The following review of operations for the three and nine months ended September 30, 2007 and 2006 should be read in conjunction with our condensed consolidated financial statements and the notes thereto included in this Form 10-Q and with the consolidated financial statements, notes and management's discussion and analysis included in our Form 10-K, as amended, for the year ended December 31, 2006.

Overview

We are an independent oil and natural gas company engaged in the acquisition, development, production and exploration of oil and natural gas properties located onshore in North America. Our properties are concentrated in East Texas/North Louisiana, onshore Gulf Coast, and in the Permian, Anadarko and Arkoma basins. We have increased our proved reserves and production through acquisitions and the exploitation of acquired properties. In 2006 we acquired approximately 537 billion cubic feet of natural gas equivalent (Bcfe) of proved reserves for approximately $2.2 billion in conjunction with our acquisitions in North Louisiana and our merger with KCS Energy, Inc. (KCS). In addition, we sold an estimated 80 Bcfe of proved reserves for approximately $200 million.

In June 2007, we announced our intention to form a publicly-traded master limited partnership, HK Energy Partners LP, or the MLP, which would initially acquire certain of our oil and natural gas properties located in West Texas, New Mexico and Oklahoma. On October 30, 2007, we filed a Form S-1 with the Securities and Exchange Commission to form this MLP. We anticipate that the MLP will offer approximately $150 million to $225 million of partnership units to the public during the first quarter of 2008, subject to regulatory processes and market conditions. At the closing of the initial public offering, We will be the general partner of the MLP and hold a majority ownership in the units of the MLP. We will continue to operate and own a working interest in certain of the assets that will form the MLP. This Report on Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities will only be made in accordance with the registration requirements of the Securities Act of 1933 or an exemption therefrom.

On October 15, 2007, Petrohawk Energy Corporation along with certain of our wholly-owned subsidiaries, entered into a definitive agreement with Milagro Development I, LP ("Milagro"), relating to the sale to Milagro of oil and natural gas properties and related assets comprising our Gulf Coast division for $825 million, subject to customary purchase price adjustments. The purchase price consists of $700 million in cash and a $125 million note. The note will mature five years and ninety-one days from the closing date and will bear interest at 12% per annum payable in kind at Milagro's option. The note will be a senior unsecured obligation of Milagro. Milagro may redeem the note at any time prior to one year after Closing for $100 million plus accrued and unpaid interest. If the redemption occurs prior to 150 days after the closing date, accrued interest will be waived. The transaction is expected to close in the fourth quarter of 2007. The economic effective date for the sale is July 1, 2007.

In the first nine months of 2007, we produced 88.5 Bcfe compared to production of 50.6 Bcfe for the comparable period of the prior year. Natural gas production was 75.2 billion cubic feet (Bcf) and oil production was 2,221 thousand barrels of oil (Mbbls) for the first nine months of 2007. Natural gas equivalent production increased 37.9 Bcfe from the same period in 2006. This increase was primarily attributable to the completion of our merger with KCS in July 2006, the completion of certain acquisitions in North Louisiana, which we refer to collectively as the North Louisiana Acquisitions, in January of 2006, as well as our continued drilling success. We drilled 268 (87 during the third quarter) gross wells during the first nine months of 2007, 258 (85 during the third quarter) of which were successful for a success rate of 96% (98% during the third quarter). We reported oil and gas revenues for the nine months ended September 30, 2007 of $656.1 million. This represents an increase of $270.2 million as compared to the prior year.

Our financial results depend upon many factors, particularly the price of oil and natural gas and our ability to market our production. Commodity prices are affected by changes in market demands, which are impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future oil and natural gas prices, and therefore, we cannot determine the effect increases or decreases in future prices will have on our capital program, production volumes and future revenues. Finding and developing oil and natural gas reserves at economical costs are also critical to our long-term success.

Capital Resources and Liquidity

Our sources of cash for the nine months ended September 30, 2007 and 2006 were from operating and financing activities. Proceeds from the issuance of long-term debt and cash received from operations were offset by cash used in investing activities to fund our drilling program and acquisition activities, net of any divestiture activities. Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Prices for oil and natural gas have historically been subject to seasonal influences characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. Working capital was substantially influenced by these variables. Fluctuation in cash flow may result in an increase or decrease in our capital and exploration expenditures. See "Results of Operations" below for a review of the impact of prices and volumes on sales. The formation of the MLP and our pending Gulf Coast division sale, when completed, will also have impact on our cash flows, capital resources and liquidity.

Net increase (decrease) in cash is summarized as follows:

                                                  Nine Months Ended September 30,
                                                    2007                   2006
                                                          (In thousands)
Cash flows provided by operating activities   $        452,988       $        182,324
Cash flows used in investing activities               (734,233 )             (925,578 )
Cash flows provided by financing activities            285,453                736,627

Net increase (decrease) in cash               $          4,208       $         (6,627 )

Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 2007 and 2006 were $453.0 million and $182.3 million, respectively. Net cash flows provided by operating activities increased in 2007 primarily due to our 74.9% increase in production volumes as a result of our recent acquisition activities as well as our continued drilling success. Also contributing to this increase was our continued success in reducing our operating costs on a per unit basis. These reductions in operating costs were partially offset by a 2.8% decrease in our realized natural gas equivalent price compared to the same period in the prior year. We are unable to predict future production levels or future commodity prices. As a result, we cannot provide any assurance about future levels of net cash provided by operating activities. We expect that our pending Gulf Coast division sale, when completed, will reduce our production levels in future periods.

Investing Activities. The primary driver of cash used in investing activities is capital spending, inclusive of acquisitions and net of dispositions. Cash used in investing activities was $734.2 million and $925.6 million for the nine months ended September 30, 2007 and 2006, respectively.

During the first nine months of 2007, we spent $566.8 million on capital expenditures in conjunction with our drilling program. We participated in the drilling of 268 wells in 2007. In 2006, we spent $222.7 million on capital expenditures in conjunction with our participation in the drilling of 235 wells.

During the third quarter of 2007, we closed our acquisition of One Tec, L.L.C. with properties in Arkansas, Indiana and Texas for $39.9 million, net of $2.1 million cash acquired.

During the first nine months of 2007, we spent $133.1 million primarily to acquire additional interests in the Fayetteville Shale in Arkansas, in the New Albany Shale in Indiana and in both the Elm Grove and Terryville fields in Louisiana. Our program to acquire additional interests and acreage in these key fields is ongoing.

On April 21, 2006, we announced that we entered into definitive agreement to merge with KCS and this transaction was consummated on July 12, 2006. Total consideration for the shares of KCS common stock was comprised of approximately $1.1 billion of our common stock, approximately $450 million of cash and the assumption of $275 million of KCS debt. In addition, all outstanding options to purchase KCS common stock were converted into options to purchase our common stock.

During the first quarter of 2006, we completed the acquisition of Winwell for $208 million in cash after closing adjustments, as well as the acquisition of certain oil and gas properties for $86 million in cash after closing adjustments.

We closed the previously announced $52.5 million divestment of substantially all of our properties in the Gulf of Mexico on March 21, 2006. The net proceeds received in this transaction were used to pay down a portion of our debt facilities.

Our capital budget for the remainder of 2007 and 2008 is expected to be funded from cash flows from operations and additional borrowings under our senior revolving credit facility. We establish the budget for these amounts based on our current estimate of future commodity prices. Due to the volatility of commodity prices, our budget may be periodically adjusted.

Financing Activities. Net cash flows provided by financing activities were $285.5 million and $736.6 million for the nine months ended September 30, 2007 and 2006, respectively. Cash flows provided by financing activities in 2007 were the result of increased borrowings, primarily to fund our drilling and acquisition activities.

In connection with the North Louisiana Acquisitions, on February 1, 2006, we issued and sold 13 million shares of our common stock for $14.50 per share, for an aggregate offering amount of approximately $188.5 million. Additionally, we repurchased approximately 3.3 million shares of common stock for $46.2 million from EnCap Investments, L.P. and certain of its affiliates. We incurred a total of $10.7 million of offering costs during the nine months ended September 30, 2006.

We strive to maintain excess availability under our debt facilities. Excess cash flow and non-core asset sales are used to repay debt to the extent available. During the first nine months of 2007, we had net borrowings of $280.8 million primarily due to the cash requirements of our drilling program as well as to fund our acquisition activities in 2007. During the first nine months of 2006, we had net borrowings of $637.9 million primarily due to the funding requirements to close the merger with KCS and the North Louisiana Acquisitions.

Financing activities in 2007 and 2006 included $3.1 million of cash received and $14.6 million of cash paid on settled derivative contracts that were acquired in conjunction with our acquisition activities.

During the first nine months of 2006, we paid out previously accrued fourth quarter of 2005 dividends of $0.1 million on our 8% cumulative preferred stock as well as our first and second quarter 2006 dividends of $0.1 million each. In April 2006, we initiated a buyback of this preferred stock for $9.25 per unit, resulting in a $5.3 million use of cash from financing activities.

Contractual Obligations

We have no material long-term commitments associated with our capital expenditure plans or operating agreements. Consequently, we believe we have a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. Our level of capital expenditures will vary in future periods depending on the success we experience in our acquisition, developmental and exploration activities, oil and natural gas price conditions and other related economic factors. Currently no sources of liquidity or financing are provided by off-balance sheet arrangements or transactions with unconsolidated, limited-purpose entities.

In our Form 10-K, as amended, for the year ended December 31, 2006, we disclosed that we had nine drilling rigs under contract for a total commitment over four years of $78.9 million. As of September 30, 2007, we have seven drilling rigs under contract for a total commitment over four years of $45.8 million of which $35.7 million relates to two rigs located in North Louisiana.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policies from those described in the 2006 Form 10-K, as amended.

Results of Operations

Quarters ended September 30, 2007 and 2006

We reported net income of $26.8 million for the three months ended September 30, 2007 compared to net income of $52.7 million for the comparable period in 2006. The decrease in net income of $25.9 million from the three months ended September 30, 2006, was primarily driven by the change in fair value of derivative instruments due to the change in our weighted average forward strip pricing which resulted in a net decrease of $47.7 million on derivative contracts. Also contributing to this decrease was a decrease in our average equivalent sales price of $0.27 per Mcfe offset by an increase in production volumes of 3.7 Bcfe primarily due to our successful drilling program.

                                                          Three Months Ended
                                                            September 30,              Increase
In thousands (except per unit and per Mcfe amounts)      2007           2006          (Decrease)
Net income                                             $  26,795      $  52,656      $    (25,861 )
Oil and gas revenues                                     213,337        196,439            16,898
Expenses:
Production:
Lease operating                                           17,236         17,594              (358 )
Workover and other                                         2,110          2,720              (610 )
Taxes other than income                                   12,844         15,739            (2,895 )
Gathering, transportation and other                        8,265          5,178             3,087
General and administrative:
General and administrative                                12,258         12,132               126
Stock-based compensation                                   3,581          3,173               408
Depletion, depreciation and amortization:
Depletion-Full cost                                       99,802         88,468            11,334
Depreciation-Other                                           854            331               523
Accretion expense                                            456            413                43
Net gain on derivative contracts                          20,337         68,048           (47,711 )
Interest expense and other                               (34,308 )      (35,870 )           1,562
Income tax provision                                     (15,165 )      (30,213 )          15,048

Production:
Natural Gas-Mmcf                                          25,601         21,871             3,730
Crude Oil-Mbbl                                               742            797               (55 )
Natural Gas Equivalent-Mmcfe                              30,052         26,652             3,400
Average Daily Production-Mmcfe                               327            290                37

Average price per unit (1):
Gas price per Mcf                                      $    6.22      $    6.52      $      (0.30 )
Oil price per Bbl                                          73.04          67.42              5.62
Equivalent per Mcfe                                         7.10           7.37             (0.27 )

Average cost per Mcfe:
Production:
Lease operating                                             0.57           0.66             (0.09 )
Workover and other                                          0.07           0.10             (0.03 )
Taxes other than income                                     0.43           0.59             (0.16 )
Gathering, transportation and other                         0.28           0.19              0.09
General and administrative:
General and administrative                                  0.41           0.46             (0.05 )
Stock-based compensation                                    0.12           0.12                -
Depletion                                                   3.32           3.32                -

For the three months ended September 30, 2007, oil and natural gas sales increased $16.9 million, from the same period in 2006, to $213.3 million. The increase was primarily due to the increase in production of 3,400 Mmcfe primarily related to our successful drilling program. Increased production led to a $25.1 million increase in revenues for the three months ended September 30, 2007. The increase in production was offset by a decrease in our realized average price per Mcfe of $0.27 per Mcfe to $7.10, which reduced our revenues by $8.2 million.

Lease operating expenses decreased $0.4 million for the three months ended September 30, 2007. The decrease was due to our continued cost control efforts offset by an increase in production volumes as a result of our successful drilling activities in 2007. We drilled 87 wells during the three months ended September 30, 2007 compared to 105 wells in 2006. On a per unit basis, lease operating expenses decreased from $0.66 per Mcfe in 2006 to $0.57 per Mcfe in 2007. We continue to identify divestment prospects in outlying, higher operating cost properties. Also contributing to the decrease on a per unit basis was our acquisition of lower cost properties in conjunction with our merger with KCS and properties acquired in the North Louisiana Acquisitions.

Taxes other than income decreased $2.9 million for the three months ended September 30, 2007 as compared to the same period in 2006. The largest components of taxes other than income are production and severance taxes which are generally assessed as a percentage of gross oil and natural gas sales. As a percentage of oil and gas sales, taxes other than income decreased from 8% in 2006 to 6% in 2007 primarily due to the timing of various refunds received in 2007 and reassessments that occurred in 2007.

Gathering, transportation and other expense increased $3.1 million, or $0.09 per Mcfe, for the three months ended September 30, 2007 as compared to the same period in 2006. This increase was due to our recent acquisition activities including the completion of our merger with KCS as well as the North Louisiana Acquisitions.

General and administrative expense for the three months ended September 30, 2007 remained relatively flat at $12.2 million compared to $12.1 million in the prior year. In 2006, we completed the North Louisiana Acquisitions as well as our merger with KCS which increased compensation and other costs associated with increased staffing levels to meet the demands of our expanding operations. Offsetting these increases were decreased legal and contracting fees from 2006 to 2007 as a result of streamlining costs after the merger with KCS. General and administrative expense has decreased on a per Mcfe basis from $0.46 per Mcfe in 2006 to $0.41 per Mcfe in 2007 as production increases have exceeded our administrative expense increases.

Stock-based compensation increased $0.4 million for the three months ended September 30, 2007 as compared to the same period in the prior year. This increase was primarily related to additional stock options and restricted stock grants assumed as part of our merger with KCS in July 2006, as well as stock appreciation rights and restricted stock grants to employees during 2007.

Depletion expense increased $11.3 million for the three months ended September 30, 2007 from the same period in 2006 to $99.8 million. Depletion for oil and natural gas properties is calculated using the unit of production method, which essentially depletes the capitalized costs associated with the evaluated properties plus future development costs based on the ratio of production volume for the current period to total remaining reserve volume for the evaluated properties. On a per unit basis, depletion expense remained flat at $3.32 per Mcfe.

We enter into derivative commodity instruments to hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market valuation of these derivative contracts in the consolidated statement of operations. The Company

recorded a net derivative gain of $20.3 million ($3.0 million unrealized loss and a $23.3 million gain for cash received on settled contracts) for the three months ended September 30, 2007 compared to a net derivative gain of $68.0 million in the prior year.

Interest expense and other decreased $1.6 million for the three months ended September 30, 2007 compared to the same period in 2006. This decrease was primarily due to the extinguishment of substantially all of our 2011 Notes in conjunction with our merger with KCS, offset by a full quarter of expense associated with the additional debt we incurred in conjunction with our merger with KCS as well as the increase in our senior revolving credit facility in 2007 that has been used to fund our drilling and acquisition activities.

Income tax expense for the three months ended September 30, 2007 decreased $15.1 million from the prior year. The decrease in income tax expense from prior year was primarily due to our pre-tax income of $42.0 million for the three months ended September 30, 2007 compared to pre-tax income of $82.9 million in 2006. The effective tax rates for the three months ended September 30, 2007 and 2006 were 36.1% and 36.5%, respectively. The decrease in our effective rate was primarily due to an increase in the disqualifying dispositions of exercised incentive stock options.

Results of Operations

Nine months ended September 30, 2007 and 2006

We reported net income of $53.0 million for the nine months ended September 30, 2007 compared to net income of $90.4 million for the comparable period in 2006. The decrease in net income of $37.4 million from the nine months ended September 30, 2006, was primarily driven by the change in fair value of derivative instruments due to the change in our weighted average forward strip pricing which resulted in a net decrease of $101.5 million on derivative contracts and a decrease in our average equivalent sales price of $0.21 per Mcfe which led to a decrease of $18.6 million in our oil and gas revenues. Also contributing to this decrease was an increase in our interest expense and other of $41.0 million and depletion expense of $131.3 million. These decreases were partially offset by an increase in production of 37.9 Bcfe due to our acquisitions and successful drilling which led to an increase of $288.8 million in our oil and gas revenues.

                                                            Nine Months Ended
                                                              September 30,              Increase
In thousands (except per unit and per Mcfe amounts)       2007            2006          (Decrease)
Net income                                              $  53,011       $  90,448       $   (37,437 )
Oil and gas revenues                                      656,062         385,859           270,203
Expenses:
Production:
Lease operating                                            50,528          40,460            10,068
Workover and other                                          6,132           5,210               922
Taxes other than income                                    43,122          30,346            12,776
Gathering, transportation and other                        23,288           9,314            13,974
General and administrative:
General and administrative                                 38,554          25,883            12,671
Stock-based compensation                                    9,866           5,041             4,825
Depletion, depreciation and amortization:
Depletion-Full cost                                       293,510         162,161           131,349
Depreciation-Other                                          2,300             869             1,431
Accretion expense                                           1,350           1,090               260
Net (loss) gain on derivative contracts                    (7,005 )        94,495          (101,500 )
Interest expense and other                                (96,847 )       (55,865 )         (40,982 )
Income tax provision                                      (30,549 )       (53,667 )          23,118

Production:
Natural Gas-Mmcf                                           75,196          38,850            36,346
Crude Oil-Mbbl                                              2,221           1,962               259
Natural Gas Equivalent-Mmcfe                               88,522          50,622            37,900
Average Daily Production-Mmcfe                                324             185               139

Average price per unit (1):
Gas price per Mcf                                       $    6.85       $    6.64       $      0.21
Oil price per Bbl                                           63.73           64.96             (1.23 )
Equivalent per Mcfe                                          7.41            7.62             (0.21 )

Average cost per Mcfe:
Production:
. . .