Permian Basin

The Permian Basin Area is the second of our two core areas and, as of December 31, 2008, accounted for 15% of our proved reserves and 18% of our PV-10 value. We own an interest in 1,604 wells in the Permian Basin, of which we operate 337. Three of our 20 largest properties, in terms of PV-10 value, are located in this area. During the year ended December 31, 2008, our net average daily production in the Permian Basin Area was approximately 18.8 MMcfe per day, or 16% of our total net average daily production. Similar to the Mid-Continent Area, the Permian Basin Area is characterized by stable, long-life, shallow decline reserves.

Tunstill Field Play—Loving and Reeves Counties, Texas. Our Tunstill Field Play covers approximately 19,840 acres. We operate these wells with a working interest of 100%. The Tunstill Field Play represents 13,787 MMcfe of our proved reserves and $28.4 million of our PV-10 value at December 31, 2008. Primary objectives in this play are the Bell Canyon Sands that occur at depths from 3,300 to 5,200 feet and the Cherry Canyon Sands that occur at depths from 4,300 to 5,200 feet. Older wells produce from the shallower Bell Canyon Sands including the Ramsey and Olds, while more recent wells have established production from the deeper Cherry Canyon Sands as well as the shallower sands. During 2007, we drilled eight wells in this play. We drilled 16 wells in 2008 and plan to drill two wells in 2009.

Haley Area Play—Loving County, Texas. The Haley Area—Bone Springs, Atoka, Strawn and Morrow play encompasses 3,840 gross acres. We own interests in and operate 11 producing wells in this play. The Haley Area represents 28,329 MMcfe of our proved reserves and $43.7 million of our PV-10 value at December 31, 2008. Production has been established from four main intervals: (1) the Bone Springs at a depth of approximately 10,100 to 11,000 feet; (2) the Strawn at a depth of approximately 15,500 feet; (3) the Atoka at a depth of approximately 16,000 feet; and (4) the Morrow at a depth of approximately 17,700 feet. Two of the existing wells are completed in the Atoka, two are completed in the Strawn, four wells are completed in the Morrow and three are completed in the Bone Springs. Recent activity in the area, on all four sides of our acreage, has established significant producing wells from the Atoka/Strawn/Morrow commingled interval with some initial potentials of 20 to 30 MMcfe per day. We recently drilled the Bowdle 47 No. 2 to test the Morrow and Atoka intervals. This well began selling gas in late November 2008, and is currently producing at approximately 15.5 MMcfe per day gross and 11.2 MMcfe net to our interests. We are currently pipeline limited and pipeline construction is underway that should allow the Bowdle 47 No. 2 to produce at even higher rates. We expect to drill an offset to the Bowdle 47 No. 2 well in the fourth quarter of 2009. We also drilled the F.D. Russell #2 well which encountered several Atoka sands and came on-line in April 2008. This well is currently producing at approximately two MMcf per day.