The Exploration Company Reports First-Quarter 2005 Results; Hedging Ch

The Exploration Company Reports First-Quarter 2005 Results; Hedging Charges Create Loss, Operating Income Up

    Business Editors/Energy Editors

    SAN ANTONIO--(BUSINESS WIRE)--May 6, 2005--The Exploration Company (Nasdaq:TXCO) today reported financial results for the quarter ended March 31, 2005. Highlights include:

--	Revenues were $14.6 million, up 29 percent.
--	Operating income rose to $1.2 million, a 37 percent rise.
--	A net loss of $3.3 million due to hedging-related losses.
--	Record assets of $115.7 million.
--	Oil and gas sales volumes of 1.1 billion cubic feet of gas equivalent.

    The Company's total revenues were $14.6 million, up from $11.4 million recorded in the first quarter of 2004, as both oil and gas sales and gas gathering revenues rose. Higher commodity prices and gas production more than offset a decline in oil production. Assets rose to a record $115.7 million, up from $114.2 million at year-end 2004.
    TXCO reported a net loss of $3.3 million for the first quarter due to $3.6 million in hedging-related losses, including a $3.4 million non-cash mark-to-market charge. The net loss equals $0.12 per share. Rising oil and gas prices during the quarter had a material, negative impact on the fair value of the Company's commodity derivatives, most of which were placed in connection with TXCO's existing credit facility. In the year-earlier quarter, net income was $69,000, equal to $0.003 per share. The Company did not hedge or have any derivatives in the first quarter of 2004. All per-share amounts are on a diluted basis.
    Excluding hedging losses, the Company's net income would have been approximately $262,000, more than triple its first-quarter 2004 results. Income from operations increased sharply to $1.2 million from the $845,000 reported for the same period a year earlier.
    Before changes in operating assets and liabilities, net cash provided by operating activities was $3.4 million, up from $3.2 million for the year-ago period. Including the changes, net cash provided by operating activities was $2.5 million, down from $3.8 million a year earlier. Ebitdax - earnings before income taxes, interest, depreciation, depletion, amortization, impairment, abandonment and exploration expense - rose to $4.7 million or $0.17 per share, a 23 percent increase from $3.9 million or $0.17 per share in the year-earlier period. Ebitda - Ebitdax less exploration expense - was $4.2 million or $0.15 per share, 14 percent above $3.7 million or $0.16 per share a year earlier. See the Company's Web site at www.txco.com for a reconciliation of non-GAAP financial measures.

    Management's Perspective

    "Through our efforts to lock in high commodity prices by hedging, we were able to insure we will receive comparatively high prices of $6.83 per million Btu and $49.10 per barrel on a significant portion of our gas and oil sales volumes through October 2006," said Chairman and CEO James E. Sigmon. "Commodity prices continued to climb in the first quarter, negatively impacting the fair value of our derivatives and causing us to incur this non-cash hedging loss.
    "Aside from this item, we had solid results in the first quarter for what is traditionally our weakest period of each year," Sigmon added. "Our cash flow remains strong, allowing us to move ahead with an ambitious capital expenditure program. To date, we have spudded or re-entered 16 wells in the Maverick Basin, leaving us in an excellent position to meet our target of 60-plus wells this year. We now have five rigs in operation on our acreage, compared with as few as two during early portions of this year.
    "The most exciting development during the quarter was further expansion of TXCO's already large Maverick Basin acreage position to 727,000 gross acres. This is a very large parcel for a company our size. The interest we acquired in an additional 175,000 acres greatly increases our exposure to some of the most promising plays in the Maverick Basin and significantly raises the number of potential drilling prospects. I believe TXCO will continue its trend of higher sales and reserves in 2005."

    About The Exploration Company

    The Exploration Company is an independent oil and gas enterprise with interests primarily in the Maverick Basin of Southwest Texas. The Company has a consistent record of long-term growth in its proved oil and gas reserves, leasehold acreage position, production and cash flow through its established exploration and development programs. Its business strategy is to build shareholder value by acquiring undeveloped mineral interests and internally develop a multi-year drilling inventory through the use of advanced technologies, such as 3-D seismic and horizontal drilling. The Company accounts for its oil and gas operations under the successful efforts method of accounting and trades its common stock on the Nasdaq Stock Market under the symbol "TXCO."

    Forward-Looking Statements

    Statements in this press release that are not historical, including statements regarding TXCO's or management's intentions, hopes, beliefs, expectations, representations, projections, estimations, plans or predictions of the future, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include those relating to oil and gas prices, capital expenditures, production levels, drilling plans, including the timing, number and cost of wells to be drilled, projects and expected response, and establishment of reserves. It is important to note that actual results may differ materially from the results predicted in any such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the costs of exploring and developing new oil and natural gas reserves, the price for which such reserves can be sold, environmental concerns affecting the drilling of oil and natural gas wells, as well as general market conditions, competition and pricing. More information about potential factors that could affect the company's operating and financial results is included in TXCO's annual report on Form 10-K for the year ended Dec. 31, 2004. This and all previously filed documents are on file at the Securities and Exchange Commission and can be viewed on TXCO's Web site at www.txco.com. Copies are available without charge, upon request from the Company.

    (Financial Information and Selected Operational Tables Follow)

THE EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31, December 31, 2005 2004 ------------ ------------

Assets

Current Assets: Cash and equivalents $1,515,038 $3,118,328 Accounts receivable, net 7,295,352 8,985,373 Prepaid expenses and other 1,485,407 800,045 Accrued derivative asset - current -- 133,971 ------------ ------------ Total Current Assets 10,295,797 13,037,717

Property and Equipment, net - successful efforts method of accounting for oil and gas properties 98,937,556 94,836,476

Other Assets: Deferred tax asset 5,232,718 5,232,718 Other assets 1,258,532 1,130,413 ------------ ------------ Total Other Assets 6,491,250 6,363,131 ------------ ------------

Total Assets $115,724,603 $114,237,324 ============ ============

THE EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31, December 31, 2005 2004 ------------ -------------

Liabilities and Stockholders' Equity

Current Liabilities: Accounts payable, trade $9,023,480 $10,339,934 Other payables and accrued liabilities 5,105,350 5,449,553 Derivative settlements payable 79,588 49,185 Accrued derivative obligation - current 2,422,927 -- Undistributed revenue 871,127 1,062,000 Current portion of long-term debt 134,501 1,666,466 ------------ ------------- Total Current Liabilities 17,636,973 18,567,138

Long-term Liabilities: Long-term debt, net of current portion 20,399,237 17,099,237 Accrued derivative obligation - long-term 839,329 -- Redeemable preferred stock, Series B (redemption value - $16 million) 11,216,560 10,991,308 Accrued dividends - preferred stock 257,727 217,728 Asset retirement obligation 1,699,110 1,679,600 ------------ ------------- Total Long-Term Liabilities 34,411,963 29,987,873

Stockholders' Equity: Preferred stock, Series A; authorized 10,000,000 shares issued and outstanding -0- shares -- -- Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 28,465,363 and 28,110,363 shares, outstanding 28,365,563 and 28,010,563 shares 284,653 281,103 Additional paid-in capital 85,302,805 84,010,730 Accumulated deficit (21,665,784) (18,363,513) Less treasury stock, at cost, 99,800 shares (246,007) (246,007) ------------ ------------- Total Stockholders' Equity 63,675,667 65,682,313 ------------ -------------

Total Liabilities and Stockholders' Equity $115,724,603 $114,237,324 ============ =============

THE EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 -------------- --------------

Revenues Oil and gas sales $7,683,463 $6,155,182 Gas gathering operations 6,927,394 5,208,893 Other operating income 6,127 3,322 -------------- -------------- Total Revenues 14,616,984 11,367,397

Costs and Expenses Lease operations 1,685,506 1,247,386 Production taxes 461,437 386,580 Exploration expenses 512,190 174,397 Impairment and abandonments 564,394 516,900 Gas gathering operations 6,571,958 4,894,134 Depreciation, depletion and amortization 2,481,196 2,335,297 General and administrative 1,179,214 968,121 -------------- -------------- Total Costs and Expenses 13,455,895 10,522,815 -------------- --------------

Income from Operations 1,161,089 844,582

Other Income (Expense) Derivative settlements loss (168,481) -- Derivative mark to market loss (3,396,227) -- Interest income 11,957 3,924 Interest expense (869,512) (729,993) Loan fee amortization (16,098) (5,256) -------------- -------------- Total Other Income (Expense) (4,438,361) (731,325) -------------- --------------

Income before income taxes and minority interest (3,277,272) 113,257

Minority interest in income of subsidiaries -- 18,160 -------------- --------------

Income before income taxes (3,277,272) 131,417 Income tax expense (24,999) (62,500) -------------- --------------

Net (Loss) Income $(3,302,271) $68,917 ============== ==============

(Loss) Earnings Per Share Basic (loss) earnings per share $(0.12) $0.00 ============== ==============

Diluted (loss) earnings per share $(0.12) $0.00 ============== ==============

THE EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 -------------- --------------

Operating Activities Net (loss) income $(3,302,271) $68,917 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation, depletion and amortization 2,481,196 2,335,297 Impairment and abandonments 564,394 516,900 Minority interest in income of subsidiaries -- (18,160) Non-cash derivative mark to market loss 3,396,227 -- Non-cash interest expense and accretion of liability - redeemable preferred stock 265,251 247,532 -------------- ------------- Net cash provided by operating activities, before changes in operating assets and liabilities 3,404,797 3,150,486

Changes in operating assets and liabilities: Receivables 1,690,021 (1,289,818) Prepaid expenses and other (813,482) 367,239 Accounts payable and accrued expenses (1,821,127) 1,604,426 -------------- ------------- Net cash provided by operating activities 2,460,209 3,832,333

Investing Activities Development and purchases of oil and gas properties (7,112,425) (6,125,299) Purchase of other equipment (14,734) (31,978) Changes in minority interests -- 28,075 -------------- ------------- Net cash used by investing activities (7,127,159) (6,129,202)

Financing Activities Proceeds from issuance of common stock, net of expenses 1,295,625 3,491,433 Proceeds from long-term debt obligations 3,300,000 -- Payments on long-term debt obligations -- (1,050,000) Payments on installment obligations (1,531,965) (1,464,017) -------------- ------------- Net cash provided by financing activities 3,063,660 977,416 -------------- -------------

Change in Cash and Equivalents (1,603,290) (1,319,453)

Cash and equivalents at beginning of period 3,118,328 6,180,560 -------------- -------------

Cash and Equivalents at End of Period $1,515,038 $4,861,107 ============== =============

THE EXPLORATION COMPANY SELECTED OPERATING DATA

Three Months Ended March 31, March 31, 2005 2004 ------------ ------------

Net cash provided in operating activities $ 2,460,209 $ 3,832,333

Ebitdax (a) 4,718,869 3,851,836

Ebitda (a) 4,206,679 3,677,440 Debt to asset ratio 31.6% 35.2%

Production

Oil: Production, in barrels 74,837 81,553 Average sales price per barrel $ 45.78 $ 31.98

Natural Gas: Production, in Mcf 693,476 638,650 Average sales price per Mcf $ 6.14 $ 5.55

Equivalent Basis: Production in BOE 190,416 187,995 Average sales price per BOE $ 40.35 $ 32.74

Production in Mcfe 1,142,498 1,127,968 Average sales price per Mcfe $ 6.73 $ 5.46

Other Operating Data Total lifting costs $ 2,146,943 $ 1,633,966 Lifting costs per Mcfe $ 1.88 $ 1.45

Production volume - oil properties - barrels 68,174 75,771 Lifting costs-oil (Incl Prod & Sev Tax) $ 1,065,747 $ 942,086 Lifting costs per Barrel $ 15.63 $ 12.43

Production volume - gas properties - Mcf 663,783 632,924 Lifting costs-gas (Incl Prod & Sev Tax) $ 1,081,196 $ 691,880 Lifting costs per Mcf $ 1.63 $ 1.09

Production volume excluding CBM properties - Mcf 656,155 626,022 Lifting costs excluding CBM activities $ 972,041 $ 578,027 Lifting costs per Mcf excluding CBM activities $ 1.48 $ 0.92

Depletion cost per BOE $ 12.66 $ 12.13

Depletion cost per Mcfe $ 2.11 $ 2.02

(a) Please see TXCO's Web site at www.txco.com for a reconciliation of these non-GAAP financial measures.

--30--CSD/sa*

CONTACT: The Exploration Company, San Antonio Investors: Roberto R. Thomae, 210-496-5300 ext. 214 bthomae@txco.com or Media: Paul Hart, 210-496-5300 ext. 264 pdhart@txco.com

KEYWORD: TEXAS INDUSTRY KEYWORD: OIL/GAS ENERGY EARNINGS SOURCE: The Exploration Company

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