We have outstanding $200 million of senior notes due in December 2010. We have begun preliminary discussions to restructure these notes with one of our larger note holders. No assurances can be made as to the results of these discussions. Continued disruptions in the capital markets could make it more difficult or expensive to refinance or restructure these notes when they come due. Current market conditions also elevate the concern over counterparty risks related to our commodity derivative contracts and trade credit. At March 31, 2009, our open commodity derivative instruments were in a net receivable position with a fair value of $14.9 million. We have all of our commodity derivative instruments with a major financial institution. Should the financial counterparty not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices and we could incur a loss. We sell our production to a variety of purchasers. Some of these parties may experience liquidity problems. Credit enhancements have been obtained from some parties in the way of parental guarantees or letters of credit; however, we do not have all of our trade credit enhanced through guarantees or credit support. Impairment of Oil and Gas Properties. If oil and gas prices decrease further or remain depressed for extended periods of time, we may be required to take additional writedowns of the carrying value of our oil and gas properties. We may be required to writedown the carrying value of our oil and gas properties when oil and gas prices are low or if we have substantial downward adjustments to our estimated net proved reserves, increases in our estimates of development costs or deterioration in our exploration results. Under the full-cost method which we use to account for our oil and gas properties, the net capitalized costs of our oil and gas properties may not exceed the present value, discounted at 10%, of future net cash flows from estimated net proved reserves, using period end oil and gas prices or prices as of the date of our auditor's report, plus the lower of cost or fair market value of our unproved properties. If net capitalized costs of our oil and gas properties exceed this limit, we must charge the amount of the excess to earnings. This type of charge will not affect our cash flows, but will reduce the book value of our stockholders' equity. We review the carrying value of our properties quarterly, based on prices in effect as of the end of each quarter or at the time of reporting our results. Once incurred, a writedown of oil and gas properties is not reversible at a later date, even if prices increase.

Reduced Prices for Oil and Gas Production. The United States and world economies are currently in a recession which could last through 2009 and perhaps longer. Both oil and gas prices have undergone significant decline during the second half of 2008 and into 2009 as a result of the reduced economic activity brought on by the recession. Continued lower commodity prices will reduce our cash flows from operations. To mitigate the impact of lower commodity prices on our cash flows, we have entered into crude oil and natural gas commodity contracts for 2009. See Note 3 to our Consolidated Financial Statements. Depending on the length of the current recession, commodity prices may stay depressed or decline further, thereby causing a prolonged downturn, which would further reduce our cash flows from operations. This could cause us to alter our business plans including reducing or delaying our exploration and development program spending and other cost reduction initiatives.
Abandonment of the Entrada Project. In late November 2008, we and our joint working interest owner, CIECO, decided to abandon the Entrada project. Under the terms of our agreements with CIECO, Callon Entrada is responsible for its share of the costs to plug and abandon the Entrada project, which we estimate to be $46 million, $23 million net to Callon Entrada. As of March 31, 2009 the wind down of the Entrada project was substantially complete and most of the costs had been paid. In addition, prior to abandonment of the project, CIECO failed to fund two loan requests totaling $40 million under our non-recourse credit agreement with them. CIECO also failed to fund its working interest share of a settlement payment to terminate a drilling contract for the Entrada project. Callon has paid its share of the settlement payment.
We continue to discuss with CIECO its failure to fund $40 million in loan requests and its share of a settlement payment to terminate a drilling contract. Because these discussions are in the early stages, no assurances can be made regarding the outcome of these discussions. We do not believe that we have waived any of our rights under the agreements with CIECO regarding the loan requests or the drilling contract settlement.
The CIECO Non-Recourse Credit Facility. The Callon Entrada credit facility is a direct obligation of Callon Entrada, an indirect, wholly-owned subsidiary of Callon Petroleum Company. The Callon Entrada credit facility is secured by a lien on the assets of Callon Entrada which generally are comprised of the Entrada Field and related equipment. At March 31, 2009 there was no value included on the balance sheet for these assets. Neither Callon Petroleum Company nor any other subsidiary of Callon Petroleum Company guaranteed or otherwise agreed to pay the principal or interest payments due on the Callon Entrada credit facility, so such facility is effectively non-recourse to Callon Petroleum Company and its other subsidiaries On April 2, 2009, Callon Entrada received a notice from CIECO advising Callon Entrada that certain events of default occurred under the non-recourse credit agreement relating to failure to pay interest when due and the breach of various other covenants related to the decision to abandon the Entrada project. The lenders under our senior secured revolving credit facility have amended the Second Amended and Restated Credit Agreement dated September 25, 2008 to state that a default under the Callon Entrada non-recourse credit facility is not a default under their facility. In addition, this amendment eliminates a possible cross default with regard to our $200 million senior notes due 2010. Accordingly, we do not believe that a default under the CIECO agreement will have a material negative impact on our financial position, results of operations and cash flows. See Note 4 to the Consolidated Financial Statements.

Other Events in First Quarter 2009
On March 16, 2009, we were notified by the New York Stock Exchange that we had fallen below one of the NYSE's continued listing standards. We received this notification pursuant to Rule 802.01B(I) of the NYSE Listed Company Manual because our average market capitalization has been less than $75 million over a 30-day trading period and our last reported stockholder's equity was less than $75 million.
We submitted a plan with the NYSE on April 30, 2009, which demonstrated our ability to achieve compliance with Rule 802.01B(I) within an 18 month cure period. If the NYSE accepts the plan, our common stock will continue to be listed on the NYSE during the cure period, subject to ongoing monitoring and our compliance with other NYSE continued listing requirements. Liquidity and Capital Resources
Our primary sources of capital are cash flows from operations, borrowings from financial institutions and the sale of debt and equity securities. On March 31, 2009, we had cash and cash equivalents of $651,000 and $33 million of availability under our UBOC senior secured credit agreement. Cash provided by operating activities during the three-month period ended March 31, 2009 totaled $2.2 million, a 94% decrease when compared to the corresponding period in 2008. The decrease is attributable to the reduction of accounts payable during the first quarter of 2009, lower commodity prices and lower production rates on an equivalent basis.
On September 25, 2008, we completed a $250 million second amended and restated senior secured credit agreement with UBOC as issuing lender, which matures September 25, 2012. The borrowing base, which will be reviewed and redetermined quarterly beginning August 1, 2009, is $48 million. Borrowings under the credit agreement are secured by mortgages covering our major fields excluding Entrada. As of March 31, 2009, there were no borrowings under the agreement; however we had a letter of credit outstanding in the amount of $15 million to secure the drilling rig, Ocean Victory, for the development of Entrada. As a result, $33 million was available for future borrowings under the credit agreement as of March 31, 2009. See Note 4 to the Consolidated Financial Statements. Subsequent to March 31, 2009, Diamond Offshore Drilling, Inc. ("Diamond") called on the outstanding letter of credit for CIECO Energy (US) Limited's ("CIECO") share of the settlement for the termination of the Ocean Victory drilling contract in the amount of $7.3 million. We paid our share, in the amount of $7.3 million, in March 2009. The remaining balance of the letter of credit was cancelled on April 2, 2009 by Diamond. As a result of these transactions, $40.7 million was available for future borrowing as of April 2, 2009. We continue to discuss with CIECO its failure to fund the settlement for the termination of the drilling contract. The $7.3 million due from CIECO for their share of the settlement for the termination of the drilling contract is recorded as a receivable.

On April 8, 2008, we completed the sale of a 50% working interest in the Entrada Field to CIECO for a purchase price of $175 million with a cash payment of $155 million at closing and the additional $20 million payable after the achievement of certain production milestones.
Simultaneously with the closing of the CIECO transaction, we used the proceeds from the sale, cash on hand and a draw of $16 million from the UBOC credit agreement, to extinguish the $200 million senior secured revolving credit agreement, which was secured by a lien on the Entrada properties. Due to the early extinguishment of the $200 million senior revolving credit facility on April 8, 2008, we incurred expenses of $11.9 million consisting of $6.3 million in cash pre-payment penalties plus a non-cash charge of $5.6 million related to the amortization expense associated with the deferred financing costs related to the credit facility.
In addition, a wholly-owned subsidiary of Callon, Callon Entrada, entered into a credit agreement with CIECO Entrada, pursuant to which Callon Entrada may borrow up to $150 million, plus interest expense incurred of up to $12 million, to finance the development of the Entrada project. The Callon Entrada credit facility is fully collateralized by the Entrada Field. However, we have entered into a customary indemnification agreement pursuant to which we agree to indemnify the lenders under the Callon Entrada credit facility against Callon Entrada's misappropriation of funds, non-performance of certain covenants and similar matters. In addition, we also guaranteed the obligations of Callon Entrada to fund its proportionate operating cost related to the Entrada project that Callon Entrada may, from time to time, expressly approve under the Entrada joint operating agreement. We also guaranteed Callon Entrada's payment of all amounts to plug and abandon wells and related facilities for a breach of law, rule or regulation (including environmental laws) and for any losses attributable to gross negligence of Callon Entrada. As of March 31, 2009, the wind down of the Entrada project was substantially complete and most of the costs had been paid. The sale of equipment purchased for the Entrada project but not used is in progress and as of March 2009, the Company had sold $934,000 of equipment net to its interest, which was applied to unpaid interest expense under the credit facility.
The Callon Entrada credit facility bears interest at six-month LIBOR (as in effect on the first day of each interest period) plus 375 basis points and requires semi-annual payments of principal and interest derived from a portion of the estimated cash flow from the Entrada project. These payments would begin six months after the date of initial production from the Entrada project. The Callon Entrada credit facility matures within five years of first production from the property, and is subject to customary representations, warranties, covenants and events of default. As of March 31, 2009, $78.4 million of principle and $3.3 million of accrued interest outstanding under this facility. Callon Entrada has no assets to pay the debt except for the sales proceeds from equipment that was purchased for the Entrada project but not used. See Note 4 to the Consolidated Financial Statements.
Due to the uncertain economic and commodity price environment, we have designed a flexible capital spending program that will be responsive to conditions that develop during 2009. Our preliminary base capital program, including plugging and abandonment, for 2009 is $75 million, which is relatively flat with the 2008 budget of $71 million, excluding the Entrada project. However, depending on commodity prices and other economic conditions we experience in 2009, this base capital program may be adjusted up or down.
We expect that the 2009 budget will be funded primarily from cash flows from operations, cash on hand, and borrowings under our senior secured revolving credit facility and/or other

financing. We will evaluate the level of capital spending throughout the year based on commodity prices, cash flows from operations and property acquisitions and divestitures.
Inflation has not had a material impact on us and is not expected to have a material impact on us in the immediate future.
The Indenture governing our 9.75% Senior Notes due 2010 and our senior secured credit facility with UBOC contain various covenants, including restrictions on additional indebtedness and payment of cash dividends. In addition, our UBOC credit agreement contains covenants for maintenance of certain financial ratios. We were in compliance with these covenants at March 31, 2009. See Note 7 of the Consolidated Financial Statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K filed March 19, 2009 for a more detailed discussion of long-term debt.
The following table describes our outstanding contractual obligations (in thousands) as of March 31, 2009:

Contractual                                           Less Than         One-Three         Four-Five          After-Five
Obligations                            Total           One Year           Years             Years              Years
Senior Secured Credit Facility
(UBOC)                               $       -        $        -        $        -        $        -        $          -
9.75% Senior Notes                     200,000                 -           200,000                 -                   -
Callon Entrada Credit Facility
(1)                                     78,435                 -                 -                 -              78,435
Throughput Commitments:
Medusa Oil Pipeline                        201                54                91                33                  23

                                     $ 278,636        $       54        $  200,091        $       33        $     78,458

(1) The Callon Entrada credit facility is a direct obligation of Callon Entrada, an indirect, wholly-owned subsidiary of Callon Petroleum Company. The Callon Entrada credit facility is secured by a lien on the assets of Callon Entrada which generally are comprised of the Entrada Field and related equipment. At March 31, 2009, there was no value included on the balance sheet for these assets. Neither
Callon
Petroleum
Company nor
any other
subsidiary of
Callon
Petroleum
Company
guaranteed or
otherwise
agreed to pay
the principal
or interest
payments due
on the Callon
Entrada
credit
facility, so
such facility
is
effectively
non-recourse
to Callon
Petroleum
Company and
its other
subsidiaries.

Capital Expenditures
Capital expenditures on an accrual basis were $3.5 million for the three-month ended March 31, 2009. Interest of approximately $925,000 and general and administrative costs allocable directly to exploration and development projects of approximately $1.5 million were capitalized for the first three months of 2009. The remainder of the capital expended primarily includes the cost of seismic data, leases and plugging and abandonment costs.
Capital expenditures for the remainder of 2009 are projected to be $63 million and include:
• proved producing property acquisitions;

• the cost of seismic data and leases; and

• capitalized interest and general and administrative costs.

In addition, we are projecting to spend $9 million for the remainder of 2009 for asset retirement obligations.
Off-Balance Sheet Arrangements
We have a 10% ownership interest in Medusa Spar LLC ("LLC"), which is a limited liability company that owns a 75% undivided ownership interest in the deepwater Spar production facilities on our Medusa Field in the Gulf of Mexico. We contributed a 15% undivided ownership interest in the production facility to the LLC in return for approximately $25 million in cash and a 10% ownership interest in the LLC. The LLC earns a tariff based upon production volume throughput from the Medusa area. We are obligated to process our share of production from the Medusa Field and any future discoveries in the area through the Spar production facilities. This arrangement allowed us to defer the cost of the Spar production facility over the life of the Medusa Field. The balance of Medusa Spar LLC is owned by Oceaneering International, Inc. and Murphy Oil Corporation. We are accounting for our 10% ownership interest in the LLC under the equity method.

Results of Operations
The following table sets forth certain unaudited operating information with
respect to the Company's oil and gas operations for the periods indicated:

                                                                            Three Months Ended
                                                                                March 31,
                                                                        2009                   2008
Net production :
Oil (MBbls)                                                                    263                   290
Gas (MMcf)                                                                   1,447                 2,090
Total production (MMcfe)                                                     3,026                 3,828
Average daily production (MMcfe)                                              33.6                  42.1

Average sales price:
Oil (Bbls) (a)                                                    $          60.59         $       86.66
Gas (Mcf)                                                                     6.13                  9.50
Total (Mcfe)                                                                  8.20                 11.75

Oil and gas revenues:
Oil revenue                                                       $         15,952         $      25,096
Gas revenue                                                                  8,863                19,864

Total                                                             $         24,815         $      44,960


Oil and gas production costs:
Lease operating expenses                                          $          4,039         $       5,178

Additional per Mcfe data:
Sales price                                                       $           8.20         $       11.75
Lease operating expense                                                       1.33                  1.35

Operating margin                                                  $           6.87         $       10.40


Depletion, depreciation and amortization                          $           3.11         $        3.93
General and administrative (net of management fees)               $           0.60         $        0.69

(a) Below is a reconciliation of the average NYMEX price to the average realized sales price per barrel of oil:

Average NYMEX oil price (a)                                       $          43.08         $       97.90
Basis differential and quality adjustments                                   (4.01 )               (3.65 )
Transportation                                                               (1.35 )               (1.25 )
Hedging                                                                      22.87                 (6.34 )

Average realized oil price                                        $          60.59         $       86.66

Comparison of Results of Operations for the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008. Oil and Gas Production and Revenues
Total oil and gas revenues were $24.8 million in the first quarter of 2009 compared to $45.0 million in the first quarter of 2008. Total production on an equivalent basis for the first quarter of 2009 decreased by 21% compared to the first quarter of 2008 and oil and gas prices on a Mcfe basis for the first quarter of 2009 decreased 30% compared to 2008.
Gas production during the first quarter of 2009 totaled 1.4 billion cubic feet (Bcf) and generated $8.9 million in revenues compared to 2.1 Bcf and $19.9 million in revenues during the same period in 2008. The average gas price after hedging impact for the first quarter of 2009 was $6.13 per thousand cubic feet of natural gas ("Mcf") compared to $9.50 per Mcf for the same period in 2008. Approximately 28% of the 31% decrease in 2009 production was due to a lower number of producing wells, with the remaining 3% resulting from normal and expected declines in production from our older properties. Four of our gas wells were shut-in during 2008 due to early water production and are now scheduled for plugging and abandonment. In addition, our High Island Block A-540 well was shut in during the second quarter of 2008, due to a plugged flowline, which management has determined uneconomic to repair.
Oil production during the first quarter of 2009 totaled 263,000 barrels and generated $16.0 million in revenues compared to 290,000 barrels and $25.1 million in revenues for the same period in 2008. The average oil price received after hedging impact in the first quarter of 2009 was $60.59 per barrel compared to $86.66 per barrel in the first quarter of 2008. The 9% decrease in 2009 production was attributable to normal and expected declines in production and our High Island Block A-540, described above. Lease Operating Expenses
Lease operating expenses were $4.0 million for the three-month period ended March 31, 2009, a 22% decrease when compared to the same period in 2008. The decrease was primarily due to a lower number of producing wells and lower insurance expense for the Medusa field. Four of our gas wells were shut-in during 2008 due to early water production and are now scheduled for plugging and abandonment. In addition, our High Island Block A-540 well was shut in during the second quarter of 2008, due to a plugged flowline, which management determined uneconomic to repair.
Depreciation, Depletion and Amortization . . .