Our price-risk management policy permits the utilization of agreements and financial instruments (such as futures, forward contracts, swaps and options contracts) to mitigate price risk associated with fluctuations in oil and natural gas prices. Below is a description of the financial instruments we have utilized to hedge our exposure to price risk.

• Price Floors – At December 31, 2004, we had in place price floors in effect through the December 2005 contract month for natural gas, these cover a portion of our domestic natural gas production for January 2005 to December 2005. The natural gas price floors cover notional volumes of 4,000,000 MMBtu, with a weighted average floor price of $5.83 per MMBtu. Our natural gas price floors in place at December 31, 2004 are expected to cover approximately 30% to 35% of our domestic natural gas production from January 2005 to December 2005. At December 31, 2004, we also had in place crude oil price floors in effect through the March 2005 contract month, which cover a portion of our domestic crude oil production for January 2005 to March 2005. The crude oil price floors cover notional volumes of 216,000 barrels, with a weighted average floor price of $37.00 per barrel. Our crude oil price floors in place at December 31, 2004 are expected to cover approximately 15% to 20% of our domestic crude oil production from January 2005 to March 2005. The fair value of these instruments at December 31, 2004, was $1.8 million and is recognized on the accompanying balance sheet in “Other current assets.” There are no additional cash outflows for these price floors, as the cash premium was paid at inception of the hedge. The maximum loss that could be sustained from these price floors in 2005 would be their fair value at December 31, 2004 of $1.8 million.
• New Zealand Gas Contracts – All of our gas production in New Zealand is sold under long-term, fixed-price contracts denominated in New Zealand Dollars. These contracts protect against price volatility, and our revenue from these contracts will vary only due to production fluctuations and foreign exchange rates.

Interest Rate Risk. Our senior notes and senior subordinated notes both have fixed interest rates, so consequently we are not exposed to cash flow risk from market interest rate changes on these notes. At December 31, 2003, we had $7.5 million in outstanding borrowings under our credit facility, which bears a floating rate of interest and therefore is susceptible to interest rate fluctuations. The result of a 10% fluctuation in the bank’s base rate would constitute 53 basis points and would reduce 2005 cash flows by less than $0.1 million based on the December 31, 2004 level of borrowing.

Income Tax Carryforwards. We had significant federal and state net operating loss and capital loss carryforwards at December 31, 2004. The Company has not recorded a valuation allowance against the deferred tax assets attributable to these carryovers at December 31, 2004, as management estimates that it is more likely than not that these assets will be fully utilized before they expire except for a $0.5 million valuation allowance against the capital loss carryforward, as detailed in Note 3 of the accompanying consolidated financial statements. Significant changes in estimates caused by changes in oil and gas prices, production levels, capital expenditures, and other variables could impact the Company’s ability to utilize the carryover amounts. If we are not able to use our carryforwards, our results of operations and cash flows will be negatively impacted.

Financial Instruments and Debt Maturities. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and senior notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid or short-term nature of these instruments. The fair values of the bank borrowings approximate the carrying amounts as of December 31, 2004 and 2003, and were determined based upon variable interest rates currently available to us for borrowings with similar terms. Based upon quoted market prices as of December 31, 2004 and 2003, the fair values of our senior subordinated notes due 2012 were $224.0 million, or 112.0% of face value, and $218.0 million, or 109% of face value, respectively. Based upon quoted market prices as of December 31, 2004, the fair value of our senior notes due 2011 was $162.4 million, or 108.25% of face value. The carrying value of our senior subordinated notes due 2012 was $200.0 million at December 31 for both 2004 and 2003. The carrying value of our senior notes due 2011 was $150.0 million at December 31, 2004.

Foreign Currency Risk. We are exposed to the risk of fluctuations in foreign currencies, most notably the New Zealand Dollar. Fluctuations in rates between the New Zealand Dollar and U.S. Dollar may impact our financial results from our New Zealand subsidiaries since we have receivables, liabilities, natural gas and NGL sales contracts, and New Zealand income tax calculations, all denominated in New Zealand Dollars. We use the U.S. Dollar as our functional currency in New Zealand and because of this, our results of operations, cash flows and effective tax rate are impacted from fluctuations between the U.S. Dollar and the New Zealand Dollar.

Customer Credit Risk. We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available. Due to availability of other purchasers, we do not believe the loss of any single oil or gas customer would have a material adverse effect on our results of operations.