, we executed three trades. A trade for 2,200 MMBtu/day natural gas for calendar 2011 (WAHA) with a price of $6.30 and a total volume of 803,000 MMBtu; a trade for 1,800 MMBtu/day natural gas for calendar 2012 (WAHA) with a price of $6.47 and a total volume 658,800

MMBtu; and a trade for 1,600 MMBtu/day natural gas for calendar 2013 (WAHA) with a price of $6.52 and a total volume 584,000 MMBtu.

										Estimated
		MMBtu of				WAHA				Fair Market
Period of Time		Natural Gas				Swap Price				Value
										($ in thousands)
January 1, 2011 through December 31, 2011			803,000			$	6.30			$	(151	)
January 1, 2012 through December 31, 2012			658,800			$	6.47				(84	)
January 1, 2013 through December 31, 2013			584,000			$	6.52				(65	)
										$	(300	)

NOTE 9. NET LOSS PER COMMON SHARE

     Basic earnings per share (“EPS”) excludes any dilutive effects of options, warrants and convertible securities and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed similar to basic earnings per share. However, diluted earnings per share reflects the assumed conversion of all potentially dilutive securities.

     The following table provides the computation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in thousands, except per share data)
Basic EPS Computation:
Numerator-
Net income (loss)		$	(1,057	)		$	58,677			$	(31,058	)		$	26,732
Denominator-
Weighted average common shares outstanding			41,646				41,566				41,614				41,429
Basic EPS:
Net income (loss) per share		$	(0.03	)		$	1.41			$	(0.75	)		$	0.65
Diluted EPS Computation:
Numerator-
Net income (loss)		$	(1,057	)		$	58,677			$	(31,058	)		$	26,732
Denominator-
Weighted average common shares outstanding			41,646				41,566				41,614				41,429
Employee stock options			—				167				—				300
Warrants			—				—				—				74
Weighted average common shares for diluted earnings per share assuming conversion			41,646				41,733				41,614				41,803
Diluted EPS:
Net income (loss ) per share		$	(0.03	)		$	1.41			$	(0.75	)		$	0.64

     For the three and nine months ended September 30, 2009, the effects of all potentially dilutive securities (including options) were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive.

NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair values and methods and assumptions used to estimate the fair values for each class of financial instruments are as follows. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between two willing parties.

     The carrying amount of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturity of these instruments.

     The carrying amount of long-term debt outstanding under our revolving credit facility as of September 30, 2009 approximated fair value because our borrowing rate on this financial instrument is based on a variable market rate of interest.

     The carrying value of our 10¹/4% senior notes as of September 30, 2009 is approximately $146.3 million and their estimated fair value is approximately $150.8 million. Fair value is estimated based on market trades at or near September 30, 2009.

     We also have derivative instruments which are described in Note 8 — Derivative Instruments.

NOTE 11. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS

     In December 2007, the FASB issued FASB ASC 805-10 (“ASC 805-10”) (Prior authoritative

literature: SFAS No. 141(R). “Business Combinations”). ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non- controlling interest in the acquiree and the goodwill acquired. The ASC also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. ASC 805-10 is effective for acquisitions that occur in an entity’s fiscal year that begins after December 15, 2008, which will be the Company’s fiscal year 2009. The adoption of ASC 805-10 effective January 1, 2009 has had no effect on our financial position or results of operations as we have made no acquisitions during the nine months ended September 30, 2009. However, the impact, if any, will depend on the nature and size of business combinations we consummate thereafter.

     In February 2008, the FASB issued FASB ASC 820-10-55 (“ASC 820-10-55”) (Prior authoritative literature: Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”), which granted a one-year deferral of the effective date as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis within the scope of FASB ASC 820-10-55-23A (e.g. those measured at fair value in a business combination and asset retirement obligations). Beginning January 1, 2009, we applied ASC 820-10-55 to non-financial assets and liabilities. The adoption of ASC 820-10-55 did not have a material impact on our financial position or results of operations.

     In March 2008, the FASB issued FASB ASC 815-10-65 (“ASC 815-10-65”) (Prior authoritative literature: SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. ASC 815-10-65 applies to all derivative instruments within the scope of FASB ASC 815-10 (Prior authoritative literature: SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to ASC 815-10-65 must provide expanded disclosures. ASC 815-10-65 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We applied ASC 815-10-65 beginning January 1, 2009. The adoption of ASC 815-10-65 has not had an impact on our financial position or results of operations.

     In December 2008, the Securities and Exchange Commission published ASC 932-10-S99 a Final Rule, Modernization of Oil and Gas Reporting. The new rule permits the use of new technologies to determine proved reserves if those technologies have been demonstrated to lead to reliable conclusions about reserves volumes. The new requirements also will allow companies to disclose their probable and possible reserves to investors. In addition, the new disclosure requirements require companies to: (a) report the independence and qualifications of its reserves preparer or auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The use of average prices will affect future impairment and depletion calculations.

     The new disclosure requirements are effective for annual reports on Forms 10-K for fiscal years ending on or after December 31, 2009. A company may not apply the new rules to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required. We have not yet determined the impact of this Final Rule, which will vary depending on changes in commodity prices, on our disclosures, financial position or results of operations.

     In April 2009, the FASB issued FASB ASC 825-10-65 (“ASC 825-10-65”) and 270-10-50 (“ASC 270-10-50”) (Prior authoritative literature: FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”)ASC 825-10-65 requires disclosures

about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10-50 requires those disclosures in summarized financial information at interim reporting periods. This ASC is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of these standards has not had an impact on our results of operations or financial position.

     In April 2009, the FASB issued FASB ASC 805-20 (ASC 805-20”) (Prior authoritative literature: FASB Staff Position FAS 141-(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”). ASC 805-20 amends and clarifies prior authoritative literature, FASB Statement No. 141 (revised 2007), Business Combinations to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This ASC is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact, if any, will depend on the nature and terms of business combinations we consummate after the effective date.

     In May 2009, the FASB issued FASB ASC 855-10-05 (“ASC 855-10-05”) (Prior authoritative literature: SFAS No. 165, “Subsequent Events), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this ASC sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim or annual financial periods ending after June 15, 2009, and is applied prospectively. We adopted ASC 855-10-05 beginning June 30, 2009 and the adoption has not had a material impact on our financial position or results of operations. The date through which subsequent events have been evaluated is November 9, 2009, the date on which we filed our Form 10-Q with the Securities and Exchange Commission.

     In June 2009, the FASB issued FASB ASC 105-10-05 (“ASC 105-10-05”) (Prior authoritative literature: SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles— a replacement of FASB Statement No. 162”) which establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of this ASC, all then-existing non-SEC accounting and reporting standards are superseded, except as noted within the FASB ASC 105-10-70. Concurrently, all nongrandfathered, non-SEC accounting literature not included in the Codification is deemed non-authoritative with some exceptions as noted within the literature. The adoption of this pronouncement has not had a material impact on our results of operations or financial position.

     On August 28, 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 provides additional guidance clarifying the measurement of liabilities at fair value. ASU 2009-05 is effective in fourth quarter 2009 for a calendar-year entity. We are currently evaluating the impact of ASU 2009-05 on our financial position, results of operations, cash flows, and disclosures.

NOTE 12. COMMITMENTS AND CONTINGENCIES

     From time to time, we are party to ordinary routine litigation incidental to our business.

     Royalty Claims

     On March 24, 2008, a lawsuit was filed in the 24^th District Court of Jackson County, Texas, against us and twenty-two other defendants in Cause No. 07-6-13069, styled “Tony Kubenka, Carolyn Kubenka, Dennis J. Kallus, David J. Kallus, Mary L. Kallus, Patricia Kallus, Nova Deleon, Janie Figuerova, and Larkin Thedford, Plaintiffs v. Tri-C Resources, Inc., Marie S. Adian, Laura E. Adian, Glenn A. Fiew, Lynn Kramer, Debra Boysen, Carol J. Gleason, Alana Sue Curlee, Connie W. Marthiljohni, Claire E. Adian, Zachary D. Adian, Donald R. Starkweather, Inc., D.A. Webernick, Danette Bundick, Johnny A. Webernick, Donna Gail Glover, Sherry Shulze, William H. Webernick, Jr., TAC Resources, Inc., New Century Exploration, Inc., Allegro Investments, Inc., Parallel Petroleum Corporation and Welper Interests, LP”. The nine plaintiffs in this lawsuit have named us and the other working interest owners, including Tri-C Resources, Inc., the operator, as defendants. The plaintiffs in this lawsuit allege that they are royalty owners under oil and gas leases which are part of a pooled gas unit (the “unit”) located in Jackson County, Texas, and that the defendants, including us, are owners of the leasehold estate under the plaintiffs’ leases and others forming the unit. Plaintiffs also assert that one of the leases (other than plaintiffs’ leases) forming part of the unit has been terminated and, as a result, the defendants have not properly computed the royalties due to plaintiffs from unit production and have failed to properly pay royalties due to them. Plaintiffs have sued for an unspecified amount of damages, including exemplary damages, under theories of breach of contract (including breach of express and implied covenants of their leases) and conversion, and seek an accounting, a declaratory judgment to declare the rights of the parties under the leases, and attorneys’ fees, interest and court costs. If a judgment adverse to the defendants were entered, as a working interest owner in the leases comprising the unit, we believe our liability would be proportionate to the ownership of the other working interest owners in the leases. We have filed an answer denying any liability. Although an initial exchange of discovery has occurred, we cannot predict the ultimate outcome of this matter, but believe we have meritorious defenses and intend to vigorously contest this lawsuit. We have not established a reserve with respect to plaintiffs’ claims.

     Internal Revenue Service

     We received a Notice of Proposed Adjustment from the Internal Revenue Service, or the “Service” in May 2007 advising us of proposed adjustments to federal income tax of approximately $2.0 million for the years 2004 and 2005. Subsequent discussions with the Service placed the issues contested in a development status. In November 2007, the Service issued a letter on the matter giving us 30 days to agree or disagree with a final examination report. The final examination report reflected revisions of the previous proposed adjustments resulting in a reduced $1.1 million of additional income tax and interest charges. The decrease in proposed tax was the result of information supplied by us to the examiner as well as discussions of the applicable tax statutes and regulations. In December 2007, we filed a protest documenting our complete disagreement with the adjustments proposed on the final examination report and requested a conference with the appeals office of the Service. The examination office of the Service filed a response to our protest in February 2008 with the appeals office. In the response the additional tax was further reduced by the examination office to $720,000. In June and November of 2008, our representatives met with the Service’s Appeals Officer to review specific issues related to the alternative minimum tax items in dispute. During these meetings we submitted supplements to our initial protest in further support of our position. On May 27, 2009 we received a written proposal from the Service under which we would not owe any additional taxes or interest for the years 2004 and 2005, but which would require us to reduce our alternative minimum tax net operating loss carryforwards by approximately $18.6 million. We have accepted the Service’s offer and have received final notification from the Service stating that this matter is closed. This reduction has no direct impact on our earnings, but could accelerate

the timing of future tax payments. We currently have no outstanding audit issues with the Service regarding our federal income tax filings.

     Class Action Complaints

     A purported class action complaint was filed on September 25, 2009 in the Chancery Court of Delaware against us and individual members of our board of directors (collectively, the “Defendants”). The action, styled Hollinger v. Parallel Petroleum Corporation, Civil Action No. 4922 (the “Hollinger Complaint”), alleges, among other things, that the members of our board of directors breached their fiduciary duties to our stockholders in connection with the Tender Offer, the Merger and the other transactions contemplated by the Merger Agreement.

     A second purported class action complaint was filed on September 29, 2009 in the District Court of Midland County, Texas against us, individual members of our board of directors, Merger Subsidiary and Parent. The action, styled Passerella vs. Oldham, Cause No. CV-47,099 (the “Passerella Complaint”), alleges, among other things, that the members of our board of directors, aided and abetted by us, Merger Subsidiary and Parent, breached their fiduciary duties to our stockholders in connection with the Tender Offer, the Merger and the other transactions contemplated by the Merger Agreement.

     A third purported class action complaint was filed on September 30, 2009 in the District Court of Harris County, Texas against us, individual members of our board of directors, Merger Subsidiary, Parent and Apollo Management. The action, styled Stratton vs. Parallel Petroleum Corporation (the “Stratton Complaint”), alleges, among other things, that the members of our board of directors, aided and abetted by us, Merger Subsidiary, Parent and Apollo Management, breached their fiduciary duties to our stockholders in connection with the Tender Offer, the Merger and the other transactions contemplated by the Merger Agreement.

     A fourth purported class action complaint was filed on October 1, 2009 in the Chancery Court of Delaware against us, Apollo Global Management LLC and individual members of our board of directors. The action, styled Bernstein vs. Parallel Petroleum Corporation, Civil Action No. 4938 (the “Bernstein Complaint”) alleges, among other things, that the members of our board of directors breached, and Apollo Global Management LLC aided and abetted our board of directors with respect to such breaches of, their fiduciary duties to our stockholders in connection with the Tender Offer, the Merger and the other transactions contemplated by the Merger Agreement.

     A fifth purported class action complaint was filed on October 2, 2009 in the Chancery Court of Delaware against us and individual members of our board of directors, Merger Subsidiary, Parent, Apollo Management and Apollo Global Management, LLC. The action, styled Harris v Parallel Petroleum Corporation, Civil Action No. 4942 (the “Harris Complaint”), alleges, among other things, that the members of our board of directors breached, and that we, Parent, Merger Subsidiary, Apollo Management and Apollo Global Management, LLC knowingly assisted our board of directors with respect to such breaches of, their fiduciary duties to our stockholders in connection with the Tender Offer, the Merger and the other transactions contemplated by the Merger Agreement.

     On October 13, 2009, the defendants and the plaintiffs in the lawsuits set forth above entered into a Memorandum of Understanding (the “Memorandum”) providing for a proposed settlement of each of the following lawsuits: In re Parallel Petroleum Shareholder Litigation, Consolidated Civil Action No. 4922, pending in the Chancery Court of Delaware (which action consolidates three individual suits: Hollinger v. Parallel Petroleum Corporation, Civil Action No. 4922, Bernstein v. Parallel Petroleum Corporation, Civil Action No. 4938, and Harris v. Parallel Petroleum Corporation, Civil Action No. 4942); Passerella v. Oldham, et al., No. CV47099, pending in the District Court of Midland County, Texas, 385th Judicial District; and Stratton v. Parallel Petroleum Corporation, et al., pending in the

District Court of Harris County, Texas, 127th Judicial District. The Memorandum contains no admission of wrongdoing.

     The Memorandum provided, among other things, that: (i) the defendants will agree to reduce the $5.5 million termination fee payable by us to Parent under the Merger Agreement to $4.0 million, plus the payment of certain expenses not to exceed $1.0 million in the aggregate; (ii) we will file an amendment to our solicitation/recommendation statement on Schedule 14D-9 that provides enhanced disclosure in form and substance similar to the disclosure recommendations set forth in an attachment to the Memorandum, which disclosures have been included in an amendment to the solicitation/recommendation statement on Schedule 14D-9 filed by us with the SEC on October 13, 2009; (iii) the plaintiffs will agree to dismiss all claims against the defendants in the lawsuits; (iv) the defendants and the plaintiffs will agree upon and execute a stipulation of settlement (the “Stipulation”), which will replace the Memorandum, and will submit the Stipulation to the appropriate courts for review; (v) the Stipulation will include a general release to the defendants and others of all claims; (vi) the defendants and the plaintiffs will negotiate in good faith regarding an agreed to fee in connection with the lawsuits and the settlement thereof; (vii) the Memorandum and the Stipulation will be conditioned upon class certification and final approval by the appropriate court or courts; and (viii) neither the Memorandum nor any of the terms of the Stipulation will be deemed to constitute an admission of the validity of any claim against the defendants, or the liability of any defendant, and the Memorandum and the Stipulation may not be used in any proceeding for any purpose (other than to enforce the terms set forth therein). In addition, the Memorandum provides that if for any reason the settlement outlined therein is not approved by the appropriate court or courts, is terminated or otherwise does not become effective then: (a) the attempted settlement will have been without prejudice, and none of its terms will be effective or enforceable; (b) the parties to the Memorandum will revert to their litigation positions immediately prior to the execution of the Memorandum; and (c) the facts and terms of the Memorandum will not be referred to or offered into evidence in any trial relating to the lawsuits. As of November 9, 2009, we are unable to determine the range of loss related to this Memorandum. For further information please see Form 8-K filed with the SEC on October 15, 2009.

     Other

     We also are presently a named defendant in one other lawsuit arising out of our operations in the normal course of business, which we believe is not material.

     We are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statues to which we are subject, nor have we been a party to any bankruptcy, receivership, reorganization, adjustment or similar proceedings.

     Effective January 1, 2005, we established a 401(k) Plan and Trust for eligible employees. For the three months ended September 30, 2009 and 2008, we made contributions to the 401(k) Plan and Trust of approximately $81,000 and $79,000, respectively. For the nine months ended September 30, 2009 and 2008, we made contributions to the 401(k) Plan and Trust of approximately $253,000 and $231,000, respectively.

NOTE 13. SUBSEQUENT EVENTS

     The date through which subsequent events have been evaluated is November 9, 2009, the date on which we filed our Form 10-Q with the SEC.

Amendment to Merger Agreement

     On October 13, 2009, we entered into Amendment No. 1 (the “Merger Amendment”) to Agreement and Plan of Merger, as described in Note 1 — Description of Business — Nature of Operations and Basis of Presentation under which the parties to the Merger Amendment agreed to reduce the $5.5 

million termination fee payable by us to Parent in the event of certain termination events under the Merger Agreement to $4.0 million plus the payment of certain expenses not to exceed $1.0 million in the aggregate. In addition, the parties to the Merger Amendment agreed to decrease the period in which we are required to pay the termination fee to Parent if, after the termination of the Merger Agreement, we consummate a merger, acquisition, recapitalization or similar transaction as described in the Merger Agreement. The period was reduced from twelve months to nine months.

Tender Offer

     Pursuant to the Merger Agreement, the Merger Subsidiary commenced the Tender Offer on September 24, 2009 for all the outstanding Shares at a price of $3.15 per Share, net to the seller in cash. The Tender Offer expired at midnight, New York City time, on Thursday, October 22, 2009. Pursuant to the Tender Offer, the Merger Subsidiary purchased 35,244,824 Shares, including approximately 802,359 Shares subject to guaranteed delivery. This amount represents approximately 84.62% of the issued and outstanding Shares as of the initial expiration of the Tender Offer. Pursuant to a subsequent offering period that commenced immediately following the initial expiration of the Tender Offer and that expired at 5:00 p.m., New York City time, on Thursday, October 29, 2009, the Merger Subsidiary acquired an additional 1,146,002 Shares, or approximately 2.76% of the issued and outstanding Shares. Including the Shares acquired during the initial Tender Offer period and the subsequent offering period, Merger Subsidiary owns approximately 87.38% of the issued and outstanding Shares.

10¹/4% Senior Notes Due 2014 Change of Control Offer

     We commenced a change of control offer on October 30, 2009 for any and all of our outstanding $150.0 million principal amount of 10¹/4 % senior notes due 2014. The change of control offer is being made pursuant to our obligations under the Indenture governing the senior notes, which requires us to make an offer to purchase the senior notes following a “Change of Control”. A “Change of Control” occurred on October 23, 2009 as a result of the purchase of more than 50% of the outstanding shares of common stock of Parallel, including the associated preferred stock purchase rights, by Merger Subsidiary and Parent.

     As required by the indenture and the senior notes, the purchase price with respect to each series of senior notes is equal to 101% of the principal amount of such senior notes, plus accrued interest payable. The purchase will occur on December 2, 2009.

     As a result of the Change of Control, the Equity Commitment Letter described in Note 3 - Credit Arrangements and the escrow arrangements described below under Waiver of Certain Provisions in Revolving Credit Agreement in this Note 13, on October 23, 2009, Parent deposited approximately $158.8 million into an escrow account created under a Waiver Escrow Agreement among Parallel, Parent and Citibank, N.A. The escrow agent may be instructed to distribute to Parallel, at the direction of Parallel and Parent, all or a portion of the escrow funds for the purchase of senior notes or payments on the bank debt in exchange for Parent receiving common stock of Parallel.

     On November 9, 2009, we entered into an Amended and Restated Waiver Escrow Agreement (the “Escrow Agreement”) with Parent and Citibank, N.A. in its capacity as Administrative Agent and Escrow Agent.

     At the earliest to occur of either December 2, 2009 or the date on which the Change of Control Offer is terminated prior to December 2, 2009 (“Release Date”) Parent and Parallel can direct the escrow agent to distribute funds to the Administrative Agent out of the two escrow accounts referred to as the “Holdings Escrow Account” and the “Parallel Deposit Account”. In addition, the escrow agent may be instructed to distribute funds to Parent out of the Holdings Escrow Account. The amount that can be distributed to the Administrative Agent is referred to as the “Parallel Revolving Payment Amount” and is an amount (not less than zero) equal to the difference between (a) the sum of (i) the amount outstanding

under the Revolving Credit Agreement at the date of distribution and (ii) the remaining outstanding principal amount of the senior notes, after taking into account the purchase and retirement of any senior notes and (b) $250.0 million. The Parallel Revolving Payment Amount will be applied to the repayment of amounts outstanding under our Revolving Credit Agreement. The amount that may be distributed to Parent, after distribution of the Parallel Revolving Payment Amount, is an amount equal to the lesser of (i) the balance remaining in the Holdings Escrow Account and (ii) $33.8 million.

     The Escrow Agreement terminates on December 31, 2009 or, if earlier, the date on which final disbursement of funds has been made. Upon termination, any funds remaining in the escrow accounts are to be deposited to a segregated account established by us, and withdrawals from the account will be permitted only for the purpose of redeeming and retiring outstanding senior notes until all of the senior notes are fully redeemed and retired. The funds in the escrow accounts and, after termination, held by us have been pledged as collateral to secure our obligations under the Revolving Credit Agreement. We do not expect that any funds will remain in the escrow accounts at the time of termination of the Escrow Agreement.

     Under the terms of the Merger Agreement, Parent has provided us with a limited guarantee in our favor guaranteeing Merger Subsidiary’s payment and performance under the Merger Agreement.

Acceleration of Vesting for Stock Based Compensation

Options and Restricted Stock

     On October 23, 2009 (the “Acceptance Date”), a Change of Control occurred as a result of the Tender Offer and, in accordance with our stock plans, each option (other than the options discussed in the immediately following paragraph, which are defined as “Excepted Options” in the Merger Agreement) that was not fully exercisable and that was outstanding immediately prior to the Acceptance Date, automatically became fully vested and exercisable immediately prior to the Acceptance Date. On the Acceptance Date, each outstanding option (other than the Excepted Options) was canceled and converted into the right to receive an amount in cash, without interest subject to any applicable withholding taxes, equal to (a) the option consideration, which is the excess, if any, of the Offer Price over the per share exercise price of the option immediately prior to the Acceptance Date, multiplied by (b) the aggregate number of Shares into which the option was exercisable immediately prior to the Acceptance Date. If the exercise price of any option (other than the Excepted Options) was equal to or greater than $3.15, it was canceled without any cash payment being made to the holder of the option.

     With respect to the Excepted Options, each Excepted Option that was not fully exercisable and that was outstanding immediately prior to the Acceptance Date automatically became fully vested and exercisable immediately prior to the Acceptance Date. Prior to the Acceptance Date, each holder of an Excepted Option with an exercise price less than the Offer Price entered into an Option Waiver, Cash-out and Release Agreement, under which each such Excepted Option was canceled on the Acceptance Date and converted into the right to receive an amount in cash, without interest, equal to (a) the option consideration, which was the excess of the Offer Price over the per share exercise price of the option immediately prior to the Acceptance Date, multiplied by (b) the aggregate number of Shares into which the Option was exercisable immediately prior to the Acceptance Date. Each holder of Excepted Options with an exercise price in excess of the Offer Price entered into an Option Waiver, Cancellation and Release Agreement, under which the aggregate number of such Excepted Options were canceled on the Acceptance Date and converted into the right to receive a $10.00 cash payment, without interest.

     The Merger Agreement also provides that immediately prior to the Acceptance Date (i) each Restricted Share (as defined in the Merger Agreement) vested in full and (ii) subject to the ultimate vesting of Restricted Shares, the holder had the right to tender (or to direct us to tender on his or her behalf) Restricted Shares held (net of any Shares withheld to satisfy employment and income tax

obligations) into the Tender Offer.

     Total cash payments to holders of all outstanding options totaled approximately $565,720. Such payments were made to the option holders on October 28, 2009. The number of options and restricted shares in which vesting was accelerated was 775,450 and 5,000, respectively, and compensation expense as a result of the accelerated vesting of the options and restricted stock was approximately $2.0 million, which will be included in Results of Operations for the three months ending December 31, 2009.

Non-Officer Employee Severance Plan

     As of the Acceptance Date, Merger Subsidiary held more than 60% of our outstanding Shares. Accordingly, each employee who is not an officer or director became entitled under terms of our Non-Officer Employee Severance Plan (the “Severance Plan Eligible Employees”) to receive an amount in cash, without interest, equal to one year’s base salary. The Severance Plan Eligible Employees received a total of approximately $4.2 million on October 28, 2009.

Consent to Extend Hedge Transactions and Counterparty Ratings Criteria

     On October 22, 2009, we received consent from our bank lenders to enter into Rate Management Transactions (as defined in our Revolving Credit Agreement) on or before November 15, 2009, designed to hedge our estimated crude oil and natural gas production for a term extending up to one year beyond the maturity date of our outstanding loans and with a counterparty not meeting certain ratings criteria, provided that the obligations of the counterparty under the rate management transactions are guaranteed by a person satisfying the ratings criteria with documentation satisfactory to us and our lenders. All of the other restrictions set forth in the Revolving Credit Agreement related to Rate Management Transactions entered into by us remain in effect, including, without limitation, the restriction limiting the percentage of our aggregate estimated crude oil and natural gas production that may be hedged at any time.

Waiver of Certain Provisions in Revolving Credit Agreement

     On October 25, 2009, we received a waiver, previously committed to by our bank lenders on September 15, 2009, of certain provisions of our Revolving Credit Agreement in order to permit the consummation of the Merger Agreement. The waiver was granted subject to the satisfaction of the minimum tender offer condition and the purchase of Shares tendered pursuant to the Merger Agreement and subject to certain other conditions which were met as of October 23, 2009, including the establishment of an escrow account in which Parent deposited approximately $158.8 million for the repurchase of our senior notes as further described under 10 ¹/4% Senior Notes Due 2014 Change of Control Offer in this Note 13.

Board Representation

     As a result of the Change of Control on October 23, 2009, and in accordance with the Merger Agreement, our Board was reconstituted on that date. Mr. Martin B. Oring was a director until his resignation on October 23, 2009 pursuant to the Merger Agreement which allowed the Parent to designate five persons for election to our Board. On the same date, in accordance with our bylaws, the Board voted unanimously to fill the newly created directorships and the vacancy created by the resignation of Mr. Oring by appointing Andrew Africk, Robert Falk, Sam Oh, Aaron Stone and Jordan Zaken as directors, each of whom are appointees of Parent. The increase in the size of the Board and the appointment of the foregoing directors were effective on the Acceptance Date. Information about the directors designated for appointment by Parent has been previously disclosed in the Supplement to Information Statement contained in Amendment No. 2 to the solicitation/recommendation statement on Schedule 14D-9, which amendment was filed by Parallel with the SEC on October 13, 2009.

Transaction Fees

     As of September 30, 2009 we had incurred, and have reflected as general and administrative expense, approximately $1.6 million in transaction fees associated with the Merger. At the completion of the Merger we will incur additional transaction fees from various financial advisors of approximately $4.8 million.

Collars

     On October 23, 2009 we executed a costless collar trade for 2,562 MMBtu/day natural gas for calendar 2013 (NYMEX Henry Hub) with a floor of $6.90 and a ceiling of $7.40 with a total volume of 935,130 MMBtu.

     On October 26, 2009 we executed a costless collar trade for 4,700 MMBtu/day natural gas for calendar 2014 (NYMEX Henry Hub) with a floor of $7.00 and a ceiling of $7.55 with a total volume of 1,715,500 MMBtu.

     On October 26, 2009 we executed a costless collar trade for 889 Bbl/day crude oil for calendar 2013 (WTI, NYMEX) with a floor of $83.00 and a ceiling of $97.60 with a total volume of 324,485 Bbl.

     On October 26, 2009 we executed a costless collar trade for 822 Bbl/day crude oil for calendar 2014 (WTI, NYMEX) with a floor of $85.00 and a ceiling of $99.00 with a total volume of 300,030 Bbl.

Commodity Swaps

     On October 23, 2009 we executed two oil swap trades. A trade for 355 Bbl/day crude oil for calendar 2011 (WTI, NYMEX) with a price of $86.36 per Bbl and a total volume 129,575 Bbl. and a trade for 149 Bbl/day crude oil for calendar 2012 (WTI, NYMEX) with a price of $88.05 per Bbl and a total volume 54,534 BBL.

     On October 23, 2009 we executed two natural gas swap trades and three natural gas basis swap trades. A trade for 3,150 MMBtu/day natural gas for calendar 2011 (NYMEX) with a price of $6.72 per MMBtu and a total volume 1,149,750 MMBtu; a trade for 2,113 MMBtu/day natural gas for calendar 2012 (NYMEX Henry Hub) with a price of $7.00 per MMBtu and a total volume 773,358 MMBtu; a basis swap trade for 6,381 MMBtu/day natural gas for calendar 2011 (NYMEX for WAHA) with a differential price for $0.455 per MMBtu and a total volume 2,329,065 MMBtu; a basis swap trade for 4,225 MMBtu/day natural gas for calendar 2012 (WAHA for NYMEX Henry Hub) with a differential price for $0.49 per MMBtu and a total volume 1,546,350 MMBtu; and a basis swap trade for 2,662 MMBtu/day natural gas for calendar 2013 (WAHA for NYMEX Henry Hub) with a differential price for $0.51 per MMBtu and a total volume 971,630 MMBtu.

Amended Revolving Credit Agreement

     On November 9, 2009, we entered into a Fourth Amendment to our Revolving Credit Agreement (the “Fourth Amendment”) with our bank lenders. The Fourth Amendment adds a covenant providing that we will not allow our Total Consolidated Funded Debt to exceed $250.0 million until all of the senior notes have been paid in full and retired, except that Total Consolidated Funded Debt may exceed $250.0 million for a period of time not to exceed three days solely as a result of any advance being used by us to redeem senior notes so long as such advance is delivered directly to the Paying Agent (as defined in the Indenture) for payment to holders of the senior notes and the senior notes are redeemed pursuant to the Indenture or as approved by Citibank, N.A. As defined in the Fourth Amendment, Total Consolidated Funded Debt means the sum of the amount outstanding under the Revolving Credit Agreement and the outstanding principal amount of our senior notes. This covenant will be reviewed by our bank lenders in connection with each borrowing base determination.

     The Fourth Amendment also adds a new liquidity maintenance covenant which provides that we will not allow our Cash Equivalent Investments (as defined in the Revolving Credit Agreement), plus the amount available for advance under the Revolving Credit Agreement, to be less than $15.0 million.

     We also agreed that all funds used to purchase senior notes will be funds distributed from the escrow accounts, and that we will not use our other cash or Cash Equivalent Investments for the purpose of purchasing senior notes.

     We estimate incurring fees of approximately $696,000 related to the Fourth Amendment. The Fourth Amendment becomes effective at the time of repayment of a portion of our bank borrowings from funds distributed to Citibank, N.A. out of the escrow accounts. For information about the escrow accounts, please see 10¹/₄% Senior Notes Due 2014 Change of Control Offer in this Note 13.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     The following discussion and analysis should be read in conjunction with management’s discussion and analysis contained in our 2008 Annual Report on Form 10-K, as well as the unaudited financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

OVERVIEW

General

     As described under “Note 1 — Description of Business — Nature of Operations and Basis of Presentation”, on September 15, 2009 we entered into the Merger Agreement with PLLL Holdings, LLC., a Delaware limited liability company (the “Parent”), and PLLL Acquisition Co., a wholly owned subsidiary of the Parent (“Merger Subsidiary”), pursuant to which, among other things, a tender offer for all of the issued and outstanding shares of our common stock, par value $0.01 per share, together with the associated preferred stock purchase rights was made by Merger Subsidiary for $3.15 per share payable to the seller in cash, without interest thereon and less any applicable withholding taxes. Please see Note 13 — Subsequent Events for events occurring subsequent to the date of the financial statements and which relate to the Tender Offer and Merger Agreement.

Strategy

     2009 Priorities. Due to the current economic environment, we have identified four areas in which we will concentrate our efforts in 2009. These areas of concentration are dependent on market conditions and some could change as prices and events in 2009 develop. At present, our four top priorities for 2009 are:

	•		maximize liquidity and financial flexibility;
	•		generate “operating cash flow” in excess of our capital investment budget (“CAPEX”);

	•		invest $29.1 million in CAPEX spending; and
	•		focus on operated properties.

     As described in Note 4 — Oil and Natural Gas Properties, we entered into a farmout agreement with Chesapeake Energy Corporation which will allow us to conserve cash and more importantly direct efforts in areas in which we believe have a greater rate of return for the Company. The majority of the remaining planned CAPEX spending for 2009 will be on our operated properties where we can control the timing and pace of this spending. If prices continue to deteriorate, we will be able to defer planned spending until prices increase and/or service costs decrease to support these projects. Under our current budget and with existing prices, we anticipate that all spending will be supported by operating cash flow generated by our expected production and by settlements of our derivative contracts. However, if we

determine that operating cash flow and derivative settlements will not support our spending, we will be able to alter our budget so that we retain our financial and operational flexibility in the existing adverse market environment.

     Conduct Exploitation Activities on Our Existing Assets. We seek to maximize economic return on our existing assets by maximizing production rates and ultimate recovery, while managing operational efficiency to minimize direct lifting costs. Development and production growth activities include infill and extension drilling of new wells, re-completion, pay adds and re-stimulation of existing wells and implementation and management of enhanced oil recovery projects such as waterflood operations. Operational efficiencies and cost reduction measures include optimization of surface facilities, such as fluid handling systems, gas compression or artificial lift installations. Efficiencies are also increased through aggressive monitoring and management of electrical power consumption, injection water quality programs, chemical and corrosion prevention programs and the use of production surveillance equipment and software. In all instances, a proactive approach is taken to achieve the desired result while ensuring minimal environmental impact.

     Use of Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays. We believe the use of horizontal drilling and fracture stimulations has enabled us to develop reserves economically, such as our Barnett Shale and Wolfcamp Carbonate gas projects. We also believe our expertise in utilizing this technology will create additional opportunities in our current projects as well as future opportunities in other resource plays. While we believe we can find oil and natural gas reserves more effectively using this technology, under the current economic environment, our capital resources can be better utilized elsewhere. We will continue to use this technology as natural gas prices and overall market conditions dictate.

     Use of Advanced Technologies and Production Techniques. We believe that 3-D seismic surveys, horizontal drilling, fracture stimulation and other advanced technologies and production techniques are useful tools that help improve normal drilling operations and enhance our production and returns. We believe that our use of these technologies and production techniques in exploring for, developing and exploiting oil and natural gas properties can reduce drilling risks, lower finding costs, provide for more efficient production of oil and natural gas from our properties and increase the probability of locating and producing reserves that might not otherwise be discovered.

     Acquire Long-Lived Properties with Enhancement Opportunities. Our acquisition strategy is focused on leveraging our geographical expertise in our core areas of operation and seeking assets located in and around these areas. We selectively evaluate acquisition opportunities and expect that they will continue to play a role in increasing our reserve base and future drilling inventory. When identifying target assets, we focus primarily on reserve quality and assets in new development plays with upside potential. Through this approach, we have traditionally targeted smaller asset acquisitions which allow us to absorb, enhance and exploit properties without taking on significant integration risk. While we have not adopted any specific quantitative guidelines for the screening of prospective leasehold or producing property acquisitions, desirable attributes related to reserve life include a reserve to production ratio of greater than 15 years and stabilized exponential decline rates of less than 20% per year. We believe these types of properties provide us with a greater certainty in growing production, reserves and shareholder value through time.

     Conduct Exploratory Activities. Although we do not emphasize exploratory drilling, we will selectively undertake exploratory projects that have known geological and reservoir characteristics that are in close proximity to existing wells so data from the existing wells can be correlated with seismic data on or near the prospect being evaluated, and that could have a potentially meaningful impact on our reserves.

     The extent to which we are able to implement and follow through with our business strategy is

influenced by:

	•		the prices we receive for the oil and natural gas we produce;
	•		sources and availability of funds to conduct operations and complete acquisitions;
	•		the results of reprocessing and reinterpreting our 3-D seismic data;
	•		the results of our drilling activities;
	•		the costs of obtaining high quality field services;
	•		our ability to find and consummate acquisition opportunities; and
	•		our ability to negotiate and enter into “work to earn” arrangements, joint ventures or other similar arrangements on terms acceptable to us.

     Significant changes in the prices we receive for the oil and natural gas we produce, or the occurrence of unanticipated events beyond our control, such as the recent and dramatic downturn in the financial markets, can cause us to defer or deviate from our business strategy, including the amounts we have budgeted for our activities. See “-Trends and Outlook” below.

Operating Performance

     Our operating performance is influenced by several factors, the most significant of which are the prices we receive for our oil and natural gas and the quantities of oil and natural gas that we are able to produce. The world price for oil has overall influence on the prices that we receive for our oil production. The prices received for different grades of oil are based upon the world price for oil, which is then adjusted based upon the particular grade. Typically, light oil is sold at a premium, while heavy grades of crude are discounted. Natural gas prices we receive are influenced by:

	•		seasonal demand;
	•		weather;
	•		hurricane conditions in the Gulf of Mexico;
	•		availability of pipeline transportation to end users;
	•		proximity of our wells to major transportation pipeline infrastructures; and

•

to a lesser extent, world oil prices.

     Additional factors influencing our overall operating performance include:

	•		production expenses;
	•		overhead requirements;
	•		costs of capital; and
	•		effects of derivative contracts.

     Our oil and natural gas exploration, development and acquisition activities require substantial and continuing capital expenditures. Historically, the sources of financing to fund our capital expenditures have included:

	•		cash flow from operations;
	•		sales of our equity and debt securities;
	•		bank borrowings; and
	•		industry joint ventures.

     Overall, decreases in the average sales price of crude oil and natural gas is the most significant factor affecting operating performance. Our average price received for crude oil during the three months ended September 30, 2009 (the “Current Quarter”) was $64.49/Bbl versus $115.19/Bbl in the three months ended September 30, 2008 (the “Comparable Quarter”). Our average price received for natural gas in the Current Quarter was $2.90/Mcf versus $8.54/Mcf for the Comparable Quarter. Oil and natural gas sales revenue is down 62% when comparing the Current Quarter to the Comparable Quarter. The reduction in pricing accounts for approximately 67% of this reduction while volume decreases accounted for the remaining 33%. During the same time, operating costs and expenses were down 40%. A substantial portion of this reduction was due to a decrease in our depreciation, depletion and amortization costs. This was a direct result of our impairments which we incurred at year end 2008 and at the end of the prior quarter. For more information regarding prices received and operating results, you should refer to the selected operating data table under “-Results of Operations” on page 36.

     Our average price received for crude oil during the nine months ended September 30, 2009 (the “Current Period”) was $51.81/Bbl versus $109.52/Bbl in the nine months ended September 30, 2008 (the “Comparable Period”). Our average price received for natural gas in the Current Period was $3.12/Mcf versus $8.78/Mcf for the Comparable Period. Oil and natural gas sales revenue was down 62% when comparing the Current Period to the Comparable Period. The reduction in pricing accounts for approximately 83% of this reduction while volume decreases accounted for just 17%. During the same time, operating costs and expenses were down 30%, excluding the impact of the $30.4 million impairment write down we made in the quarter ended March 31, 2009. A substantial portion of this reduction was due to a decrease in our depreciation, depletion and amortization costs. This was a direct result of our impairments which we incurred at year end 2008 and at the end of the prior quarter. For more information regarding prices received and operating results, you should refer to the selected operating data table under “-Results of Operations” on page 36.

     Our oil and natural gas producing activities are accounted for using the full cost method of accounting. Under this accounting method, we capitalize all costs incurred in connection with the acquisition of oil and natural gas properties and the exploration for and development of oil and natural gas reserves. These costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling productive and non-productive wells, and overhead expenses directly related to land and property acquisition and exploration and development activities. Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction in capitalized costs, with no gain or loss recognized unless a disposition involves a material change in the relationship between capitalized costs and reserves, in

which case the gain or loss is recognized. Please see Note 4 — Oil and Natural Gas Properties for a discussion on the impairment calculation.

     Depletion of the capitalized costs of oil and natural gas properties, including estimated future development costs, is provided using the equivalent unit-of-production method based upon estimates of proved oil and natural gas reserves and production, which are converted to a common unit of measure based upon their relative energy content. Unproved oil and natural gas properties are not amortized, but are individually assessed for impairment. The cost of any impaired property is transferred to the balance of oil and natural gas properties being depleted.

Results of Operations

     Our business activities are characterized by frequent, and sometimes significant, changes in our:

	•		reserve base;
	•		sources of production;
	•		product mix (gas versus oil volumes); and
	•		the prices we receive for our oil and natural gas production.

     Year-to-year or other periodic comparisons of the results of our operations can be difficult and may not fully and accurately describe our condition.

     The following table shows selected operating data for each of the three and nine months ended September 30, 2009 and September 30, 2008.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(in thousands, except per unit data)
Production Volumes:
Oil (Bbls)			237				274				737				758
Natural gas (Mcf)			2,036				2,886				6,761				8,338
BOE(1)			576				755				1,864				2,148
BOE per day			6.3				8.2				6.8				7.8
Sales Prices:
Oil (per Bbl)		$	64.49			$	115.19			$	51.81			$	109.52
Natural gas (per Mcf)		$	2.90			$	8.54			$	3.12			$	8.78
BOE price		$	36.76			$	74.45			$	31.80			$	72.73
Operating Revenues:
Oil		$	15,299			$	31,552			$	38,204			$	83,043
Natural gas			5,893				24,649				21,078				73,174
		$	21,192			$	56,201			$	59,282			$	156,217
Operating Expenses:
Lease operating expense		$	5,040			$	7,539			$	18,667			$	21,772
Production taxes			495				2,836				1,829				8,121
General and administrative			4,452				3,125				11,166				8,958
Depreciation, depletion and amortization			5,155				11,551				17,334				31,386
Impairment of oil and natural gas properties			—				—			$	30,426				—
		$	15,142			$	25,051				79,422			$	70,237
Operating income (loss)		$	6,050			$	31,150			$	(20,140	)		$	85,980