Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No T
The
Issuer's revenues for the year ended December 31, 2007 were
$1,827,664.
The
aggregate market value of Common Stock held by non-affiliates of the registrant
at March 14, 2008, based upon the last reported sales prices on the OTCBB, was
$18,527,250.
As of
March 14, 2008, there were approximately 41,239,738 shares of Common Stock
outstanding.
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PART
I
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Page
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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PART
II
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Item
5.
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Item
6.
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Item
7.
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Item
8.
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Item
8A.
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Item
8B.
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PART
III
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Item
9.
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Item
10.
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Item
11.
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Item
12.
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Item
13.
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Item
14.
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PART
I
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BUSINESS
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Petrosearch
Energy Corporation (the “Company”), a Nevada corporation formed in November
2004, is an independent crude oil and natural gas exploration and production
company. We are the successor of Petrosearch Corporation, a Texas
corporation formed in August 2003. (All references to capitalization
and business operations herein apply to our current capitalization and operating
history, including our predecessor, Petrosearch Texas.) We are a
resource based energy company with operations focused in two core areas of the
lower 48 states of the United States with existing production in North Dakota,
Texas and Oklahoma. A majority of our effort over the next 12
months will focus on growth through the drill bit in our two Core
Areas:
|
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§
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The
Barnett Shale project through our participation in DDJET Limited LLP;
and
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§
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The
Texas Panhandle water flood which we
operate.
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Our goal
is to develop additional production and reserves from our existing resource
base.
We are
the successor to the business of Petrosearch Corporation, a Texas corporation
that was formed in August 2003. In November 2004, shareholders of
Petrosearch Corporation approved a 6.5-to-1 reverse stock split which took
effect immediately prior to its merger with the Company on December 30,
2004. The effect of the merger, among other things, was to re-domicile to
Nevada. Upon the completion of the merger, shareholders of Petrosearch
Corporation were issued shares of our common and preferred stock representing
100% of the then issued and outstanding common and preferred
shares.
Our
common shares have been publicly traded on the OTC Bulletin Board under the
symbol “PTSG” since November, 2005. Our principal offices are
located at 675 Bering Drive, Houston, Texas 77057, and our telephone number is
713-961-9337. Our website is www.petrosearch.com.
Business
Plan
We are a
resource based energy company with operations focused in two core areas of the
lower 48 states of the United States. Our strategic goal is to build intrinsic
shareholder value through focused operations in our two core property areas
while maintaining a low cost structure at every level of our
Company. We intend to bring additional production and revenues from
our existing high quality resource base. We also continue to identify
and evaluate other potential opportunities that would complement our current
business plan and create economic value.
Over the
past two years, we have assembled an inventory of high quality drilling
opportunities in our core focus areas. We have a budget commitment of
approximately $11-12 million for lease acquisition and drilling in our Barnett
Shale partnership over the next year; and we have 23 producing locations for
development on our Texas panhandle waterflood. In the Barnett Shale
project we have accumulated a significant leasehold position inside our 2
million acre, 8-county Contract Area and a multi-rig drilling program is planned
for the area over the next several years. We have embarked on a program to
exploit this inventory for the benefit of our shareholders.
As of
December 31, 2007 we have $55,485,780 of pre-tax PV-10 for proved reserves
associated with our properties. We are also focused on maintaining a
low cost structure throughout our business by maintaining tight control on our
corporate overheads and operating costs in our properties.
Employees
As of
December 31, 2007, we had five full-time employees and one part time employee,
of which three are in executive positions. None of our employees are
represented by a union and we consider our employee relations to be
good.
|
PROPERTIES
|
CORE
PROPERTIES:
Barnett Shale Project -- Our
Barnett Shale Project is part of the
Barnett Shale natural gas play in the Fort Worth Basin, which is arguably one of
the most exciting plays to emerge in the lower 48 states in the past decade. In
December 2006, through our wholly owned subsidiary, Barnett Petrosearch LLC, we
joined in the formation of a partnership, DDJET Limited LLP (“Partnership”), for
the development of the integrated venture. We own a 5.54% interest in the
Partnership along with partners Metroplex Barnett Shale LLC (a wholly owned
subsidiary of Exxon Mobil Corporation), which directs operations, and Cinco
County Barnett Shale LLC (a privately held Dallas-based company).
The
Partnership’s assets include all leases acquired to-date within an 8-county
contract area, comprising approximately 2 million acres that was established
under a previous agreement among affiliates of the three partners. Partnership
assets also include associated facilities that include nearly 100 miles of
pipeline and an option on a separate pipeline right-of-way. Approximately 35
miles of gas pipeline facilities have been completed and are operational. We
believe our ownership of these pipeline assets is a strategic advantage in this
urban area. A leasing program within the 8-county contract area and a
multi-rig drilling program is planned for 2008 and beyond.
As of
March 14, 2008, 12 Partnership wells (seven in Ellis County and five in Tarrant
County) have been completed and are selling gas through the Partnership-owned
pipeline. The cumulative production rate of these 12 completed wells continues
to meet our expectations. An additional two wells, in Tarrant County,
have been drilled and awaiting completion; and one well, also in Tarrant County
is being drilled. As of December 31, 2007 our independent reserve
engineers, Cawley, Gillespie and Associates, Inc. estimated our net share of
proved natural gas reserves at 1.9 Bcfe.
On
February 29, 2008 we announced that we executed an authorization for the general
partner of the Partnership to immediately commence a sales marketing program to
interested potential purchasing parties in order to fully assess the current
market value of the Partnership. We have no obligation to sell our
Partnership interest and retain all of our rights under the Partnership
agreement in the event of a proposed sale by the partners in which the Company
chooses not to participate.
Our Board
of Directors has retained Friedman, Billings, Ramsey & Co., Inc. (“FBR”) to
advise them in connection with a review of strategic alternatives that may be
available to the Company in connection with the possible Partnership
divestiture. The marketing of the Partnership interests presents us with various
options which include: 1) selling our interest in the Partnership at an
acceptable price; 2) utilizing certain preferential rights afforded to us under
the Partnership Agreement to acquire all or a part of the non-Company interests
which the Company could pursue by venturing with a strategic industry or
financial partner; or 3) retaining our current position in the Partnership with
new and/or existing partners. To date, the Company and FBR have held
confidential discussions with a limited number of potential strategic and
financial partners and expect to continue the investigation of available options
as the Partnership sales process moves forward.
North Texas/Panhandle Water Flood
Project - In November 2005, we acquired a 100% working interest in 1,755
acres in the Quinduno Field in Roberts County, Texas, in the Anadarko Basin. The
project is focused on infill drilling and the implementation of a water flood on
the property. Our leases at Quinduno have a large established resource base of
over 23 million barrels of original oil in place. Since its discovery
in 1953, approximately 5.1 million barrels have been produced using primary
production.
One
infill well has been drilled to date. We have an ongoing program to enter each
of the 19 old wells that have not been plugged. So far, we have entered seven of
these older wells to determine their mechanical status and establish potential
productivity. Two of these wells have been equipped and are now capable of
producing. We have prepared a detailed study and development plan for the field.
As of December 31, 2007, our independent engineers, Ryder Scott, estimated our
net share of proved oil reserves extractable by water flood at 1.5 million
barrels of oil equivalent. Slightly deeper than the water flood zone,
the Moore County Limestone formation has undrilled exploration potential that
may be tested in a future well.
To
provide adequate water for injection, in November 2006 we executed a water
supply agreement with a landowner in the leasehold, which allows us to draw
fresh water from the aquifer underlying the landowner’s property. In that same
month, we received approval from the Panhandle Groundwater Authority District
(“PGAD”) to produce up to 5,000 barrels per day from the aquifer for use in the
flood. We received the approval from the PGAD over the protest filed
with the PGAD by the Canadian River Municipal Water Authority (“CRMWA”)
attempting to preserve the freshwater for local municipal use only in the area
in which we own the rights to the fresh water. We also applied to the
Texas Railroad Commission to amend a previously granted saltwater injection
permit to include fresh water injection. On January 5, 2007 we received a letter
from the Texas Railroad Commission (“TRRC”) informing us of a protest by CRMWA
contesting our application for fresh water injection in the Quinduno Field water
flood. However, as of November 7, 2007, CRMWA has withdrawn
their protest and request for hearing as part of an agreement with CRMWA that
addresses their concerns with our use of fresh water for enhanced oil
recovery.
In
January 2008 we signed an agreement with Complete Production Services Inc.
(“CPS”), an international oilfield service company which provides that CPS, at
its sole expense, will design and construct a water treatment facility no later
than 90 days from the effective date of the agreement that will be capable of
treating all of our production water up to a maximum of 10,000 bbls per day and
likewise treat and provide to the Company a minimum of 5,000 bbls per day
of production water from third party sources. We, in turn,
have committed to be capable of injecting not less than 2,000 bbls of treated
water per day derived from third party production water within 30 days after the
facility is opened, and have further committed to be capable of injecting not
less than 5,000 bbls of treated water per day derived from third party
production water within 180 days after the facility opens, in addition to
re-injecting our own treated production water from the oil and gas lease it
operates. We will be required to pay a scaled management fee to CPS
commencing on the date the facility opens on the basis of the volume of treated
and re-injected water derived from our production. We are currently
applying to regulatory agencies to add more wells to the existing flood permit,
as required under the agreement, to ensure our ability to inject the volumes
that CPS will make available. We do not anticipate any difficulty
with obtaining the approval.
At present we are also in negotiations
with several potential industry venture partners to allow for the commencement
of the flood to begin as soon as possible.
SW Garwood, Colorado County, Texas –
The Wilcox Trend, SW Garwood
field has had three wells drilled with one of these in the process of being
completed. Two additional locations are on current
leases. The initial well on this prospect, the Pintail #1,
completed in the Upper Wilcox in December 2004, paid out in April of
2006. As of payout, we began participating in the production from the
well with a 16% working interest. As of March 14, 2008 the
well was not producing as it was in the process of being worked
over.
The
second well, the Pintail Flats #1, was completed and fracture stimulated in May,
2005 from 15,950 feet to 16,010 feet in the Lower Wilcox. In July
2006 we re-completed and fracture stimulated an up-hole zone at 15,135 feet. The
well flowed back stimulation fluids with a 2000 Mcfpd gas rate into the sales
line as of August 3, 2006. As of March 14, 2008 the well was producing
approximately 70 Mcfpd. We have a 16% working interest in the
well after payout. The well has four additional potentially productive zones in
the Lower Wilcox and five additional potentially productive zones in the Upper
Wilcox.
A third
well, the Kallina 46 #1, began drilling in June, 2006 and reached its targeted
depth of 16,230 feet on August 6, 2006. We have attempted production from
several sands in the lower and middle Wilcox formations without achieving
commercial rates. Data is currently being reviewed in consideration
of possibly plugging and abandoning the well. We have an 87.5%
working interest in the Kallina lease and the Kallina 46 #1 well before payout
and a 75.5% interest after payout.
In order
to finance the Kallina #46-1 well and future wells on the Kallina lease, we
signed a Securities Purchase Agreement and Secured Term Note with Laurus Master
Fund, Ltd. (“Laurus”) for Laurus to provide financing for the
drilling of the Kallina 46 #1 well and payment of the future completion costs
for the Kallina 46 #1 well which is in process of being
completed. We formed a subsidiary, Garwood Petrosearch Inc.,
(“Garwood”) to hold our interest in the Kallina Lease and the Kallina 46 #1
well. Also, as a part of the financing arrangement,
Garwood issued Laurus a Warrant to acquire, upon payout of the Note
indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise
of the Warrant, Garwood would be owned 55% by us and 45% by Laurus and the sole
asset is the Kallina lease.
In the SW
Garwood Project, in addition to the working interest in the wells noted above,
we currently own a 16% after payout working interest in 960 acres of undeveloped
leases; and an 87.5% before payout and 75.5% after payout working interest in
438 acres.
OTHER
PROJECT AREAS:
Gruman Prospect, Stark County, North
Dakota - On March 28, 2006, we spudded the Gruman 18-3 well intended to
be either an increased density well if it proved to be up dip of the Gruman 18-1
producing well or a water injection well if it was down dip. The well reached
total depth of 9,890 feet on April 14, 2006, and was completed as an injection
well. In October 2006, we undertook certain remedial work on the
Gruman 18-1 which has improved the production on the well. The well is currently
producing approximately 60 bopd and 10 Mcfpd. We are currently
assessing the positive impact on the long term production.
On
February 1, 2007, we began injecting produced water into the Gruman 18-3 well.
The result has been to reduce the cost of operating the Gruman 18-1 by
eliminating the need to truck produced water to a disposal facility. We are
considering supplementing this injection with water from the Dakota for pressure
maintenance in the mound. We have established that the Gruman 18-3 is in
pressure communication with the Gruman 18-1. Further testing or stimulation may
be necessary to achieve the desired future injection rates. Proved developed
reserves in the prospect to our share of the well as of December 31, 2007, were
215 Mbo and 68 MMcf of natural gas, as estimated by a third party engineering
firm, McCartney Engineering, LLC.
Mississippi Tuscaloosa Prospects --
We have identified five Tuscaloosa oil prospects in the Mississippi
Inland Salt Basin, in Yazoo County, comprising a maximum of 2,295 acres and up
to 18 potential drilling locations. We are in discussions with a
potential industry partner to co-develop these prospects with
us. Once a joint venture is established, we plan to initially
drill 8 locations, ranging from 6,150 feet to 7,500 feet in depth. Approximately
55% of the entire prospect acreage has been leased. We currently own 100% of the
prospect; however, we are in the final stages of negotiating a farm out
agreement with an industry partner.
Oil
and Natural Gas Reserves
Our
estimate of proved reserves is based on the quantities of oil and gas which
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretation, and
judgment. For example, we must estimate the amount and timing of future
operations, development activities and costs, and work-over costs, all of which
may in fact vary considerably from actual results. In addition, as prices and
costs change from year to year, the estimate of proved reserves also
changes. Any significant variance in these assumptions could
materially affect the estimated quantity and value of our reserves.
Despite
the inherent imprecision in these engineering estimates, our reserves are used
throughout our financial statements. For example, since we use the
unit-of-production method to amortize our oil and gas properties, the quantity
of reserves could significantly impact our depreciation, depletion and
amortization expense and accretion expense. Our oil and gas properties are also
subject to a "ceiling" limitation based in part on the quantity of our proved
reserves. Finally, these reserves are the basis for our supplemental oil and gas
disclosures. For the vast majority of our reserves, we engage
independent petroleum engineering firms to prepare our estimates of proved
hydrocarbon liquid and gas reserves. These reserve estimates have not
previously been filed with any other Federal authority or agency.
The
following table sets forth summary information with respect to our proved
reserves as of December 31, 2007, as estimated by compiling reserve information,
which was prepared by the engineering firms of Ryder Scott Company, Cawley,
Gillespie and Associates Inc., McCartney Engineering, LLC and internally
generated engineering estimates (internal estimates make up less
than 1% of our proved reserve estimates).
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Net Reserves
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Pre-Tax Present
Value of Future
Net Revenues
|
|||||||||||||||
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Category
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Oil (Bbls)
|
Gas (Mcf)
|
BOE(1)
|
|||||||||||||
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December 31, 2007
|
||||||||||||||||
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Proved Developed
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257,600 | 993,743 | 423,224 | $ | 13,353,622 | |||||||||||
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Proved Undeveloped
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1,454,664 | 1,689,500 | 1,736,247 | $ | 42,132,158 | |||||||||||
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Total Proved
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1,712,264 | 2,683,243 | 2,159,471 | $ | 55,485,780 | |||||||||||
(1) Estimated
using a conversion ratio of 1.0 Bbl/6.0 Mcf (thousand cubic feet).
Total
PV-10 value increased to $55,485,780 as of December 31, 2007 from
$29,424,306 as of December 31, 2006. The factors that
caused the significant increase in the PV-10 value and the increase in the
reserve quantities from 2007 to 2006 were related to i) the significant increase
in the price of oil as of the end of 2007 as opposed to the end of 2006; and ii)
the addition of our Barnett Shale reserves which did not exist in
2006. These factors were partly offset by a decrease in our Garwood
Field reserves due to the Kallina 46 #1 not being a commercial
well.
We note
that reserve and cash flow estimates utilize experience and judgment as well as
actual data, but actual results are often different than the
estimate. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil, condensate and natural gas that cannot
be measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. The quantities of oil and natural gas that are
ultimately recovered, production and operating costs, the amount and timing of
future development expenditures and future oil and natural gas sales prices may
differ from those assumed in these estimates. Therefore, the pre-tax 10% Present
Value of Future Net Revenues amounts shown above should not be construed as the
current market value of the oil and natural gas reserves attributable to our
properties.
In
accordance with the guidelines of the Securities and Exchange Commission, the
engineers’ estimates of future net revenues from our properties and the pre-tax
10% Present Value of Future Net Revenues thereof are made using oil and natural
gas sales prices in effect as of the effective dates of such estimates and are
held constant throughout the life of the properties, except where such
guidelines permit alternate treatment, including the use of fixed and
determinable contractual price escalations.
Productive
Wells
The
following table sets forth the total number of our active well bores and working
interests (WI) that we maintain in each well as of March 14, 2008.
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No. of
Wells
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WI
(Oil)
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WI
(Gas)
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Gruman 18-1
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% | % | |||||||||
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Gordon 1-18
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% | N/A | |||||||||
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Quinduno(1)
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% | % | |||||||||
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Barnett Shale(3)
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5.54 | % | 5.54 | % | |||||||
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Pintail #1
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% | % | |||||||||
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REP Pintail Flats(2)
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% | % | |||||||||
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Corbett N. 13 #1
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% | % | |||||||||
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Total Productive Wells
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(1)
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Project
in which the Company’s working interest reduces to 90% (as described
herein– North Texas/Panhandle Water Flood Project
Section)
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(2)
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Well
in SW Garwood Prospect, Colorado County, Texas, in which we have a
reversionary back-in interest after
payout
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(3)
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Ownership
is through a partnership interest in DDJET Limited
LLP
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Acreage
The
following table summarizes our gross and net developed and undeveloped natural
gas and crude oil wells and acreage under lease as of March 14,
2008:
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Wells
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Acreage
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|||||||||||||||||
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State
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Gross
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Net
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Gross
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Net
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||||||||||||||
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Developed acreage:
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