Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

Note 7 - Commitments and Contingencies

During the second quarter of 2011, the Company entered into two natural gas gathering and services agreements whereby it is subject to certain natural gas gathering through-put commitments for up to ten years pursuant to each contract.  The Company may be required to make periodic deficiency payments for any shortfalls in delivering the minimum applicable annual or semi-annual volume commitments.  In the event that no gas is delivered pursuant to the agreements, the aggregate deficiency payments will total approximately $729.4 million.  If a shortfall in the minimum volume commitment arises, the Company can arrange for third party gas to be delivered into the applicable gathering system and applied to the Company’s minimum commitment.

During the first quarter of 2011, the Company entered into a hydraulic fracturing services contract.  The total commitment is $180.0 million over a two-year term commencing January 1, 2011.  However, the Company’s liability in the event of early termination of this contract is not to exceed $24.0 million.

The Company is subject to litigation and claims that have arisen in the ordinary course of its business.  The Company accrues for such items when a liability is probable and the amount can be reasonably estimated.  The Company currently has no such accruals.  In the opinion of management, any adverse results in any such pending litigation and claims will not have a material effect on the results of operations, the financial position, or cash flows of the Company.

The Company is currently a defendant in litigation where the plaintiffs claim an aggregate overriding royalty interest of 7.46875 percent in production from approximately 22,000 of the Company’s net acres in the Eagle Ford shale play in South Texas.  The plaintiffs seek to quiet title to their claimed overriding royalty interest and seek the recovery of unpaid overriding royalty interest proceeds allegedly due.  The Texas District Court has issued an order granting plaintiffs’ motion for summary judgment, but the Company believes that the summary judgment order is incorrect under the governing agreements and applicable law, and the Company intends to appeal and continue to contest the litigation.  In July 2011, the court entered judgment awarding the plaintiffs damages of approximately $5.2 million.  If the plaintiffs were to ultimately prevail, the overriding royalty interest would reduce the Company’s net revenue interest in the affected acreage.  The Company does not currently believe that an unfavorable ultimate outcome is probable, nor that if the plaintiffs prevail there would be a material effect on the financial position of the Company.  Based on the Company’s current view of the facts and circumstances of the case, no accrual has been made for any loss.