Management Comments

Thomas Cooke, Chairman and CEO, commented, “The 2012 first quarter was a quarter of continued progress along with a few long-standing challenges that we believe have now been put behind us. We continued to see excellent results from our recompletion and workover program.

The quarter saw the completion of long-standing infrastructure projects that have historically presented impediments to operation of wells at optimal production rates due to bottlenecking and related issues. While we were frustrated by the long lead times for fabrication of key components to complete those projects, we are pleased that as we exited the quarter we believe that the principal bottlenecking issues are now behind us and we are now in a position to operate existing wells at their optimal production rates and to support anticipated growth in production going forward. Completion of those projects, together with our recompletion and work-over program, fueled production growth over the last days of the quarter and continuing after the quarter, driving growth in our daily production from an average of approximately 2,600 BOEPD for calendar year 2011 to an average of approximately 4,000 BOEPD in our most recent month, April 2012.

We also addressed during the quarter the plugging of five legacy "orphan" wells. We assumed these P&A obligations in the 2008 acquisition of the Harvest Companies and these wells had no further utility for the Company. The respective wells were deep high-pressured wells that presented unique and unusual challenges. As a result of the challenges faced in plugging those wells, we incurred P&A costs above our original estimates resulting in a one-time charge to earnings. With the plugging of those wells, we now have only one remaining deep, high-pressured well requiring plugging once production has ceased.

From an operating income standpoint, the delays in bringing our production up to anticipated levels discussed above, along with the costs associated with P&A of legacy wells and a jump in our DD&A put us in a net loss position for the quarter. The jump in DD&A reflected a combination of depreciation of our substantial investments in infrastructure over the past year plus the growth in our production rates along with investments in our development, recompletion and workover program. Notwithstanding the anomalies during the quarter, we continue to produce strong cash flow, with discretionary cash flow growing from $5.4 million in the 2011 quarter to $5.8 million in the 2012 quarter and EBITDAX growing from $9.3 million in the 2011 quarter to $10.0 million in the 2012 quarter.

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