East Texas/North Louisiana

East Texas/North Louisiana is our largest division in terms of production and reserves. Our primary targets across this region include the Haynesville and Bossier shales. We also have production from the Cotton Valley, Travis Peak, Pettet and Hosston formations. Currently, our emphasis is on exploitation of our acreage in the Haynesville shale play where we hold approximately 76,000 net acres. We continue to seek additional acreage that is complementary to our existing acreage, operations and pipeline infrastructure.

Our budgeted capital expenditures in 2011 are $782 million, of which $683 million will fund the drilling and completion of 233 gross (65.2 net) horizontal shale wells (163 operated and 70 non operated). We are planning to run 22 operated rigs in this area throughout the year. In East Texas/North Louisiana, we drilled and completed 27 gross operated wells (11.6 net) in the fourth quarter 2010. We drilled and completed 92 gross operated wells (38.4 net) during the year in the region and realized a 100 % success rate.

Haynesville Shale

Our development program in the Haynesville shale play is concentrated in DeSoto Parish, Louisiana and the recently acquired Shelby Trough area in East Texas. We are developing our core DeSoto Parish position on 80-acre spacing in a manufacturing mode utilizing multi-pad development. In the Shelby Trough our efforts are focused on delineating our position, establishing units and holding our acreage. Although we will be developing some units in 2011, we expect to transition the development of the Shelby Trough acreage to full manufacturing mode in 2012.

In DeSoto Parish our development program has made a transformation from a testing and delineation program to a full field development program. In mid 2010 we initiated a manufacturing process with full unit development on 80-acre spacing. In June 2010 we completed our first four well, 80-acre spacing test across 320 acres, and we completed our first eight well, 80-acre spacing test across a full 640 acre unit in October 2010. Our manufacturing process typically involves four drilling rigs per 640 acre unit to simultaneously drill all wells in the unit, followed by two to three fracture stimulation fleets to simultaneously complete all wells in the unit. We believe this approach to full field development maximizes value and the recovery of the resource. At year end 2010, we had 12 units in progress for full 80-acre development and plan to target an additional 15 units in 2011. The multi-well pad design also minimizes surface impact and provides for a more capital efficient gathering and production system layout than can be achieved with single well locations. In late 2010 we commissioned a 12 mile, 24 inch diameter water distribution line which utilizes waste water from a local paper mill to support our frac fleets. We recently used this line to simultaneously feed three frac fleets located in the same section as we completed seven wells.

In 2010, we acquired a strong acreage position in Shelby, San Augustine and Nacogdoches Counties, Texas and we now hold 24,000 net acres in this second core area of the Haynesville shale play. By year end 2010 we had six drilling rigs running in the area and a total of 19 horizontal wells flowing to sales with a total gross production rate of approximately 100 Mmcf per day (34 Mmcf per day net). At the time of the initial acquisition, gross production in this area was 34 Mmcf per day (7 Mmcf per day net). Some of our recent wells have yielded results comparable to our DeSoto Parish area. In the fourth quarter 2010, we turned seven new wells to sales in this area. Notable highlights for the quarter included completing and turning to sales two wells with initial rates of 23 and 28 Mmcf per day with flowing pressures of 8,979 and 9,520 psi, respectively. Our 2011 development plan for this area will have a strong focus on evaluation and delineation. By year end 2011 we expect to have all of our core San Augustine and Nacogdoches acreage held by production.

Our operational focus has resulted in significant improvements in drilling and completion efficiencies. In late 2010, in our DeSoto Parish area, we achieved our best drilling time performance to date of 28 days from spud to rig release. This was accomplished by our most consistent and experienced flex rig in our fleet, the same rig that drilled our first horizontal well in 2008. We have recently set several drilling records in the play including single bit runs from surface to intermediate hole depth and single bit runs from intermediate to production hole total depth, typically 16,500 ft. This has been achieved by working closely with our in-house service providers to design the appropriate bit and motor combination for the specific area.

We continue to use the latest technologies to enhance our shale development. We recently completed 168 square miles of 3-D seismic in DeSoto Parish and acquired another 126 square miles in the Shelby Trough area. In 2010, we monitored five wells with micro-seismic and another 19 wells with our buried array monitoring system. In our completion evaluation process, we gathered production logs on 10 horizontal wells and conducted tracer evaluations on 17 horizontal wells. In 2010, we also drilled a dedicated vertical pressure monitoring well and installed permanent down hole gauges to measure and monitor the reservoir pressure in the Haynesville shale.

In addition to our success in reducing well costs with drilling time improvements and efficiencies, we are also focused on optimizing our completions. Almost 50% of our well cost is incurred during the completion phase. We plan to implement cost effective and efficient design changes as part of our manufacturing program. We are utilizing four dedicated fracture stimulation fleets and continue to see greater consistency and efficiencies in our fracturing operations. These commitments have provided the necessary level of frac equipment available to us, and we have maintained a proper alignment with our drilling to keep a low inventory of wells waiting on completion. At December 31, 2010, we had 17 wells in our completion inventory which is low considering our drilling activity level and pad development process. We target a minimum working inventory of completions and design our program to flow gas directly to the sales line once the well is completed. We have no wells currently waiting on pipeline. This is possible due to close coordination with our jointly-held company, TGGT, which installs the gathering lines in concert with our drilling operations in most of our development areas.

We are currently running 22 rigs and plan to maintain this activity level in the play throughout 2011. Our service contracts for drilling and completions are secure but flexible. We have the ability with our current contracts to drop our rig count to 11 rigs by August 2011 if product pricing does not meet our economic hurdles.

Bossier Shale

The Bossier shale that overlies the Haynesville shale is a significant resource that is present across most of our acreage. We drilled and tested two horizontal Bossier wells in our core DeSoto Parish area during 2010 with initial flow rates of 11 and 13 Mmcf per day. We will continue to monitor well performance of these two wells before we begin additional testing in this area. In the Shelby Trough area we drilled our first EXCO operated Bossier test in the fourth quarter 2010 and will complete the well in late January 2011. We also acquired a Bossier completion from Common Resources. Additional Bossier testing for the Shelby area will be evaluated following this test.

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