The Exploration Company Finances Completion of Taylor Well

The Exploration Company has financed completion of the Taylor 132-1 Jurassic wildcat and an associated 640-acre drilling unit. Separately, TXCO has signed a letter of intent to acquire an interest in leases totaling 12,200 acres in Maverick County, Texas.

Kayne Anderson Energy Fund II L.P., Los Angeles, has agreed to pay 48.75 percent of the Taylor well's completion costs in exchange for a 34.125 percent net profit interest in the well. Payment for Kayne Anderson's interest will be collected from dividends payable to Kayne Anderson on TXCO's Series B Redeemable Preferred Stock that Kayne Anderson acquired in August 2003. Kayne Anderson's net profits account will be credited with revenue from the sale of 34.125 percent of the oil and gas sold from the well, less proportionate charges for royalties and lease operating expenses.

TXCO retains a 40.625 percent working interest in the well while paying only 31.25 percent of the anticipated completion costs. TXCO's partner, Horizontal Co. of Wichita Falls, Texas, retains a 22.75 percent working interest while paying 17.5 percent of the anticipated completion costs. The Company's other partner, A.L.S. Oil and Gas Ltd., also of Wichita Falls, retains a 2.5 percent working interest. TXCO estimates completion costs will be under $1 million.

"We are pleased to have arranged this financing with Kayne Anderson," said President and CEO James E. Sigmon. "We have increased our exposure to this exciting prospect from a 15.625 percent net carried interest under our original arrangement with Blue Star Oil & Gas Ltd. of Dallas to more than a 40 percent net working interest while exposing the Company to an estimated $350,000 or less in completion costs."

Perforating and testing of the well -- the first in the Maverick Basin to penetrate the Jurassic -- is under way today. TXCO assumed operatorship of the well from its partner, Blue Star, in February and announced plans to test the upper Jurassic at 14,942 to 15,140 feet and 15,292 to 15,400 feet. Blue Star earlier had tested the Jurassic at lower intervals and found non-commercial quantities of rich, 1,200 MMbtu natural gas. Blue Star relinquished its interest in the well but remains a partner with TXCO and its partners in a 50,000-acre tract below the Sligo formation. Blue Star has announced its intention to drill a second Jurassic well based on information obtained from the Taylor well.

Separately, TXCO announced it has signed a letter of intent with J. Charles Hollimon Ltd. of San Antonio to acquire a 50 to 75 percent working interest in a 12,200-acre prospect area located just south of TXCO's 480,000-acre Maverick Basin lease block. Terms were not announced. TXCO anticipates closing in mid March. A 3-D seismic survey of the prospect has been acquired and will be interpreted to locate prospective drilling locations.