TXCO Posts Loss for Q4, Lower Profit for 2006

--Revenues
--Operating income and cash flow
--Oil and gas sales
--Proved reserves

For the year, total revenues rose to a record $72.4 million, an 8 percent increase from $67.0 million in 2005. The Company's net income was $7.2 million, or $0.22 per share, compared with $13.7 million, or $0.48 per share, in the prior year, which included the benefit of a $24.5 million pre-tax gain from an asset sale to EnCana Oil & Gas (USA) Inc. of certain Maverick Basin assets. All per-share amounts are on a diluted basis.

Operating income rose to a record $10.5 million, a 44 percent increase from $7.3 million in the prior year. Net cash provided by operating activities also set a record, $24.7 million, a nearly 300 percent increase from $6.3 million recorded in the prior year. Ebitda - earnings before income taxes, interest expense, depreciation, depletion, amortization, impairment and abandonment expense - was a record $37.3 million or $1.17 per share, up 75 percent from $21.3 million, or $0.74 per share in 2005. Ebitdax - Ebitda plus exploration expense - also set a record at $40.3 million, $1.26 per share, a 64 percent increase from $24.6 million, or $0.85 per share, a year earlier.

Total assets at year end stood at $143.8 million, a 31 percent increase from $109.5 million at Dec. 31, 2005. Stockholder equity in TXCO was $123.6 million versus $83.3 million at year-end 2005, a 48 percent increase.

TXCO's oil and gas sales increased 47 percent from the prior year to a record $56.5 million, partially offset by a decline in gas gathering revenues to $15.9 million as gas volumes declined. The Company's average commodity price for crude oil rose to $62.56 per barrel while the average price for natural gas declined to $7.18 per thousand cubic feet, compared with 2005.

Fourth Quarter Results

TXCO's revenues for the three months ended Dec. 31, 2006, were $15.3 million, compared to $19.8 million for fourth-quarter 2005. The Company incurred a quarterly net loss of $4.4 million, $0.13 per share, compared to net income of $2.8 million, $0.09 per share, in the year-earlier period. The loss primarily resulted from higher depletion rates due to engineering adjustments on six Glen Rose Porosity wells placed on production in quarters three and four, which did not perform as originally projected. These wells have been evaluated and are scheduled for re-entry in 2007.

Oil and gas sales rose to $12.1 million, compared to $11.0 million in the year-earlier quarter. Oil and gas volumes increased to 1.5 Bcfe, compared with 1.1 Bcfe in fourth-quarter 2005.

All 2006 and fourth-quarter financial results do not reflect the impact of TXCO's proposed acquisition of Output Exploration LLC, announced Feb. 21, 2007. Closing is expected on or about April 2. Acquisition of the privately held oil and gas producer is expected to double TXCO's proved reserves and increase daily production by two-thirds.

Continuing Growth in Reserves

TXCO continued its long-term trend of year-over-year increases in proved reserves. Net proved reserves at the end of 2006 rose to 41.4 billion cubic feet equivalent of natural gas, up 5 percent from 39.4 Bcfe at year-end 2005. Combined with 2006 production of 5.9 Bcfe, gross reserve additions were 7.9 Bcfe. TXCO had a 134.5 percent all-source reserve replacement rate for the year. The standardized measure value of the estimated, discounted future net cash flows related to proved reserves at year end were $102.0 million, based on adjusted commodity prices of $57.75 per barrel for crude oil and $5.40 per million Btu for gas, compared with $98.0 million in 2005.

The Company's reserve life index stood at seven years, compared with 8.6 years at the end of 2005. TXCO's reserve mix at year end consisted of 81 percent oil and 19 percent gas, of which approximately 48 percent was proved developed. In the last five years, the Company's proved reserves have increased 325 percent. All reserve estimates were prepared by the independent engineering firms of DeGolyer and MacNaughton and William M. Cobb & Associates Inc. in accordance with Securities and Exchange Commission and Financial Accounting Standards Board requirements.

Management's Perspective

"The mostly positive results TXCO had in 2006, coupled with our proposed acquisition of Output Exploration, places the Company in an excellent position going forward," said Chairman, President and CEO James E. Sigmon. "Although disappointed with fourth-quarter Glen Rose Porosity results, we begin 2007 on a high note with higher capital availability, a large inventory of attractive drilling targets and three growth catalysts that offer us high-impact potential - the San Miguel oil sands project and Pearsall gas resource play in our core Maverick Basin area, plus the Marfa Basin shale play in West Texas.

"In addition, Output's assets in East Texas, along the Gulf Coast and in the Anadarko Basin offer us the opportunity to leverage our strength and knowledge of the Glen Rose formation and create additional value for our shareholders," Sigmon added.

The Exploration Company is an independent oil and gas enterprise with interests primarily in the Maverick Basin of Southwest Texas and the Marfa Basin in West Texas.