South Texas Oil Co. Posts Proved Reserves, 2009 Budget

South Texas Oil Company has announced estimated total proved reserves quantities at December 31, 2008 of 5.1 million barrels of oil equivalent (MMBoe). The Company also announced a preliminary 2009 capital expenditure budget (CAPEX) of $10.0 million.

2008 Proved Reserves

For 2008, total proved reserves are comprised of 3.1 million barrels of oil and 12.1 billion cubic feet of natural gas. The reserve mix is approximately 60% crude oil. Approximately 12% of the proved reserves are classified as proved developed and 88% are proved undeveloped (PUD).

At December 31, 2008, the Company's estimated, pre-tax future net cash flows discounted at 10% (commonly known as SEC PV-10) for proved reserves was $70.3 million. In determining the 2008 PV-10 calculation, the Company's reserve engineers used net year-end commodity prices of $44.60 per barrel of crude oil at West Texas Intermediate pricing adjusted by lease for quality, transportation fees and regional price differentials, and for determining the natural gas quantities, $5.71 per million British thermal units (MMBtu) of natural gas priced at Henry Hub Cash Market Price adjusted by lease for Btu content, transportation fees and regional price differentials. All prices are held constant through the life of the wells.

The majority of total proved reserves are located in the Giddings and Bastrop Fields in the Company's core operating area. With the exception of the DJ Basin, for 2008, the Company's reserve estimates are engineered by Dallas-based independent, third-party reservoir engineering consultants, Forrest A. Garb & Associates, Inc. and conform to the definition as set forth in the SEC Regulation S-X Part 210.4-10 (a) as clarified by subsequent Commission Staff Accounting bulletins. The 2008 DJ Basin reserves were engineered by Denver-based MHA Petroleum Consultants and were audited by Forrest A. Garb & Associates, Inc. The proved reserves are also in accordance with Financial Accounting Standards Board Statement No. 69 requirements, and the reserve estimates do not include any probable or possible reserves.

For 2007, reserve estimates were engineered by independent reservoir engineering consultants, Netherland, Sewell & Associates, Inc.
For reserves booked in 2009, new SEC-defined regulations for oil and gas reserve disclosures will become effective. The new methodology utilizes average commodity prices received throughout the year in calculating the value of proved reserves. The current methodology employs a point-in-time calculation based on the price at December 31 of the year the reserves are booked. Under the average-price scenario, utilizing a simple arithmetic average of the closing price on the last day of month for previous 12-month period, South Texas Oil Company's proved reserves quantities at December 31, 2008 would have been 5.2 MMBOE carrying a SEC PV-10 value of $162.8 million. Average prices used in the calculation of reserve quantities under the average pricing scenario were $95.60 per barrel and $8.63 per MMBtu, as compared to the above-mentioned $44.60 per barrel and $5.71 per MMBtu on December 31, 2008.

"Since installing new management in June 2008, we implemented disciplined top-to-bottom analysis of the Company," said Mike Pawelek, Chairman and CEO. "The comprehensive process included meticulous scrutiny of our asset base and core operating areas, our geologic and geophysical data, reserves data and extensive land and title review and evaluation. In addition, our Chief Financial Officer undertook subsequent improvement of our reporting and accounting functions. The review process has been a top priority for management that resulted in part in the increase in reserves reported today. We booked a higher quantity of proved undeveloped locations due to what we believe is the lower-risk nature of these reserves as demonstrated through analogous well data from long-term historical production in the immediate areas that were evaluated. The majority of the low-risk PUD locations are located in Giddings and Bastrop areas which have demonstrated reliable production and reservoir characteristics for South Texas Oil and other operators over the years."

2009 Initial Capital Expenditure Budget

For 2009, the Board of Directors has approved a preliminary CAPEX budget of $10.0 million. The 2009 drilling program focuses primarily on the Austin Chalk, Georgetown and Buda formations in the Giddings Field and Bastrop area where the Company has an inventory of 27 laterals which range from 500 to 5,000 feet. The preliminary CAPEX budget includes an estimated $5.5 million for the Giddings and Bastrop laterals, $4.0 million for the previously announced Blue Moon Exploration Project Agreement, and $0.5 million for Matagorda Bay activities.

The preliminary 2009 CAPEX budget excludes acquisitions, but may include installation of gathering system infrastructure and pipeline hookups, and geophysical operations, including seismic data acquisition. The CAPEX budget may be modified depending upon commodity prices and market conditions. The Company intends to fund its 2009 drilling program through cash flow from operations, cash on hand and through potential debt or equity financings during 2009.

Pawelek continued, "Through our asset evaluation process, we have force-ranked rate-of-return projects that can provide maximum value for shareholders in the current lower-price commodity environment. The 27 laterals in inventory are low-cost re-entries of existing well bores that we believe are highly economical at present drilling and completion costs and commodity prices. To ensure that we can drill the laterals, we have acquired additional leasehold in the Giddings core area, where we now own approximately 16,000 net mineral acres. The lateral project is a focus for 2009 and provides us flexibility to return to our other projects at a later date when the commodity price backdrop improves."