TXCO Posts Loss for First Quarter

The Exploration Co. on Friday reported financial results for the quarter ended March 31, 2007, and provided an update of current operations.

First-Quarter Results

TXCO recorded a quarterly net loss of $1.9 million, equal to $0.06 per share, compared with net income of $1.3 million, or $0.04 per share, for the year-earlier quarter. All per-share amounts are on a diluted basis. Total revenues were $11.2 million, compared with $16.0 million in the first quarter of 2006.

The Company's oil and gas revenues, $8.7 million, were below the $10.5 million reported in the year-earlier period due to $1.2 million in losses on derivatives designated as cash flow hedges, $1.1 million of which were non-cash in this period. Decreased oil and gas sales were also attributable to lower commodity prices received in the quarter and to essentially flat equivalent production on a quarter-over-quarter basis. As previously announced, oil sales volumes were adversely impacted by several factors, including unscheduled repairs that closed a third-party oil pipeline serving the Maverick Basin region, fourth-quarter 2006 drilling technique issues, and a seasonal drilling slowdown. TXCO's primary crude purchaser has added additional trucking capacity to partially offset the impact of the temporary pipeline closure.

For the 2007 quarter, the average sales price received for crude oil was $54.98 per barrel and $7.26 per thousand cubic feet (mcf) for natural gas. This compares to $58.94 per barrel and $8.06/mcf, respectively, in the 2006 quarter.

TXCO closed its acquisition of Output Exploration LLC on April 2, effectively doubling its proved reserves and increasing its sales volumes by more than 60 percent. Financial impact of the acquisition is not reflected in the first quarter and will be reflected in second-quarter 2007 earnings and operating results.

Operations Update

TXCO currently has six rigs operating in its core, Maverick Basin operations area. Four target the Glen Rose Porosity oil play, one a Glen Rose shoal for gas and one is drilling a San Miguel/Olmos prospect. At the end of April, TXCO had spudded or re-entered 25 Texas wells this year, including 15 wells begun during the first quarter. Seven of these wells are now on production, nine are completed and awaiting hook-up, two are to be re-completed, six are drilling and one was plugged and abandoned.

Eleven Glen Rose Porosity wells have been spudded or re-entered this year. Five have been placed on production, two are in completion and four are drilling currently.

Porosity oil sales in the first quarter were 123,298 barrels, or 1,370 barrels of oil per day (bopd), a 16 percent increase from first-quarter 2006 but lower than in fourth-quarter 2006. Daily Porosity oil production for April increased to more than 2,100 bopd as new wells came on and as additional trucking capacity was added to offset constraints stemming from the temporary third-party pipeline curtailment mentioned above.

Recent Glen Rose wells include the Cage 1-28H (100 percent working interest), a Porosity well that went on production in mid April averaging 675 bopd and no water on a 12/64-inch choke with 650 pounds per square inch (psi) flowing tubing pressure. The Chittim 2-127 (47% WI), producing from the Glen Rose Shoal, tested at a rate of 1.1 million cubic feet of gas per day (mmcfd) on a 48/64-inch choke with 150 psi flowing tubing pressure. The well was placed on production in late April.

The Cage-West B 437 Unit 4-37H (100% WI), one of six horizontal Porosity wells TXCO drilled in late 2006 with laterals parallel to the formation's fracture system, was re-entered and re-completed with a conventional lateral perpendicular to the fracture pattern. The well was placed back on production in April and late in the month averaged 100 bopd and 332 barrels of water per day with 250 psi flowing tubing pressure on a 14/64-inch choke. TXCO plans to re-enter the remaining five wells this year.

TXCO's two-well San Miguel tar sands pilot project (50% WI) continues to evaluate the commercial potential of the large resource play, using a cyclic steam stimulation process. The pilot's first well is now in its second production phase while the second well has started its second steam-injection phase. Oil produced from the wells has been shipped to laboratories for analysis and pricing. TXCO plans to drill a new, 32-well production-size pilot with 21 of the wells in the project to be drilled this year and the remaining 11 wells to be drilled in early 2008.

Meanwhile, the Company has begun a separate pilot project (100% WI) to test the feasibility of producing 10-14 degree API gravity heavy oil from a separate shallow San Miguel zone using a series of horizontal well bores to heat the formation. The first phase of the project includes two horizontal wells and five vertical temperature monitoring wells, which will be converted to producing wells as the reservoir is heated.

Operations are ongoing on former Output Exploration properties in Texas and Oklahoma. TXCO currently is assimilating new staff, CAPEX budget and related operations. The Company currently expects to drill more than 30 wells this year on prospects acquired through Output.

Management Perspective

"I'm pleased to see a run-up in activity in recent weeks as we move ahead with our record drilling program that we outlined for 2007," said Chairman, President and CEO James E. Sigmon. "Furthermore, we expect to see a jump in drilling activity in the current quarter following the closing of our Output Exploration acquisition on April 2. As we have noted before, the Output acquisition doubled TXCO's proved reserves, increased our daily production by approximately two thirds, and offers us many new drilling prospects. Our first quarter results do not include any production increase from the Output acquisition.

"The first quarter is typically TXCO's slowest operating period each year. But with current trends, we remain confident that TXCO's proved reserves and production will continue to increase as we move ahead with an $85-90 million capital budget that calls for more than 100 new wells and re-entries in 2007."

TXCO is an independent oil and gas enterprise with interests in the Maverick Basin, the onshore Gulf Coast region, the Marfa Basin of Texas and the Midcontinent region of western Oklahoma.