TXCO Reports Record-breaking Quarter, Nine Months

The Exploration Company

The Exploration Company (TXCO) on Friday reported record earnings for the third quarter and nine months ended Sept. 30, 2006. Highlights include record:

--Nine-month earnings.
--Third-quarter and nine-month operating income.
--Total assets and revenues.

Third Quarter

TXCO's net income for the third quarter was $6.4 million, equal to $0.19 per share, in contrast to net income of $15.3 million, or $0.53 per share, in the third quarter of 2005, which included a one-time, $24.5 million pre-tax gain from the sale of selected assets in TXCO's Maverick Basin operations area to EnCana Oil & Gas (USA) Inc. All per-share amounts are on a diluted basis. Quarterly operating income rose sharply to a record $8.4 million, compared with $1.4 million reported for the year-earlier period.

Total revenues rose to a record $21.6 million, a 26 percent increase from $17.1 million in the 2005 period. Oil and gas sales of $18.1 million rose 65 percent on record volumes and record oil prices, offset by lower gas gathering revenues of $3.5 million. A 119 percent increase in oil sales volumes more than offset a decline in natural gas volumes. The Company's 2006 drilling budget focuses on the oil-prone Glen Rose Porosity play with a corresponding increase in oil output.

Nine-Month Period

For the January-September period, TXCO reported record net income of $11.6 million, equal to $0.35 per share. In the year-earlier period, net income was $11.0 million, or $0.38 a share, including the asset-sale gain mentioned above. Operating income for the nine months was sharply higher at $18.1 million, more than 400 percent above the $3.2 million reported in the prior-year period. Revenues were a record $57.2 million, up 21 percent from $47.2 million for the 2005 period. TXCO's assets rose to $145.3 million, 33 percent above the $109.5 million recorded at year-end 2005.

Net cash provided by operating activities for the nine months was $14.0 million, a 13 percent increase from $12.3 million in the year-earlier period. Ebitdax - earnings before income taxes, interest, depreciation, depletion, amortization, impairment, abandonment and exploration expense - rose to a record $32.0 million, an 84 percent increase from $17.4 million in 2005. Ebitda - Ebitdax less exploration expense - was $31.1 million, double the $15.6 million reported in the 2005 period. See TXCO's Web site at www.txco.com/gaaprecon.html for a reconciliation of non-GAAP financial measures.

Management's Perspective

"TXCO sustained its strong financial performance in the third quarter as rising oil sales from the expansion of our successful Glen Rose Porosity play combined with record oil prices," said President and CEO James E. Sigmon. "Our record cash flow metrics and low debt levels allow us to anticipate an ambitious drilling program in 2007.

"I want to emphasize once again that our strong financial and operational results are based on organic, drillbit growth as we continue to successfully develop our Maverick Basin leasehold. We look to continue the trend of creating measurable value for our shareholders. Key to our objectives are the Porosity play - as well as our new tar sand project, the highly prospective Pearsall formation and the Marfa Basin in West Texas. Our growth prospects have never been stronger."

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. The Company has a consistent record of long-term growth in its proved oil and gas reserves, leasehold acreage position, production and cash flow through its established exploration and development programs. Its business strategy is to build shareholder value by acquiring undeveloped mineral interests and internally developing a multi-year drilling inventory through the use of advanced technologies, such as 3-D seismic and horizontal drilling.