UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

CONTANGO OIL & GAS COMPANY

(Exact name of registrant as specified in its charter)

DELAWARE		95-4079863
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

3700 BUFFALO SPEEDWAY, SUITE 960
HOUSTON, TEXAS 77098
(Address of principal executive offices)

(713) 960-1901
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The total number of shares of common stock, par value $0.04 per share, outstanding as of April 30, 2009 was 15,828,980.

 

 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED MARCH 31, 2009

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2009 and June 30, 2008			3
Consolidated Statements of Operations for the three and nine months ended March 31, 2009 and 2008			5
Consolidated Statements of Cash Flows for the nine months ended March 31, 2009 and 2008			6
Consolidated Statement of Shareholders’ Equity for the nine months ended March 31, 2009			7
Notes to the Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			38
PART II — OTHER INFORMATION
Item 1A. Risk Factors			38
Item 5. Other Information			39
Item 6. Exhibits			40
Exhibit 10.1
Exhibit 23.1
Exhibit 31.1
Exhibit 32.1

All references in this Form 10-Q to the “Company”, “Contango”, “we”, “us” or “our” are to Contango Oil & Gas Company and its wholly-owned Subsidiaries. Unless otherwise noted, all information in this Form 10-Q relating to natural gas and oil reserves and the estimated future net cash flows attributable to those reserves are based on estimates prepared by independent engineers and are net to our interest.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

		March 31,				June 30,
		2009				2008
		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	41,457,487			$	59,884,574
Inventory tubulars			334,797				334,797
Accounts receivable:
Trade receivables			13,164,553				72,343,761
Advances to affiliates			5,359,342				5,754,516
Joint interest billings receivable			7,131,917				18,019,847
Prepaid capital costs			1,264,278				1,264,278
Other			3,418,353				1,147,345
Total current assets			72,130,727				158,749,118
PROPERTY AND EQUIPMENT:
Natural gas and oil properties, successful efforts method of accounting:
Proved properties			461,960,239				442,630,193
Unproved properties			4,055,829				7,591,447
Furniture and equipment			272,231				278,737
Accumulated depreciation, depletion and amortization			(34,569,064	)			(13,134,511	)
Total property and equipment, net			431,719,235				437,365,866
OTHER ASSETS:
Cash and other assets held by affiliates			1,056,884				3,299,002
Other			356,236				559,764
Total other assets			1,413,120				3,858,766
TOTAL ASSETS		$	505,263,082			$	599,973,750

The accompanying notes are an integral part of these consolidated financial statements.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

LIABILITIES AND SHAREHOLDERS’ EQUITY

		March 31,				June 30,
		2009				2008
		(Unaudited)
CURRENT LIABILITIES:
Accounts payable		$	6,087,080			$	22,990,887
Royalties and working interests payable			16,315,528				66,606,414
Accrued liabilities			2,838,277				10,334,008
Joint interest advances			3,508,360				15,666,389
Accrued exploration and development			11,754,698				3,082,399
Advances from affiliates			—				2,965,022
Debt of affiliates			3,515,739				3,261,177
Income tax payable			—				3,463,176
Other current liabilities			31,416				466,232
Total current liabilities			44,051,098				128,835,704
LONG-TERM DEBT			—				15,000,000
DEFERRED TAX LIABILITY			114,665,464				112,189,684
ASSET RETIREMENT OBLIGATIONS			2,644,185				1,949,881
SHAREHOLDERS’ EQUITY:
Common stock, $0.04 par value, 50,000,000 shares authorized, 19,638,334 shares issued and 15,828,980 outstanding at March 31, 2009, 19,404,746 shares issued and 16,819,746 outstanding at June 30, 2008			785,533				776,189
Additional paid-in capital			76,036,607				73,030,926
Treasury stock at cost (3,809,354 shares at March 31, 2009; 2,585,000 shares at June 30, 2008)			(58,639,644	)			(6,843,900	)
Retained earnings			325,719,839				275,035,266
Total shareholders’ equity			343,902,335				341,998,481
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	505,263,082			$	599,973,750

The accompanying notes are an integral part of these consolidated financial statements.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2009				2008				2009				2008
REVENUES:
Natural gas, oil and liquids sales		$	36,133,376			$	20,779,574			$	154,370,771			$	47,256,798
Total revenues			36,133,376				20,779,574				154,370,771				47,256,798
EXPENSES:
Operating expenses			4,553,421				1,482,578				14,505,666				3,159,695
Exploration expenses			12,756,737				4,261,686				20,387,619				5,171,795
Depreciation, depletion and amortization			8,919,740				4,077,017				22,167,167				6,002,997
Lease expirations and relinquishments			3,678,708				245,361				4,125,125				245,361
Impairment of natural gas and oil properties			2,709,239				591,737				2,709,239				591,737
General and administrative expenses			1,490,401				2,209,844				5,993,640				5,307,486
Total expenses			34,108,246				12,868,223				69,888,456				20,479,071
NET INCOME FROM CONTINUING OPERATIONS BEFORE OTHER INCOME AND INCOME TAXES			2,025,130				7,911,351				84,482,315				26,777,727
OTHER INCOME (EXPENSE):
Interest expense — net of interest capitalized			(147,392	)			(1,425,715	)			(589,812	)			(3,585,074	)
Interest income			154,058				914,826				757,571				1,763,335
Gain on sale of assets and other			—				59,919,478				—				62,034,996
NET INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			2,031,796				67,319,940				84,650,074				86,990,984
Provision for income taxes			(1,184,182	)			(23,557,442	)			(33,965,501	)			(30,431,664	)
NET INCOME FROM CONTINUING OPERATIONS			847,614				43,762,498				50,684,573				56,559,320
DISCONTINUED OPERATIONS (NOTE 8)
Discontinued operations, net of income taxes			—				68,981,433				—				174,079,822
NET INCOME			847,614				112,743,931				50,684,573				230,639,142
Preferred stock dividends			—				345,000				—				1,245,000
NET INCOME ATTRIBUTABLE TO COMMON STOCK		$	847,614			$	112,398,931			$	50,684,573			$	229,394,142
NET INCOME PER SHARE:
Basic
Continuing operations		$	0.05			$	2.69			$	3.06			$	3.45
Discontinued operations			—				4.28				—				10.85
Total		$	0.05			$	6.97			$	3.06			$	14.30
Diluted
Continuing operations		$	0.05			$	2.56			$	3.01			$	3.30
Discontinued operations			—				4.03				—				10.15
Total		$	0.05			$	6.59			$	3.01			$	13.45
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			16,162,928				16,122,707				16,543,485				16,045,785
Diluted			16,466,988				17,127,187				16,857,136				17,155,007

The accompanying notes are an integral part of these consolidated financial statements.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

		Nine Months Ended
		March 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations		$	50,684,573			$	56,559,320
Plus income from discontinued operations, net of income taxes			—				174,079,822
Net income			50,684,573				230,639,142
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			22,167,167				8,788,796
Lease expirations and relinquishments			4,125,125				—
Impairment of natural gas and oil properties			2,709,239				837,098
Exploration expenditures			19,361,419				4,543,776
Deferred income taxes			2,475,780				98,655,429
Tax benefit from exercise/cancellation of stock options			(264,187	)			(694,555	)
Stock-based compensation			1,096,443				1,170,850
Gain on sale of assets and other			—				(322,798,205	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other			58,358,818				(2,107,291	)
Increase in notes receivable			—				(250,000	)
Increase in prepaid insurance			(225,134	)			(608,923	)
Decrease (increase) in interest receivable			1,079,107				(563,681	)
Increase (decrease) in accounts payable and advances from joint owners			(29,030,422	)			20,830,169
Increase (decrease) in other accrued liabilities			(57,786,616	)			2,426,436
Increase (decrease) in income taxes payable			(4,942,928	)			25,501,052
Net cash provided by operating activities			69,808,384				66,370,093
CASH FLOWS FROM INVESTING ACTIVITIES:
Natural gas and oil exploration and development expenditures			(23,103,005	)			(98,146,425	)
Increase in restricted cash			—				(113,342,115	)
Sale of short-term investments			—				2,200,576
Additions to furniture and equipment			(5,378	)			(43,078	)
Proceeds from the sale of assets			—				395,672,421
Sale/acquisition costs			—				(7,847,613	)
Purchase of assets			—				(209,000,000	)
Investment in Contango Venture Capital Corporation			—				(1,166,624	)
Net cash used in investing activities			(23,108,383	)			(31,672,858	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility			—				20,000,000
Repayments under credit facility			(15,000,000	)			(40,000,000	)
Borrowings by affiliates			—				11,213,104
Preferred stock dividends			—				(1,245,000	)
Repurchase/cancellation of stock options and warrants			—				(5,922,532	)
Tax benefit from exercise/cancellation of stock options			264,187				694,555
Purchase of common stock			(51,795,744	)			(663,900	)
Debt issuance costs			(250,000	)			(113,510	)
Proceeds from exercised options, warrants and others			1,654,469				580,760
Net cash used in financing activities			(65,127,088	)			(15,456,523	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(18,427,087	)			19,240,712
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			59,884,574				6,177,618
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	41,457,487			$	25,418,330
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes		$	36,432,652			$	2,542,034
Cash paid for interest		$	335,250			$	4,120,259

The accompanying notes are an integral part of these consolidated financial statements.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

																						Total
		Common Stock								Paid-in				Treasury				Retained				Shareholders’
		Shares				Amount				Capital				Stock				Earnings				Equity
Balance at June 30, 2008			16,819,746			$	776,189			$	73,030,926			$	(6,843,900	)		$	275,035,266			$	341,998,481
Exercise of stock options			204,500				8,180				1,413,615				—				—			$	1,421,795
Tax benefit of exercising stock options			—				—				120,540				—				—			$	120,540
Issuance of restricted common stock			—				—				78,375				—				—			$	78,375
Net income			—				—				—				—				30,920,372			$	30,920,372
Treasury shares at cost			(143,454	)			—				—				(7,906,442	)			—			$	(7,906,442	)
Expense of stock options			—				—				285,304				—				—			$	285,304
Balance at September 30, 2008			16,880,792			$	784,369			$	74,928,760			$	(14,750,342	)		$	305,955,638			$	366,918,425
Exercise of stock options			8,000				320				100,340				—				—			$	100,660
Tax benefit of exercising stock options			—				—				109,221				—				—			$	109,221
Issuance of restricted common stock			3,088				124				162,082				—				—			$	162,206
Net income			—				—				—				—				18,916,587			$	18,916,587
Treasury shares at cost			(574,200	)			—				—				(25,735,318	)			—			$	(25,735,318	)
Expense of stock options			—				—				285,304				—				—			$	285,304
Balance at December 31, 2008			16,317,680			$	784,813			$	75,585,707			$	(40,485,660	)		$	324,872,225			$	360,757,085
Exercise of stock options			18,000				720				131,170				—				—			$	131,890
Tax benefit of exercising stock options			—				—				34,426				—				—			$	34,426
Net income			—				—				—				—				847,614			$	847,614
Treasury shares at cost			(506,700	)			—				—				(18,153,984	)			—			$	(18,153,984	)
Expense of stock options			—				—				285,304				—				—			$	285,304
Balance at March 31, 2009			15,828,980			$	785,533			$	76,036,607			$	(58,639,644	)		$	325,719,839			$	343,902,335

The accompanying notes are an integral part of these consolidated financial statements.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K for the fiscal year ended June 30, 2008. The consolidated results of operations for the three and nine months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2009.

2. Summary of Significant Accounting Policies

The application of GAAP involves certain assumptions, judgments, choices and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can result in varying results from company to company. Contango’s significant accounting policies are described below.

Successful Efforts Method of Accounting. The Company follows the successful efforts method of accounting for its natural gas and oil activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, and any such impairment is charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs, such as seismic costs and other geological and geophysical expenses, are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above. Depreciation, depletion and amortization is on a field by field basis using the unit of production method, with lease acquisition costs amortized over total proved reserves and other costs amortized over proved developed reserves.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, when circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future net cash flows on a cost center basis to the unamortized capitalized cost of the asset. If the future undiscounted net cash flows, based on the Company’s estimate of future natural gas and oil prices and operating costs and anticipated production from proved reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair market value. During the nine months ended March 31, 2009, the Company’s analysis determined that Grand Isle 70 was impaired and the Company recorded an impairment charge of approximately $2.7 million related to this well. Additionally, the Company recorded lease expiration and relinquishment expense of $4.1 million due to the expiration or relinquishment of 43 lease blocks owned by our partially-owned subsidiaries, Republic Exploration LLC (“REX”), and / or Contango Offshore Exploration LLC (“COE”).

An integral and on-going part of our business strategy is to sell our proved reserves from time to time in order to generate additional capital to reinvest in our offshore exploration programs. In accordance with SFAS 144, the Company classifies such property sales as discontinued operations.

Cash Equivalents. Cash equivalents are considered to be highly liquid investment grade debt investments having an original maturity of 90 days or less. As of March 31, 2009, the Company had approximately $41.5 million in cash and cash equivalents. Of this amount, approximately $16.3 million was invested in U.S. Treasury money market funds and the remaining $25.2 million was invested in overnight U.S. Treasury funds.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Principles of Consolidation. The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries and affiliates, after elimination of all intercompany balances and transactions. Wholly-owned subsidiaries are fully consolidated. The Company has two subsidiaries that are not wholly owned: 32.3% owned REX and 65.6% owned COE. These subsidiaries are not controlled by the Company and are proportionately consolidated.

For the fiscal year ended June 30, 2007, the Company owned 42.7% of REX and 76.0% of COE. Effective April 1, 2008, the Company sold a portion of its ownership interest in REX and COE to an existing owner for approximately $0.8 million and $0.9 million, respectively. As a result of the sale, the Company’s equity ownership interest in REX and COE decreased to 32.3% and 65.6%, respectively.

Recent Accounting Pronouncements. In June 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payments Transactions Are Participating Securities”. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in SFAS No. 128, “Earnings per Share”. The provisions of FSP EITF 03-6-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of FSP EITF 03-6-1. Early application is not permitted. We do not expect FSP EITF 03-6-1 to have a material effect on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We are currently evaluating the provisions of SFAS 162 and assessing the impact, if any, it may have on our financial position and results of operations.

Effective July 1, 2009, the FASB issued SFAS No. 157-2 (“SFAS 157-2”), “Effective Date of FASB Statement No. 157”. This pronouncement defers the effective date of SFAS No. 157 (“SFAS 157”), “Fair Value Measurements” to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). An entity that has issued interim or annual financial statements reflecting the application of the measurement and disclosure provisions of SFAS 157 prior to February 12, 2008, must continue to apply all provisions of SFAS 157. We are currently evaluating the provisions of SFAS 157-2 and assessing the impact, if any, it may have on our financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), “Business Combinations” and SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements”. These statements require most identifiable assets, liabilities and noncontrolling interests to be recorded at full fair value and require noncontrolling interests to be reported as a component of equity. Both statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141(R) will be applied to business combinations occurring after the effective date and SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the provisions of SFAS 141(R) and SFAS 160 and assessing the impact, if any, they may have on our financial position and results of operations.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Recent SEC Rule-Making Activity. In December 2008, the SEC announced that it had approved revisions designed to modernize the oil and gas company reserve reporting requirements. The most significant amendments to the requirements include the following:

	•		Commodity Prices — Economic producibility of reserves and discounted cash flows will be based on a 12-month average commodity price unless contractual arrangements designate the price to be used.
	•		Disclosure of Unproved Reserves — Probable and possible reserves may be disclosed separately on a voluntary basis.
	•		Proved Undeveloped Reserve Guidelines — Reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered.
	•		Reserve Estimation Using New Technologies — Reserves may be estimated through the use of reliable technology in addition to flow tests and production history.
	•		Reserve Personnel and Estimation Process — Additional disclosure is required regarding the qualifications of the chief technical person who oversees our reserves estimation process. We will also be required to provide a general discussion of our internal controls used to assure the objectivity of the reserves estimate.
	•		Non-Traditional Resources — The definition of oil and gas producing activities will expand and focus on the marketable product rather than the method of extraction.

The rules are effective for fiscal years ending on or after December 31, 2009, and early adoption is not permitted. We are currently evaluating the new rules and assessing the impact they will have on our reported natural gas and oil reserves. The SEC is coordinating with the FASB to obtain the revisions necessary to SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies”, and SFAS No. 69, “Disclosures About Oil and Gas Producing Activities”, to provide consistency with the new rules. In the event that consistency is not achieved in time for companies to comply with the new rules, the SEC has indicated that it will consider delaying the compliance date.

Stock-Based Compensation. The Company applies the fair value based method prescribed in SFAS No. 123, “Accounting for Stock Based Compensation”. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. The fair value of each award is estimated as of the date of grant using the Black-Scholes option-pricing model. Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment”. SFAS 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for the options (excess tax benefit) to be classified as financing cash flows. The fair value of each option is estimated as of the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for the 60,000 options granted during the nine months ended March 31, 2009: (i) risk-free interest rate of 3.01 percent; (ii) expected life of five years; (iii) expected volatility of 53 percent and (iv) expected dividend yield of zero percent. No options were granted for the nine months ended March 31, 2008.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Under the Company’s 1999 Stock Incentive Plan, as amended (the “1999 Plan”), the Company’s Board of Directors may also grant restricted stock awards to officers or other employees of the Company. Restricted stock awards made under the 1999 Plan are subject to such restrictions, terms and conditions, including forfeitures, if any, as may be determined by the Board. Grants of service-based restricted stock awards are valued at our common stock price at the date of grant. For the nine months ended March 31, 2009, the Company granted 3,088 shares of restricted stock to its Board of Directors as part of its annual compensation. For the nine months ended March 31, 2008, the Company granted 4,140 shares of restricted stock to its Board of Directors as part of its annual compensation and 331 shares of restricted stock to a new member of the Board. These shares vest over a period of one year.

During the nine months ended March 31, 2009 and 2008, the Company recorded stock-based compensation charges of $1.1 million and $1.2 million, respectively, to general and administrative expense for restricted stock and option awards. These amounts do not reflect compensation actually received by the individuals, but rather represent expense recognized in the Company’s consolidated financial statements that relate to restricted stock and option awards granted in current and previous fiscal years, in accordance with SFAS 123(R), excluding any assumption for future forfeitures.

3. Natural Gas and Oil Exploration and Production Risk

The Company’s future financial condition and results of operations will depend upon prices received for its natural gas and oil production and the cost of finding, acquiring, developing and producing reserves. Substantially all of its production is sold under various terms and arrangements at prevailing market prices. Prices for natural gas and oil are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors beyond the Company’s control.

Other factors that have a direct bearing on the Company’s financial condition are uncertainties inherent in estimating natural gas and oil reserves and future hydrocarbon production and cash flows, particularly with respect to wells that have not been fully tested and with wells having limited production histories; the timing and costs of our future drilling; development and abandonment activities; access to additional capital; changes in the price of natural gas and oil; availability and cost of services and equipment; and the presence of competitors with greater financial resources and capacity. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported results of operations, the amount of reported assets, liabilities and contingencies, and proved natural gas and oil reserves. We use the successful efforts method of accounting for our natural gas and oil activities.

4. Customer Concentration Credit Risk

The customer base for the Company is concentrated in the natural gas and oil industry. Major purchasers of our natural gas and oil for the nine months ended March 31, 2009 were ConocoPhillips Company, Shell Trading US Company, Atmos Energy Marketing, LLC and Trans Louisiana Gas Pipeline, Inc. Our sales to these companies are not secured with letters of credit and in the event of non-payment, we could lose up to two months of revenues. The loss of two months of revenues would have a material adverse effect on our financial position, but there are numerous other potential purchasers of our production.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

5. Net Income per Common Share

A reconciliation of the components of basic and diluted net income per share of common stock is presented in the tables below.

		Three Months Ended												Three Months Ended
		March 31, 2009												March 31, 2008
						Weighted												Weighted
						Average				Per								Average				Per
		Income				Shares				Share				Income				Shares				Share
Income from continuing operations, including preferred dividends		$	847,614				16,162,928			$	0.05			$	43,417,498				16,122,707			$	2.69
Discontinued operations, net of income taxes		$	—				—			$	—			$	68,981,433				16,122,707			$	4.28
Basic Earnings per Share:
Net income attributable to common stock		$	847,614				16,162,928			$	0.05			$	112,398,931				16,122,707			$	6.97
Effect of Potential Dilutive Securities:
Stock options			—				640,167				—				—				305,003				—
Shares assumed purchased			—				(337,651	)			—				—				—				—
Series E preferred stock			—				—				—			$	345,000				699,477			$	0.49
Restricted shares			—				1,544				—				—				—				—
Income from continuing operations		$	847,614				16,466,988			$	0.05			$	43,762,498				17,127,187			$	2.56
Discontinued operations, net of income taxes		$	—				—			$	—			$	68,981,433				17,127,187			$	4.03
Diluted Earnings per Share:
Net income, attributable to common stock		$	847,614				16,466,988			$	0.05			$	112,743,931				17,127,187			$	6.59

		Nine Months Ended												Nine Months Ended
		March 31, 2009												March 31, 2008
						Weighted												Weighted
						Average				Per								Average				Per
		Income				Shares				Share				Income				Shares				Share
Income from continuing operations, including preferred dividends		$	50,684,573				16,543,485			$	3.06			$	55,314,320				16,045,785			$	3.45
Discontinued operations, net of income taxes		$	—				—			$	—			$	174,079,822				16,045,785			$	10.85
Basic Earnings per Share:
Net income attributable to common stock		$	50,684,573				16,543,485			$	3.06			$	229,394,142				16,045,785			$	14.30
Effect of Potential Dilutive Securities:
Stock options			—				685,167				—				—				349,747				—
Shares assumed purchased			—				(373,060	)			—				—				—
Series E preferred stock			—				—				—			$	1,245,000				759,475			$	1.64
Restricted shares			—				1,544				—				—				—				—
Income from continuing operations		$	50,684,573				16,857,136			$	3.01			$	56,559,320				17,155,007			$	3.30
Discontinued operations, net of income taxes		$	—				—			$	—			$	174,079,822				17,155,007			$	10.15
Diluted Earnings per Share:
Net income, attributable to common stock		$	50,684,573			$	16,857,136			$	3.01			$	230,639,142				17,155,007			$	13.45

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

6. Long-Term Debt

On October 3, 2008, the Company and Contango Resources Company completed the arrangement of a $50 million Hydrocarbon Borrowing Base secured revolving credit facility pursuant to a credit agreement with Guaranty Bank, as administrative agent and issuing lender (the “Credit Agreement”). On March 31, 2009, the Credit Agreement was amended and restated to reflect the merger of Contango Resources Company with and into Contango Operators, Inc., with Contango Operators, Inc. being the surviving entity. The credit facility is secured by substantially all of the Company’s assets and is available to fund the Company’s offshore Gulf of Mexico exploration and development activities, as well as the repurchase of shares of the Company’s common stock, the payment of dividends, and working capital as needed. Borrowings under the Credit Agreement bear interest at LIBOR plus 2.0% per annum. The outstanding principal amount and any accrued interest thereon is due October 3, 2010, and may be prepaid at any time in accordance with the Credit Agreement with no prepayment penalty. An arrangement fee of 0.5%, or $250,000, was paid in connection with the facility and a commitment fee of 0.5% is paid on the unused commitment amount. As of March 31, 2009, the Company had no amounts outstanding under the Credit Agreement.

On August 26, 2008, the Company prepaid the $15.0 million it had outstanding under its $30.0 million Term Loan Agreement with a private investment company and terminated the Term Loan Agreement. For the nine months ended March 31, 2009, the Company paid $212,816 in interest and non-use fees.

7. Gain on Sale of Asset

On February 5, 2008, the Company sold its 10% limited partnership interest in Freeport LNG Development Inc. for $68.0 million to an affiliate of Osaka Gas Company Ltd. The Company recognized a gain on sale of approximately $63.4 million.

8. Sale of Properties — Discontinued Operations

The Company did not have any discontinued operations during the nine months ended March 31, 2009.

During the fiscal year ended June 30, 2008, the Company sold its Arkansas Fayetteville Shale properties, an on-shore well in Texas and an on-shore well in Louisiana for approximately $328.3 million, in the aggregate. In accordance with SFAS 144, the Company classified these property sales as discontinued operations in the consolidated financial statements for all periods presented.

The summarized financial results for discontinued operations for the three and nine months ended March 31, 2008 are as follows:

Operating Results:

		Three Months Ended				Nine Months Ended
		March 31,				March 31,
		2008				2008
Revenues		$	(255,486	)		$	8,641,857
Operating expenses			(12,143	)			(968,903	)
Depletion expenses			—				(2,785,799	)
Exploration expenses			—				47,280
Gain on sale of discontinued operations			106,392,910				262,880,675
Gain before income taxes			106,125,281				267,815,110
Provision for income taxes			(37,143,848	)			(93,735,288	)
Gain from discontinued operations, net of income taxes		$	68,981,433			$	174,079,822

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

9. Related Party Transactions

Effective September 1, 2008, COI purchased an interest in an existing offshore lease from Juneau Exploration, L.P. (“JEX”) for $600,000.

On September 8, 2008, the Company purchased 21,754 shares of common stock from a member of its board of directors for approximately $1.3 million, or $60.81 per share, which represented the closing price of the Company’s common stock on that date.

10. Share Repurchase Program

In September 2008, the Company’s board of directors approved a $100 million share repurchase program. All shares are purchased in the open market from time to time by the Company or through privately negotiated transactions. The purchases will be made subject to market conditions and certain volume, pricing and timing restrictions to minimize the impact of the purchases upon the market. Repurchased shares of common stock become authorized but unissued shares, and may be issued in the future for general corporate and other purposes. As of March 31, 2009 we had purchased 1,224,354 shares of our common stock at an average cost per share of $42.30, for a total expenditure of approximately $51.8 million.

Available Information

General information about us can be found on our Website at www.contango.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our Website as soon as reasonably practicable after we file or furnish them to the Securities and Exchange Commission (“SEC”).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes and other information included elsewhere in this Form 10-Q and in our Form 10-K for the fiscal year ended June 30, 2008, previously filed with the SEC.

Cautionary Statement about Forward-Looking Statements

Some of the statements made in this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. The words and phrases “should be”, “will be”, “believe”, “expect”, “anticipate”, “estimate”, “forecast”, “goal” and similar expressions identify forward-looking statements and express our expectations about future events. These include such matters as:

	•		Our financial position
	•		Business strategy, including outsourcing
	•		Meeting our forecasts and budgets
	•		Anticipated capital expenditures
	•		Drilling of wells
	•		Natural gas and oil production and reserves
	•		Timing and amount of future discoveries (if any) and production of natural gas and oil
	•		Operating costs and other expenses
	•		Cash flow and anticipated liquidity
	•		Prospect development
	•		Property acquisitions and sales

Although we believe the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such expectations will occur. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from actual future results expressed or implied by the forward-looking statements. These factors include:

	•		Low and/or declining prices for natural gas and oil
	•		Natural gas and oil price volatility
	•		Operational constraints, start-up delays and production shut-ins at both operated and non-operated production platforms, pipelines and gas processing facilities
	•		The risks associated with acting as the operator in drilling deep high pressure wells in the Gulf of Mexico
	•		The risks associated with exploration, including cost overruns and the drilling of non-economic wells or dry holes, especially in prospects in which the Company has made a large capital commitment relative to the size of the Company’s capitalization structure
	•		The timing and successful drilling and completion of natural gas and oil wells
	•		Availability of capital and the ability to repay indebtedness when due
	•		Availability of rigs and other operating equipment
	•		Ability to raise capital to fund capital expenditures
	•		Timely and full receipt of sale proceeds from the sale of our production
	•		The ability to find, acquire, market, develop and produce new natural gas and oil properties
	•		Interest rate volatility

	•		Uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures
	•		Operating hazards attendant to the natural gas and oil business
	•		Downhole drilling and completion risks that are generally not recoverable from third parties or insurance
	•		Potential mechanical failure or under-performance of significant wells, production facilities, processing plants or pipeline mishaps
	•		Weather
	•		Availability and cost of material and equipment
	•		Delays in anticipated start-up dates
	•		Actions or inactions of third-party operators of our properties
	•		Actions or inactions of third-party operators of pipelines or processing facilities
	•		The ability to find and retain skilled personnel
	•		Strength and financial resources of competitors
	•		Federal and state regulatory developments and approvals
	•		Environmental risks
	•		Worldwide economic conditions
	•		The ability to construct and operate offshore infrastructure, including pipeline and production facilities
	•		The continued compliance by the Company with various pipeline and gas processing plant specifications for the gas and condensate produced by the Company
	•		Drilling and operating costs, production rates and ultimate reserve recoveries in our Eugene Island 10 (“Dutch”) and State of Louisiana (“Mary Rose”) acreage.

You should not unduly rely on these forward-looking statements in this report, as they speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. See the information under the heading “Risk Factors” in this Form 10-Q for some of the important factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in forward-looking statements.

Overview

Contango is a Houston-based, independent natural gas and oil company. The Company’s business is to explore, develop, produce and acquire natural gas and oil properties primarily offshore in the Gulf of Mexico. Contango Operators, Inc. (“COI”), our wholly-owned subsidiary, acts as operator on certain offshore prospects.

Our Strategy

Our exploration strategy is predicated upon two core beliefs: (1) that the only competitive advantage in the commodity-based natural gas and oil business is to be among the lowest cost producers and (2) that virtually all the exploration and production industry’s value creation occurs through the drilling of successful exploratory wells. As a result, our business strategy includes the following elements:

Funding exploration prospects generated by Juneau Exploration, L.P., our alliance partner. We depend totally upon our alliance partner, Juneau Exploration, L.P. (“JEX”), for prospect generation expertise. JEX is experienced and has a successful track record in exploration.

Using our limited capital availability to increase our reward/risk potential on selective prospects. We have concentrated our risk investment capital in our offshore Gulf of Mexico prospects. Exploration prospects are inherently risky as they require large amounts of capital with no guarantee of success. COI drills and operates our offshore prospects. Should we be successful in any of our offshore prospects, we will have the opportunity to spend significantly more capital to complete development and bring the discovery to producing status.

Operating in the Gulf of Mexico. COI was formed for the purpose of drilling and operating exploration wells in the Gulf of Mexico. While the Company has historically drilled turnkey wells, adverse weather conditions as well as difficulties encountered while drilling our offshore wells could cause our contracts to come off turnkey and thus lead to significantly higher drilling costs.

Sale of proved properties. From time-to-time as part of our business strategy, we have sold and in the future expect to continue to sell some or a substantial portion of our proved reserves and assets to capture current value, using the sales proceeds to further our offshore exploration activities. Since its inception, the Company has sold approximately $484 million worth of natural gas and oil properties, and views periodic reserve sales as an opportunity to capture value, reduce reserve and price risk, and as a source of funds for potentially higher rate of return natural gas and oil exploration opportunities.

Controlling general and administrative and geological and geophysical costs. Our goal is to be among the most efficient in the industry in revenue and profit per employee and among the lowest in general and administrative costs. We plan to continue outsourcing our geological, geophysical, and reservoir engineering and land functions. We have seven employees.

Structuring transactions to share risk. JEX, our alliance partner, shares in the upfront costs and the risk of our exploration prospects.

Structuring incentives to drive behavior. We believe that equity ownership aligns the interests of our partners, employees, and stockholders. Our directors and executive officers beneficially own or have voting control over approximately 24% of our common stock.

Exploration Alliance with JEX

JEX is a private company formed for the purpose of assembling domestic natural gas and oil prospects. Under our agreement with JEX, JEX generates natural gas and oil prospects and evaluates exploration prospects generated by others. JEX focuses on the Gulf of Mexico, and generates offshore exploration prospects via our affiliated companies, Republic Exploration LLC (“REX”) and Contango Offshore Exploration LLC (“COE”) (see “Offshore Gulf of Mexico Exploration Joint Ventures” below). We do not have a written agreement with JEX which contractually obligates them to provide us with their services.

Offshore Gulf of Mexico Exploration Joint Ventures

Contango, through its wholly-owned subsidiary COI, and its partially-owned subsidiaries, REX and COE, conducts exploration activities in the Gulf of Mexico. During the nine months ended March 31, 2009, the Company returned 43 Gulf of Mexico leases to the Minerals Management Service (“MMS”). Approximately half of these leases were about to expire and approximately half were relinquished early. As of April 30, 2009, Contango, through COI, REX and COE, had an interest in 24 offshore leases. See “Offshore Properties” below for additional information on our offshore properties.

As of March 31, 2009, Contango owned a 32.3% equity interest in REX and a 65.6% equity interest in COE, both of which were formed for the purpose of generating exploration opportunities in the Gulf of Mexico. These companies focus on identifying prospects, acquiring leases at federal and state lease sales and then selling the prospects to Contango, subject to timed drilling obligations plus retained reversionary interests in favor of REX and COE.

Impact of Hurricanes Gustav and Ike

In August 2008 and September 2008, Hurricanes Gustav and Ike, respectively, moved through the Gulf of Mexico and it was necessary for us to shut-in our Dutch and Mary Rose production at various times before, during and after the storms. Our offshore facilities sustained only minor damage from Hurricane Ike, and was limited to our Dutch and Mary Rose wells, affecting mainly SCADA control systems, helideck skirting, risers, and disrupted flowlines. Repairs have been completed on the damaged wells at an 8/8ths cost of approximately $2.4 million, which is covered by the Company’s insurance after an 8/8ths deductible of $500,000. The third-party processing and pipeline facilities on which we rely, however, incurred significant damage from Hurricane Ike and necessitated significant downtime for our production while repairs were being made. All third-party facilities have now been repaired and we have resumed production from our Gulf of Mexico assets.

Our corporate office sustained major damage and we temporarily relocated. Repairs to our corporate office have been completed and we returned to our offices in the first quarter of the 2009 calendar year.

Republic Exploration LLC

In March 2009, COI spud Eugene Island 56 #1 (“High Country West”), a REX prospect, which has been determined to be a dry hole. COI has a 100% working interest (“WI”) and paid 100% of the drilling costs of approximately $12.0 million. These costs together with associated leasehold costs and prospect fees of approximately $0.5 million are reflected as exploration expenses in the Company’s Consolidated Statements of Operations for the three and nine months ended March 31, 2009.

On March 18, 2009, REX was the apparent high bidder on two lease blocks at the Central Gulf of Mexico Lease Sale No. 208. REX bid $257,777 on East Cameron 210 and $157,777 on South Timbalier 97. An apparent high bid (“AHB”) gives the bidding party priority in award of offered tracts, notwithstanding the fact that the Minerals Management Service (“MMS”) may reject all bids for a given tract. The MMS review process can take up to 90 days on some bids. Upon completion of that process, final results for all AHB’s will be known.

In October 2008, COI spud West Delta 77 (“Devil’s Elbow”), a REX prospect, which has been determined to be a dry hole. COI has a 100% working interest and paid 100% of the drilling costs of approximately $5.4 million. These costs together with associated leasehold costs of approximately $1.7 million are reflected as exploration expenses in the Company’s Consolidated Statements of Operations for the nine months ended March 31, 2009.

West Delta 36, a REX prospect, is operated by a third party. The Company depends on a third-party operator for the operation and maintenance of this production platform. The well resumed production in January 2009 after being temporarily shut-in due to minor damage from Hurricane Ike. As of April 28, 2009, the well was producing at an 8/8ths rate of approximately 5.2 million cubic feet equivalent per day (“Mmcfed”). REX has a 25.0% WI, and a 20.0% net revenue interest (“NRI”), in this well.

Contango Offshore Exploration LLC

Grand Isle 72 (“Liberty”), a COE prospect operated by COI, began producing in March 2007. COE has a 50% WI and a 40% NRI in this well. As of March 31, 2009, COE had borrowed $4.3 million from the Company under a promissory note (the “Note”) to fund a portion of its share of development costs at Grand Isle 72. The Note bears interest at a per annum rate of 10% and is payable upon demand. As of March 31, 2009, accrued and unpaid interest on the Note was $1.1 million. In March 2009, COE completed the top-most zone and increased production on this well. The estimated cost on an 8/8ths basis was approximately $0.8 million, or $0.3 million net to the Company’s ownership percentage in COE.

Grand Isle 70, another COE prospect, was drilled by COI in July 2006 and proved to be a discovery. The well has been temporarily abandoned while alternative development scenarios are being evaluated. For the nine months ended March 31, 2009, the Company recorded impairment expense of $2.7 million related to Grand Isle 70 as a result of the expected future undiscounted net cash flows of this well being lower than the unamortized capitalized cost. COE has a 45.1% WI before completion of the well and a 52.6% WI after completion of the well, while COI has a 3.6% WI before and after completion of the well.

Ship Shoal 358, a COE prospect, is operated by a third party. The Company depends on a third-party operator for the operation and maintenance of this production platform. As of April 30, 2009, the well was producing at an 8/8ths rate of approximately 0.6 Mmcfed. COE has a 10.0% WI and a 7.7% NRI in this well.

Contango Resources Company and Contango Operators, Inc

Contango Resources Company (“CRC”), a wholly-owned subsidiary of the Company, was formed for the purpose of drilling and operating exploration and development wells in the Gulf of Mexico. On March 31, 2009, CRC was merged with and into COI, with COI being the surviving entity. Thus, all of Contango’s offshore exploration, production, and operations are now performed by COI. Additionally, COI acquires significant working interests in offshore exploration and development opportunities in the Gulf of Mexico, usually under a farm-out agreement, or similar agreement, with either REX or COE. COI may also operate and acquire significant working interests in offshore exploration and development opportunities under farm-in agreements with third parties.

The majority of the Company’s production is from its four Dutch wells, four Mary Rose wells, and Eloise North well. These nine wells produce via two platforms; the Company-owned and operated platform at Eugene Island 11 and a third-party owned and operated platform at Eugene Island 24.

Eugene Island 11 Platform

The Company’s platform at Eugene Island 11 is currently processing approximately 138.1 Mmcfed (approximately 55.2 Mmcfed net to Contango). This platform was designed with a capacity of 500 million cubic feet per day (“Mmcfd”) and 6,000 barrels of oil per day (“bopd”). This platform services production from the Company’s four Mary Rose wells, Eloise North, and Dutch #4. From the Eugene Island 11 platform, the gas and condensate flow to Eugene Island 63 via our pipeline, which has been designed with a capacity of 330 Mmcfd and 6,000 bopd, and then to on-shore processing facilities near Patterson, Louisiana.

The Company’s Mary Rose #1 well was recently worked over at a cost of approximately $10.0 million ($5.3 million net to Contango), to reduce water production from a water bearing sand above our production reservoir. We also installed line heaters at the Eugene Island 11 platform which allowed us to further increase our production rate. Production had been constrained due to entrained water that attached to the paraffin in our condensate. The line heaters were installed at a cost of approximately $0.3 million ($0.1 million net to Contango). Currently, the Company’s Mary Rose #2 well is shut-in for workover operations which are scheduled to begin in May 2009.

Eugene Island 24 Platform

The third-party owned and operated production platform at Eugene Island 24 is currently processing approximately 100.0 Mmcfed (approximately 38.1 Mmcfed net to Contango). This platform was designed with a capacity of 100 Mmcfd and 3,000 bopd. This platform services production from the Company’s Dutch #1, #2 and #3 wells.

Other Activities

Effective September 1, 2008, COI purchased additional working interests in nine offshore lease blocks from existing owners for a total of $2.1 million. See “Offshore Properties” below for a detailed description of the interests owned in our offshore properties.

Offshore Properties

Producing Properties. The following table sets forth the interests owned by Contango through its related entities in the Gulf of Mexico which were producing natural gas or oil as of April 30, 2009:

Area/Block		WI				NRI				Status
Contango Operators, Inc.:
Eugene Island 10 #D-1 (Dutch #1)			47.05	%			38.1	%		Producing
Eugene Island 10 #E-1 (Dutch #2)			47.05	%			38.1	%		Producing
Eugene Island 10 #F-1 (Dutch #3)			47.05	%			38.1	%		Producing
Eugene Island 10 #G-1 (Dutch #4)			47.05	%			38.1	%		Producing
S-L 18640 #1 (Mary Rose #1)			53.21	%			40.5	%		Producing
S-L 19266 #1 (Mary Rose #2)			53.21	%			38.7	%		Being worked over
S-L 19266 #2 (Mary Rose #3)			53.21	%			38.7	%		Producing
S-L 18860 #1 (Mary Rose #4)			34.58	%			25.5	%		Producing
S-L 19266 #3 (Eloise North #1)			36.90	%			26.9	%		Producing
Republic Exploration LLC
Eugene Island 113B			0.0	%			3.3	%		Producing
West Delta 36			25.0	%			20.0	%		Producing
Contango Offshore Exploration LLC:
Grand Isle 72			50.0	%			40.0	%		Producing
Ship Shoal 358, A-3 well			10.0	%			7.7	%		Producing

Leases. The following table sets forth the working interests owned by Contango and related entities in leases in the Gulf of Mexico that have not been impaired as of April 30, 2009.

Area/Block		WI				Lease Date		Expiration Date
Contango Operators, Inc.:
S-L 19261			53.21	%		Feb 07		Feb 12
S-L 19396			53.21	%		Jun 07		Jun 12
Eugene Island 11			53.21	%		Dec 07		Dec-12
Ship Shoal 14			50.00	%		May-06		May-11
South Marsh Island 57			50.00	%		May-06		May-11
South Marsh Island 59			50.00	%		May-06		May-11
South Marsh Island 75			50.00	%		May-06		May-11
Ship Shoal 263			25.00	%		Jan-06		Jan-11
Eugene Island 56			100.00	%		Jul-08		Jul-13
Republic Exploration LLC
South Marsh Island 57			50.00	%		May-06		May-11
South Marsh Island 59			50.00	%		May-06		May-11
South Marsh Island 75			50.00	%		May-06		May-11
Ship Shoal 14			50.00	%		May-06		May-11
Contango Offshore Exploration LLC:
East Breaks 369			(1	)		Dec-03		Dec-13
East Breaks 370			100.00	%		Dec-03		Dec-13
East Breaks 366			100.00	%		Nov-05		Nov-15
East Breaks 410			100.00	%		Nov-05		Nov-15
Ship Shoal 263			75.00	%		Jan-06		Jan-11
Viosca Knoll 383			100.00	%		Jan-06		Jan-11
Viosca Knoll 119			50.00	%		Jun-06		Jun-11

Application of Critical Accounting Policies and Management’s Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements included in this Quarterly Report on Form 10-Q. We have identified below the policies that are of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. The Company analyzes its estimates, including those related to its natural gas and oil reserve estimates, on a periodic basis and bases its estimates on historical experience, independent third party reservoir engineers and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:

Successful Efforts Method of Accounting. Our application of the successful efforts method of accounting for our natural gas and oil business activities requires judgments as to whether particular wells are developmental or exploratory, since exploratory costs and the costs related to exploratory wells that are determined to not have proved reserves must be expensed whereas developmental costs are capitalized. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver natural gas and oil in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. On occasion, wells are drilled which have targeted geologic structures that are both developmental and exploratory in nature, and in such instances an allocation of costs is required to properly account for the results. Delineation seismic costs incurred to select development locations within a productive natural gas and oil field are typically treated as development costs and capitalized, but often these seismic programs extend beyond the proved reserve areas and therefore management must estimate the portion of seismic costs to expense as exploratory. The evaluation of natural gas and oil leasehold acquisition costs included in unproved properties requires management’s judgment to estimate the fair value of exploratory costs related to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.

Reserve Estimates. While we are reasonably certain of recovering our reported reserves, the Company’s estimates of natural gas and oil reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of the Company’s natural gas and oil properties and/or the rate of depletion of such natural gas and oil properties. Actual production, revenues and expenditures with respect to the Company’s reserves will likely vary from estimates, and such variances may be material. Holding all other factors constant, a reduction in the Company’s proved reserve estimate at March 31, 2009 of 1% would not have a material effect on depreciation, depletion and amortization expense. Holding all other factors constant, a reduction in the Company’s proved reserve estimate at March 31, 2009 of 5%, 10% and 15% would affect depreciation, depletion and amortization expense by approximately $1.1 million, $2.3 million and $3.6 million, respectively.

Impairment of Natural Gas and Oil Properties. The Company reviews its proved natural gas and oil properties for impairment on an annual basis or whenever events and circumstances indicate a potential decline in the recoverability of their carrying value. The Company compares expected undiscounted future net cash flows on a cost center basis to the unamortized capitalized cost of the asset. If the future undiscounted net cash flows, based on the Company’s estimate of future natural gas and oil prices and operating costs and anticipated production from proved reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair market value. The factors used to determine fair value include, but are not limited to, estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Given the complexities associated with natural gas and oil reserve estimates and the history of price volatility in the natural gas and oil markets, events may arise that will require the Company to record an impairment of its natural gas and oil properties and there can be no assurance that such impairments will not be required in the future nor that they will not be material.

Stock-Based Compensation. Effective July 1, 2006, we adopted SFAS No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment” which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123(R) requires that management make assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, which are set forth in Note 2 to our consolidated financial statements.

MD&A Summary Data

The table below sets forth revenue, expense and production data for continuing operations for the three and nine months ended March 31, 2009 and 2008.

		Three Months Ended												Nine Months Ended
		March 31,												March 31,
		2009				2008				Change				2009				2008				Change
		($000)												($000)
Revenues:
Natural gas, oil and liquids sales		$	36,133			$	20,780				74	%		$	154,371			$	47,257				227	%
Total revenues		$	36,133			$	20,780				74	%		$	154,371			$	47,257				227	%
Production:
Natural gas (million cubic feet)			5,583				1,555				259	%			15,458				4,651				232	%
Oil and condensate (thousand barrels)			148				38				289	%			363				95				282	%
Natural gas liquids (thousand gallons)			3,534				1,403				152	%			4,573				2,218				106	%
Total (million cubic feet equivalent)			6,976				1,983				252	%			18,289				5,538				230	%
Natural gas (million cubic feet per day)			62.0				17.1				263	%			56.4				16.9				234	%
Oil and condensate (thousand barrels per day)			1.6				0.4				300	%			1.3				0.3				333	%
Natural gas liquids (thousand gallons per day)			39.3				15.4				155	%			16.7				8.1				106	%
Total (million cubic feet equivalent per day)			77.2				21.7				256	%			66.6				19.9				235	%
Average Sales Price:
Natural gas (per thousand cubic feet)		$	4.93			$	7.35				-33	%		$	7.99			$	7.69				4	%
Oil and condensate (per barrel)		$	41.53			$	102.48				-59	%		$	73.02			$	87.22				-16	%
Natural gas liquids (per gallon)		$	0.70			$	1.56				-55	%		$	0.96			$	1.45				-34	%
Operating expenses		$	4,553			$	1,483				207	%		$	14,506			$	3,160				359	%
Exploration expenses		$	12,757			$	4,262				199	%		$	20,388			$	5,172				294	%
Depreciation, depletion and amortization		$	8,920			$	4,077				119	%		$	22,167			$	6,003				269	%
Lease expiration and relinquishments		$	3,679			$	245				1402	%		$	4,125			$	245				1584	%
Impairment of natural gas and oil properties		$	2,709			$	592				358	%		$	2,709			$	592				358	%
General and administrative expenses		$	1,490			$	2,210				-33	%		$	5,994			$	5,307				13	%
Interest expense, net of interest capitalized		$	147			$	1,426				-90	%		$	590			$	3,585				-84	%
Interest income		$	154			$	915				-83	%		$	758			$	1,763				-57	%
Gain on sale of asset and other		$	—			$	59,919				-100	%		$	—			$	62,035				-100	%

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Natural Gas, Oil and Natural Gas Liquids (“NGL”) Sales. We reported revenues of approximately $36.1 million for the three months ended March 31, 2009, compared to revenues of approximately $20.8 million for the three months ended March 31, 2008. This increase is principally attributable to increased natural gas and oil sales from our Mary Rose #1 and #3 discoveries which began producing in April 2008, our Mary Rose #2 discovery which began producing in June 2008, our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009, all partially offset by significant declines in oil and condensate prices.

For the three months ended March 31, 2009, the average price of natural gas was $4.93 per thousand cubic feet (“Mcf”) while the average price for oil and condensate was $41.53 per barrel and the average price for NGLs was $0.70 per gallon. For the three months ended March 31, 2008, the average price of natural gas was $7.35 per Mcf while the average price for oil and condensate was $102.48 per barrel and the average price for NGLs was $1.56 per gallon.

Natural Gas, Oil and NGL Production and Average Sales Prices. Our net natural gas production for the three months ended March 31, 2009 was approximately 62.0 Mmcfd, up from approximately 17.1 Mmcfd for the three months ended March 31, 2008. Net oil and condensate production for the comparable periods also increased from approximately 400 barrels per day to approximately 1,600 barrels per day, and our NGL production increased from approximately 15,400 gallons per day to approximately 39,300 gallons per day. This increase in natural gas, oil and NGL production is principally attributable to our Mary Rose #1 and #3 discoveries which began producing in April 2008, our Mary Rose #2 discovery which began producing in June 2008, our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009.

Operating Expenses. Lease operating expenses (“LOE”) for the three months ended March 31, 2009 were approximately $4.6 million which related mainly to continuing operations from our four Dutch wells, four Mary Rose wells, and our Eloise North well. Included in LOE is a credit of approximately $2.9 million for Louisiana state severance taxes. For wells drilled to a true vertical depth of 15,000 feet or more, where production commences after July 31, 1994, the State of Louisiana exempts taxpayers from paying severance taxes on these wells for 24 months from the date production begins, or until payout of well cost, whichever comes first. Lease operating expenses for the three months ended March 31, 2008 were $1.5 million which related to only three Dutch wells.

Exploration Expense. We reported approximately $12.8 million of exploration expense for the three months ended March 31, 2009. Of this amount, approximately $12.5 million was related to dry hole costs for Eugene Island 56 while the remaining $0.3 million was attributable to various geological and geophysical activities, seismic data, and delay rentals. For the three months ended March 31, 2008, we reported $4.3 million of exploration expense. Of this amount, approximately $4.0 million was related to dry hole costs for High Island A198. The remaining costs are attributable to various geological and geophysical activities, seismic data, and delay rentals.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the three months ended March 31, 2009 was approximately $8.9 million. For the three months ended March 31, 2008, we recorded $4.1 million of depreciation, depletion and amortization. The increase in depreciation, depletion and amortization was primarily attributable to added production from newly added reserves from our Mary Rose #1, #2, #3 and #4 discoveries, our Eloise discovery, and our Dutch #4 discovery.

Lease Expiration and Relinquishment Expense. For the three months ended March 31, 2009, the Company recorded lease expiration and relinquishment expense of approximately $3.7 million due to the expiration and relinquishment of 40 lease blocks owned by our partially-owned subsidiaries, Republic Exploration LLC (“REX”), and Contango Offshore Exploration LLC (“COE”). For the three months ended March 31, 2008, the Company recorded lease expiration expense of $245,361 due to the expiration of two lease blocks owned by COE.

Impairment Expense. For the three months ended March 31, 2009, the Company recorded impairment expense of approximately $2.7 million related to our Grand Isle 70 well as a result of the expected future undiscounted net cash flows of this well being lower than the unamortized capitalized cost. For the three months ended March 31, 2008, the Company recorded impairment expense of $591,737 related to the Company’s 4,000 net mineral acres in the West Texas Barnett Shale play in Jeff Davis and Reeves Counties, Texas.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2009 and the three months ended March 31, 2008 were approximately $1.5 million and $2.2 million, respectively.

Major components of general and administrative expenses for the three months ended March 31, 2009 included approximately $0.2 million in State of Louisiana franchise taxes, $0.6 million in salaries and benefits, $0.3 million in legal, accounting, engineering and other professional fees, $0.1 million in insurance costs, and $0.3 million related to the cost of expensing stock options and stock grant compensation.

Major components of general and administrative expenses for the three months ended March 31, 2008 included approximately $1.0 million in salaries and benefits, approximately $0.3 million in legal, accounting, engineering and other professional fees, $0.3 million in office administration expenses, $0.1 million in insurance costs, and $0.5 million related to the cost of expensing stock options and stock grant compensation.

Interest Expense. We reported interest expense of $147,392 for the three months ended March 31, 2009, compared to interest expense of approximately $1.4 million for the three months ended March 31, 2008. The lower level of interest expense is attributable to the Company retiring all of its long term debt in the first quarter of fiscal year 2009.

Interest Income. We reported interest income of $154,058 for the three months ended March 31, 2009. This compares to $914,826 of interest income reported for the three months ended March 31, 2008. The higher level of interest income in 2008 is due to higher levels of cash during the three months ended March 31, 2008 as a result of our various property sales, coupled with much higher interest rates during the three months ended March 31, 2008.

Gain (Loss) on Sale of Assets and Other. For the three months ended March 31, 2008, we reported a gain on sale of assets and other of approximately $59.9 million. Of this amount, approximately $63.4 million relates to the gain on the sale of the Company’s 10% limited partnership interest in Freeport LNG Development Inc. (“Freeport LNG”), offset by a $2.9 million loss recognized on the sale of certain assets held by Contango Venture Capital Corporation (“CVCC”) and a $0.6 million loss when the Company wrote down its investment in Moblize Inc.

Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008

Natural Gas, Oil and NGL Sales. We reported revenues of approximately $154.4 million for the nine months ended March 31, 2009, compared to revenues of approximately $47.3 million for the nine months ended March 31, 2008. This increase is attributable to increased natural gas and oil sales from our Dutch #3 discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began producing in April 2008, our Mary Rose #2 discovery which began producing in June 2008, our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009. This increase was partially offset by reduced sales from our three Dutch wells which were shut-in during all of October and the majority of November 2008 due to Hurricane Ike. The increase is also attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

For the nine months ended March 31, 2009, the average price of natural gas was $7.99 per Mcf while the average price for oil and condensate was $73.02 per barrel and the average price for NGLs was $0.96 per gallon. For the nine months ended March 31, 2008, the average price of natural gas was $7.69 per Mcf while the average price for oil and condensate was $87.22 per barrel and the average price for NGLs was $1.45 per gallon.

Natural Gas, Oil and NGL Production and Average Sales Prices. Our net natural gas production for the nine months ended March 31, 2009 was approximately 56.4 Mmcfd, up from approximately 16.9 Mmcfd for the nine months ended March 31, 2008. Net oil and condensate production for the comparable periods also increased from approximately 300 barrels per day to approximately 1,300 barrels per day, while our NGL production increased from approximately 8,100 gallons per day to approximately 16,700 gallons per day. This increase in natural gas and oil and NGL production is principally attributable to our Dutch #3 discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began producing in April 2008, our Mary Rose #2 discovery which began producing in June 2008, our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009. This increase was partially offset by reduced production from our three Dutch wells which were shut-in during all of October and the majority of November 2008 due to Hurricane Ike. The increase is also attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

Operating Expenses. LOE for the nine months ended March 31, 2009 were approximately $14.5 million which related mainly to continuing operations from our four Dutch wells, four Mary Rose wells, and Eloise North well. Included in LOE is approximately $2.1 million of Louisiana state severance taxes, which includes a credit of approximately $2.9 million. For wells drilled to a true vertical depth of 15,000 feet or more, where production commences after July 31, 1994, the State of Louisiana exempts taxpayers from paying severance taxes on these wells for 24 months from the date production begins, or until payout of well cost, whichever comes first. Lease operating expenses for the nine months ended March 31, 2008 were approximately $3.2 million which related to production from only three Dutch wells.

Exploration Expense. We reported approximately $20.4 million of exploration expense for the nine months ended March 31, 2009. Of this amount, approximately $7.1 million related to the dry hole the Company drilled at West Delta 77, $12.5 million related to the dry hole the Company drilled at Eugene Island 56, and the remaining $0.8 million related to various geological and geophysical activities, seismic data, and delay rentals. For the nine months ended March 31, 2008, we reported $5.2 million of exploration expense attributable to various geological and geophysical activities, seismic data, and delay rentals.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the nine months ended March 31, 2009 was approximately $22.2 million. For the nine months ended March 31, 2008, we recorded approximately $6.0 million of depreciation, depletion and amortization. The increase in depreciation, depletion and amortization was primarily attributable to added production from newly added reserves from our Dutch #3 and #4 discoveries, as well as reserves from our Mary Rose #1, #2, #3 and #4 discoveries and Eloise North discovery, as well as from the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008, partially offset by reduced sales from our three Dutch wells which were shut-in during all of October and the majority of November 2008 due to Hurricane Ike.

Lease Expiration and Relinquishment Expense. For the nine months ended March 31, 2009, the Company recorded lease expiration and relinquishment expense of approximately $4.1 million due to the expiration and relinquishment of 43 lease blocks owned by REX and COE. For the nine months ended March 31, 2008, the Company recorded lease expiration expense of $245,361 due to the expiration of two lease blocks owned by COE.

Impairment Expense. For the nine months ended March 31, 2009, the Company recorded impairment expense of approximately $2.7 million related to Grand Isle 70 as a result of the expected future undiscounted net cash flows of this well being lower than the unamortized capitalized cost. For the nine months ended March 31, 2008, the Company recorded impairment expense of $591,737 related to the Company’s 4,000 net mineral acres in the West Texas Barnett Shale play in Jeff Davis and Reeves Counties, Texas.

General and Administrative Expenses. General and administrative expenses for the nine months ended March 31, 2009 and the nine months ended March 31, 2008 were approximately $6.0 million and $5.3 million, respectively.

Major components of general and administrative expenses for the nine months ended March 31, 2009 included approximately $1.3 million in State of Louisiana franchise taxes, $1.7 million in salaries and benefits, $1.3 million in legal, accounting, engineering and other professional fees, $0.2 million in office administration expenses, $0.4 million in insurance costs, and $1.1 million related to the cost of expensing stock options and stock grant compensation.

Major components of general and administrative expenses for the nine months ended March 31, 2008 included approximately $2.3 million in salaries and benefits, approximately $0.9 million in legal, accounting, engineering and other professional fees, $0.4 million in office administration expenses, $0.3 million in insurance costs, and $1.4 million related to the cost of expensing stock options and stock grant compensation.

Interest Expense. We reported interest expense of $589,812 for the nine months ended March 31, 2009, compared to interest expense of approximately $3.6 million for the nine months ended March 31, 2008. The lower level of interest expense is attributable to the Company retiring all of its long term debt in the in the first quarter of fiscal year 2009.

Interest Income. We reported interest income of $757,571 for the nine months ended March 31, 2009. This compares to $1.8 million of interest income reported for the nine months ended March 31, 2008. The higher level of interest income in 2008 is due to higher levels of cash during the nine months ended March 31, 2008 as a result of our various property sales, coupled with much higher interest rates during the nine months ended March 31, 2008. The decrease is also due to outstanding promissory notes during the nine months ended March 31, 2008 between the Company and Trulite Inc. that were converted into shares of Trulite Inc. common stock in late November 2007.

Gain (Loss) on Sale of Assets and Other. For the nine months ended March 31, 2008, we reported a gain on sale of assets and other of approximately $62.0 million. Of this amount, approximately $63.4 million relates to the gain on the sale of the Company’s 10% limited partnership interest in Freeport LNG, $2.1 relates to a payment from a stockholder related to a short swing profit liability, offset by a $2.9 million loss recognized on the sale of certain assets held by CVCC and a $0.6 million loss when the Company wrote down its investment in Moblize, Inc.

Production, Prices, Operating Expenses, and Other

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2009				2008				2009				2008
		(Dollar amounts in 000’s,								(Dollar amounts in 000’s,
		except per Mcfe amounts)								except per Mcfe amounts)
Production Data:
Natural gas (million cubic feet)			5,583				1,555				15,458				4,651
Oil and condensate (thousand barrels)			148				38				363				95
Natural gas liquids (thousand gallons)			3,534				1,403				4,573				2,218
Total (million cubic feet equivalent)			6,976				1,983				18,289				5,538
Natural gas (million cubic feet per day)			62.0				17.1				56.4				16.9
Oil and condensate (thousand barrels per day)			1.6				0.4				1.3				0.3
Natural gas liquids (thousand gallons per day)			39.3				15.4				16.7				8.1
Total (million cubic feet equivalent per day)			77.2				21.7				66.6				19.9
Average Sales Price:
Natural gas (per thousand cubic feet)		$	4.93			$	7.35			$	7.99			$	7.69
Oil and condensate (per barrel)		$	41.53			$	102.48			$	73.02			$	87.22
Natural gas liquids (per gallon)		$	0.70			$	1.56			$	0.96			$	1.45
Selected data per Mcfe:
Lease operating expenses (including property and severence taxes)		$	0.65			$	0.75			$	0.79			$	0.57
General and administrative expenses		$	0.21			$	1.12			$	0.33			$	0.96
Depreciation, depletion and amortization of natural gas and oil properties		$	1.26			$	2.00			$	1.17			$	1.01

*    Not meaningful.

Capital Resources and Liquidity

Cash From Operating Activities. Cash flows from operating activities provided approximately $69.8 million in cash for the nine months ended March 31, 2009 compared to $66.4 million for the same period in 2008. This increase in cash provided by operating activities is attributable to increased natural gas and oil sales from our Dutch #3 and #4 discoveries, our Mary Rose #1, #2, #3 and #4 discoveries, and our Eloise North discovery, as well as from the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008, partially offset by reduced production from our three Dutch wells which were shut-in during all of October and the majority of November 2008 due to Hurricane Ike.

Cash From Investing Activities. Cash flows used in investing activities for the nine months ended March 31, 2009 were approximately $23.1 million, compared to using $31.7 million in investing activities for the nine months ended March 31, 2008. This decrease is primarily attributable to reduced capital expenditures for drilling exploration and developmental wells.

Cash From Financing Activities. Our financing activities used approximately $65.1 million in cash flow for the nine months ended March 31, 2009 compared to using $15.5 million for the same period in 2008. This increase is primarily attributable to purchasing approximately $51.8 million of our common stock while not incurring any preferred stock dividend payments during the nine months ended March 31, 2009.

Capital Budget. We have no significant capital expenditures planned for the remainder of the fiscal year ending June 30, 2009. Our plan is to continue to build our cash reserves and use our liquidity to repurchase our shares in the open market at opportune times.

The Company views periodic reserve sales as an opportunity to capture value, reduce reserve and price risk, in addition to being a source of funds for potentially higher rate of return natural gas and oil exploration investments. We believe these periodic natural gas and oil property sales are an efficient strategy to meet our cash and liquidity needs by providing us with immediate cash, which would otherwise take years to realize through the production lives of the fields sold. We have in the past and expect in the future to continue to rely heavily on the sales of assets to generate cash to fund our exploration investments and operations.

These sales bring forward future revenues and cash flows, but our longer term liquidity could be impaired to the extent our exploration efforts are not successful in generating new discoveries, production, revenues and cash flows. Additionally, our longer term liquidity could be impaired due to the decrease in our inventory of producing properties that could be sold in future periods. Further, as a result of these property sales the Company’s ability to collateralize bank borrowings is reduced which may increase our dependence on more expensive mezzanine debt and potential equity sales. The availability of such funds will depend upon prevailing market conditions and other factors over which we have no control, as well as our financial condition and results of operations.

Natural Gas and Oil Reserves

The following table presents our estimated net proved, developed producing natural gas and oil reserves at March 31, 2009. The offshore reserves were based on a reserve report generated by William M. Cobb & Associates, Inc. The Company believes that having an independent and well respected third-party engineering firm prepare its reserve report enhances the credibility of our reported reserve estimates. Management is responsible for the reserve estimate disclosures in this filing, and meets regularly with our independent third-party engineer to review these reserve estimates.

		Proved
		Reserves as of
		March 31, 2009
Natural Gas (MMcf)			281,742
Oil, Condensate and Natural Gas Liquids (MBbls)			12,419
Total proved reserves (Mmcfe)			356,256