The following discussion is intended to assist in understanding our results of operations and our current financial condition. Our consolidated financial statements and the accompanying notes included elsewhere in this Form 10-K contain additional information that should be referred to when reviewing this material.

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed.

Overview

We are an independent oil and natural gas company engaged in the exploration, development and production of predominately natural gas properties located onshore in the United States. Our properties are primarily located in Louisiana, Texas, Arkansas and Oklahoma. We organize our operations into two principal regions: the Mid-Continent, which includes our Louisiana and Arkansas properties; and the Western, which includes our Texas and Oklahoma properties.

Historically, we have grown through acquisitions, with a focus on properties within our core operating areas which we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves while lowering lease operating costs. In late 2007 and throughout 2008, we sought to aggressively expand our leasehold position in resource-style natural gas plays within our core operating areas, particularly in the Haynesville Shale play in northern Louisiana and East Texas. We currently own leasehold interests in approximately 300,000 net acres in the Haynesville Shale play. We also own leasehold interests covering approximately 157,000 net acres in the Fayetteville Shale in Arkansas, and, during 2008, we announced our discovery of the Eagle Ford Shale play in South Texas, where we currently own leasehold interests in approximately 156,000 net acres. The vast majority of our acreage in these plays is currently undeveloped. Typically, the leases we own require that production in paying quantities be established on units under the lease within the lease term (generally three to five years) or the lease will expire, although a significant percentage of the leases in the Haynesville Shale play are currently held by production from other producing zones. Lease expirations will be an important factor determining our capital expenditures focus over the next several years.

At December 31, 2008, our estimated total proved oil and natural gas reserves, as prepared by our independent reserve engineering firm, Netherland, Sewell, were approximately 1,418 Bcfe, consisting of 14 MMBbls of oil, and 1,335 Bcf of natural gas and natural gas liquids. Approximately 56% of our proved reserves were classified as proved developed. We maintain operational control of approximately 83% of our proved reserves. Production for the fourth quarter averaged 361 Mmcfe/d and we exited the quarter producing 400 Mmcfe/d. Full year 2008 production was 305 Mmcfe/d. We drilled 739 gross wells (267.4 net wells) in 2008, 727 gross (265.4 net) of which were successful resulting in a success rate of 98%. We had total operating revenues of $1.1 billion compared to $883 million in 2007, an increase of almost 25%.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success.

During the second half 2008, oil and natural gas prices declined significantly in response to the credit crisis, the turmoil in the global financial system and the economic recession in the United States and in other developed

and developing countries. In response to declining oil and natural gas prices during the last quarter of 2008, we reduced and refocused our 2009 capital budget on the development of non-proved locations in our Haynesville, Fayetteville and Eagle Ford Shale plays. We believe these projects offer the potential for the highest internal rates of return and reserve growth. Currently we plan to spend approximately $1 billion on drilling, completions, seismic and facilities during 2009, of which $690 million has been allocated to our Haynesville Shale properties, $100 million to our Fayetteville Shale properties and $50 million to our Eagle Ford Shale properties. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted.

Another consequence we face as a result of declining oil and natural gas prices is the possibility that we may be required to recognize a non-cash impairment expense under the full cost method of accounting, which we use to account for our oil and natural gas exploration and development activities. We recorded a full cost ceiling impairment of approximately $1.0 billion at December 31, 2008, at which time the West Texas Intermediate posted price was $41.00 per barrel for oil and the Henry Hub spot market price was $5.71 per MMbtu for natural gas. At times, oil and natural gas prices subsequent to year-end have been lower than they were at December 31, 2008. If oil and natural gas prices do not recover, we may be required to take additional impairment charges in the future.

Capital Resources and Liquidity

Our primary sources of capital resources and liquidity are internally generated cash flows from operations, availability under our Senior Credit Agreement, and access to capital markets, to the extent available. The capital markets, as they relate to us, have been adversely impacted by the current financial crisis, concerns about overall deflation and its effect on commodity prices, the possibility of a deepening world recession that may extend for a long period into the future, a lack of liquidity in the banking system and the unavailability and cost of credit. Continued volatility in the capital markets could adversely impact our ability to access the capital markets, which could reduce our ability to execute our development and acquisition plans, our ability to replace our reserves, and eventually, our production levels. During the first quarter of 2009, we initiated a borrowing base redetermination of our Senior Credit Agreement. Our borrowing base of $950 million, along with our existing terms and pricing, were reaffirmed. We will continue to monitor our liquidity and the capital markets.

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on capital resources available and the success of finding and acquiring additional reserves. During 2008 and to date in 2009, we have raised $1.3 billion of debt (net of expenses) and $1.8 billion of equity capital (net of discounts and expenses). We expect to fund our future capital requirements through internally generated cash flows, borrowings under our Senior Credit Agreement which gives us $950 million of borrowing capacity as of today, and additional future capital market issuances if necessary. Long-term cash flows are subject to a number of variables including the level of production and prices as well as various economic conditions that have historically affected the oil and natural gas industry. Oil and natural gas prices have continued to fall after December 31, 2008. If these prices hold for a prolonged period of time or continue to fall, our ability to fund capital expenditures, reduce debt, meet financial obligations and become profitable may be materially impacted. We also strive to maintain financial flexibility and may access capital markets as necessary to maintain substantial borrowing capacity under our Senior Credit Agreement, facilitate drilling on our large undeveloped acreage position and permit us to selectively expand our acreage position and infrastructure projects.

Cash Flow

Our primary sources of cash in 2008, 2007 and 2006 were from operating and financing activities. Proceeds from the sale of common stock, the issuance of new senior debt and cash received from operations were offset by repayments of our Senior Credit Agreement and 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. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. 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. See "Results of Operations" below for a review of the impact of prices and volumes on sales.

                                                        Years Ended December 31,
                                                   2008            2007           2006
                                                             (In thousands)
 Cash flows provided by operating activities   $    608,955     $  605,045     $  296,893
 Cash flows used in investing activities         (3,030,450 )     (876,696 )     (972,566 )
 Cash flows provided by financing activities      2,426,566        267,870        668,355

 Net increase (decrease) in cash               $      5,071     $   (3,781 )   $   (7,318 )

Operating Activities. Net cash flows provided by operating activities were $609.0 million, $605.0 million and $296.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs.

Net cash provided by operating activities increased in 2008 primarily due to the 21% increase in our average realized natural gas equivalent price compared to the same period in the prior year, partially offset by a 4% decrease in production volumes due to the sale of our Gulf Coast properties during the fourth quarter of 2007. Production for the fourth quarter was 361 Mmcfe/d compared to 315 Mmcfe/d during the third quarter of 2008. We exited the quarter producing 400 Mmcfe/d. Full year 2008 production was 305 Mmcfe/d. We expect to continue to increase our production volumes in 2009 as a result of our capital program which is primarily focused on drilling opportunities in the Haynesville, Fayetteville and Eagle Ford Shales. However, we are unable to predict future production levels or future commodity prices, and, therefore, we cannot provide any assurance about future levels of net cash provided by operating activities.

Net cash flows provided by operating activities increased in 2007 primarily due to our 46% increase in production volumes primarily due to our merger with KCS in July 2006, as well as our 3% increase in our realized natural gas equivalent price.

As a result of significant declines in oil and natural gas prices, net cash flows provided by operating activities declined significantly in the fourth quarter 2008 compared to the third quarter despite significant increases in production.

Investing Activities. The primary driver of cash used in investing activities is capital spending, inclusive of acquisitions and net of divestitures. Cash used in investing activities was $3.0 billion, $876.7 million and $972.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

In 2008, we spent $3.1 billion on acquisitions of oil and gas properties and capital expenditures. Our acquisitions were partially funded by the remaining restricted cash that we had deposited with a qualified intermediary to facilitate like-kind exchange transactions following the sale of our Gulf Coast properties. We participated in the drilling of 739 gross wells in 2008. We spent an additional $164.8 million on other property and equipment during 2008 as well, primarily to fund the development of gathering systems primarily in the

Fayetteville Shale in Arkansas and the beginning stages of the development of our gathering systems in the Haynesville Shale in Louisiana.

In 2008, we used a portion of the funds from our debt and equity offerings discussed below to purchase a net $123.0 million of marketable securities. These marketable securities have been classified and accounted for as trading securities and will be used primarily to fund a portion of our 2009 capital program.

In 2007, we spent $1.3 billion on acquisitions of oil and gas properties and capital expenditures. We spent $764.3 million on capital expenditures in conjunction with our drilling program. We participated in the drilling of 420 gross wells in 2007, of which 15 were dry holes, for a success rate of 96%. In addition, we spent $488.9 million primarily to acquire additional interests in the Fayetteville Shale in Arkansas and in both the Elm Grove and Terryville fields in Louisiana. Our program to acquire additional interests and acreage in these fields is ongoing.

On November 30, 2007, we closed the sale of our Gulf Coast properties for $825 million, before customary closing adjustments, consisting of $700 million in cash and a $125 million note from the purchaser (the Note). The Note matured five years and ninety-one days from the closing date and bare interest at 12% per annum payable in kind at the purchaser's option. The economic effective date for the sale was July 1, 2007. Proceeds from the sale were recorded as a decrease to our full cost pool. In conjunction with the closing of this sale, we deposited $650 million with a qualified intermediary to facilitate potential like-kind exchange transactions. At December 31, 2007, we had $269.8 million remaining for use in future acquisitions, all of which was utilized for property acquisitions during the fourth quarter of 2007 and first quarter of 2008. On April 28, 2008, the purchaser redeemed the Note for $100 million.

During the third quarter of 2007, we closed our acquisition of One TEC, LLC, with properties primarily in Arkansas and Texas, for $39.9 million, net of $2.1 million cash acquired.

Cash used in investing activities in 2006 was $972.6 million. During the fourth quarter of 2006 we sold certain oil and natural gas assets in Michigan, Wyoming and California with total estimated reserves of approximately 49 Bcfe. The majority of these assets were acquired in our merger with KCS. Our proceeds from these three separate transactions totaled approximately $135 million, before customary closing adjustments. The proceeds received were used to pay down a portion of our Senior Credit Agreement.

On July 12, 2006, we merged with KCS Resources, Inc.. Total consideration for the shares of KCS common stock consisted of approximately $1.1 billion of our common stock, approximately $450 million in cash and the assumption of $275 million of KCS debt. In addition, all outstanding options to purchase KCS common stock and restricted shares of KCS common stock were converted into options to purchase our common stock or restricted shares of our common stock using an exchange ratio of 2.3706 shares of our common stock to one share of KCS common stock.

During the first quarter of 2006, we completed the acquisition of stock of Winwell Resources, Inc. for $208 million in cash after customary closing adjustments, and the acquisition of certain oil and natural gas properties for $86 million in cash after customary closing adjustments. In conjunction with these acquisitions, we deposited a total of $22.5 million in earnest money that was included in other non-current assets at December 31, 2005 and applied to the overall purchase price in January 2006.

We closed a $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 Senior Credit Agreement. We received an additional $12.6 million in proceeds from the sale of non-operated properties during the third quarter of 2006.

In 2006, we spent $483.4 million on acquisitions of oil and gas properties and capital expenditures. We spent $395.5 million on capital expenditures in conjunction with our drilling program. We participated in the drilling of 330 gross wells in 2006, of which 20 were dry holes, for a success rate of 94%.

We spent an additional $87.9 million primarily on the acquisition of oil and natural gas properties in North Louisiana as described above.

Financing Activities. The primary driver of cash provided by financing activities is proceeds from the issuance of common stock and long-term debt offset by repayments of long-term debt. Net cash flows provided by financing activities were $2.4 billion, $267.9 million and $668.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

On February 1, 2008, we sold an aggregate of 20.7 million shares of our common stock in an underwritten public offering. The net proceeds from the sale were approximately $297 million, after deducting underwriting discounts and commissions and estimated expenses.

On May 13, 2008, we sold 25.0 million shares of our common stock in an underwritten public offering. Pursuant to the underwriting agreement, we granted the underwriters a 30-day option to purchase up to an additional 3.75 million shares of common stock at the public offering price less underwriting discounts and commissions. The underwriters exercised in full their option to purchase additional shares of common stock which closed on May 23, 2008. The net proceeds from these sales were approximately $727 million, after deducting underwriting discounts and commissions and estimated expenses.

On May 13, 2008, we issued $500 million aggregate principal amount of the 2015 Notes in a private placement under the Securities Act of 1933, as amended. The net proceeds from the sale of the 2015 Notes were approximately $490 million, after deducting the initial purchasers' discounts and estimated offering expenses and commissions.

On June 19, 2008, we issued an additional $300 million aggregate principal amount of 2015 Notes in a private placement under the Securities Act of 1933, as amended. The net proceeds from the sale of the 2015 Notes were approximately $294 million, after deducting the initial purchasers' discount and estimated offering expenses and commissions.

On August 15, 2008, we sold an aggregate of 28.8 million shares of our common stock in an underwritten public offering. The net proceeds from the sale were approximately $734 million, after deducting underwriting discounts and commissions and estimated expenses.

Capital financing and excess cash flow are used to repay debt to the extent available. In 2008, we had net borrowings of $677.7 million primarily due to the cash requirements of our drilling and acquisition activities in 2008 offset by sales of common stock and issuances of long term debt discussed above. On January 27, 2009, we completed a private placement offering to eligible purchasers of an aggregate principal amount of $600 million 10.5% senior notes due August 1, 2014. The notes were priced at 91.279% of the face value to yield 12.75% to maturity. As of December 31, 2008, the Senior Credit Agreement had a $1.1 billion borrowing base and we had $450 million outstanding, all of which was repaid in conjunction with the completion of the $600 million private placement on January 27, 2009. As a result of the offering, our borrowing base decreased from $1.1 billion to $950 million.

Cash flows provided by financing activities include net borrowings of $260.4 million and $569.5 million for the years ended December 31, 2007 and 2006, respectively, primarily due to our acquisitions activities discussed below as well as our ongoing drilling activities.

In connection with our merger with KCS, on July 12, 2006, we consummated a private placement of 9.125% senior notes. These notes were issued at 98.735% of the face amount of $650 million for gross proceeds of approximately $642.0 million, before estimated offering expenses and the initial purchasers' discount. We applied a portion of the net proceeds to fund the $450 million that was paid to KCS stockholders in connection

with the merger. On July 27, 2006, we issued an additional $125 million of these notes at 101.125% of the face amount. We applied the net proceeds from the sale of the additional 2013 Notes to repay indebtedness outstanding under our senior revolving credit facility.

In connection with the North Louisiana Acquisitions, on February 1, 2006, we issued and sold 13.0 million shares of our common stock for $14.50 per share, for gross proceeds of $188.5 million. Contemporaneously with the offering, we repurchased 3.3 million shares of our common stock for $46.2 million from EnCap Investments, L.P. and certain of its affiliates. We incurred a total of $10.9 million of offering costs during 2006.

Financing activities included $14.6 million of cash paid on settled derivative contracts that were acquired in conjunction with our acquisition activities in 2006 and $3.6 million of cash received on settled derivative contracts in 2007.

In April 2006, we initiated a buyback of our 8% cumulative convertible preferred stock for $9.25 per share, resulting in a $5.3 million use of cash in financing activities.

Contractual Obligations

We believe we have a significant degree of flexibility to adjust the level of our future capital 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. The following table summarizes our contractual obligations and commitments at December 31, 2008 by payment periods as of December 31, 2008.

                                                          Payments Due by Period
                                                                                             2014 and
Contractual Obligations               Total         2009       2010-2011      2012-2013       Beyond
                                                              (In thousands)
Senior revolving credit
facility                           $   450,000    $      -     $       -     $   450,000    $        -
7 7/8% $800 million senior
notes                                  800,000           -             -              -         800,000
9 1/8% $775 million senior
notes (1)                              768,725           -             -         768,725             -
7 1/8% $275 million senior
notes (2)                              272,375           -             -         272,375             -
9 7/8% senior notes                        254           -            254             -              -
Interest expense on long-term
debt (3)                               848,802      166,543       333,068        259,941         89,250
Deferred premiums on
derivatives (4)                         15,193        9,426         5,767             -              -
Rig commitments                        433,035      147,303       237,186         48,546             -
Other commitments (5)                  507,795       89,033        78,134         77,587        263,041
Operating leases                        28,668        5,125         9,081          8,642          5,820

Total contractual obligations      $ 4,124,847    $ 417,430    $  663,490    $ 1,885,816    $ 1,158,111

(1) Excludes $5.9 million of unamortized discount and $1.0 million of unamortized premium recorded in conjunction with the issuance of the notes. See "9.125% Senior Notes" below for more details.

(2) Excludes a net $8.3 million discount recorded in conjunction with our merger with KCS. See "7.125% Senior Notes" below for more details.

(3) Future interest expense was calculated based on interest rates and amounts outstanding at December 31, 2008 less required annual repayments.

(4) Approximately $9.4 million of this amount has been classified as current at December 31, 2008.

(5) Other commitments pertains to exploration, development and production activities including commitments for pipeline and well equipment, obtaining and processing seismic data and natural gas transportation space on various pipelines.

The contractual obligations table does not include obligations to taxing authorities due to the uncertainty surrounding the ultimate settlement of amounts and timing of these obligations or the $600 million of 10.5% Senior Notes due 2014 that we issued during the first quarter of 2009. In addition, amounts related to our asset retirement obligations are not included in the table above given the uncertainty regarding the actual timing of such expenditures. The total amount of asset retirement obligations at December 31, 2008 is $28.6 million.

Senior Revolving Credit Facility

We entered into the Third Amended and Restated Senior Revolving Credit Agreement, dated as of September 10, 2008 (the Senior Credit Agreement), between us, each of the lenders from time to time party thereto (the Lenders), BNP Paribas, as administrative agent for the Lenders, Bank of America, N.A. and BMO Capital Markets Financing, Inc. as co-syndication agents for the Lenders, and JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Fortis Capital Corp. as co-documentation agents for the Lenders., which amends and restates our $1 billion senior revolving credit agreement dated July 12, 2006. The Senior Credit Agreement provides for a $1.5 billion facility with a current borrowing base of $950 million that will be redetermined on a semi-annual basis, with us and the Lenders each having the right to one annual interim unscheduled redetermination, and adjusted based on our oil and gas properties, reserves, other indebtedness . . .