UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

RANGE RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		0-9592		34-1312571
(State or other jurisdiction of		(Commission		(IRS Employer
incorporation)		File Number)		Identification No.)

777 Main Street, Suite 800
Ft. Worth, Texas		76102
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (817) 870-2601

(Former name or former address, if changed since last report): Not applicable

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions (see General Instruction A.2. below):

     o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

     o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

     o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

     o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Index to Financial Statements

		Page
Description		number
Consolidated Financial Statements of Stroud Energy, Inc.		F-1
Unaudited Pro Forma Combined Financial Information of Range Resources Corporation		F-46

Item 2.01 — Completion of Acquisition or Disposition of Assets

This Current Report on Form 8-K/A amends and supplements the Current Report on Form 8-K of Range Resources Corporation (“Range”), filed with the Securities and Exchange Commission (the “SEC”) on June 21, 2006 (the “Form 8-K”), which reported under Item 2.01 the completion of the acquisition of Stroud Energy, Inc. (“Stroud”) pursuant to the Agreement and Plan of Merger, by and among Range, Range Acquisition Texas, Inc., a wholly-owned subsidiary of Range, and Stroud. This amendment is filed to provide the financial statements and pro forma financial information required by Item 9.01. The description of the acquisition included in Item 2.01 of the Form 8-K is incorporated by reference herein.

Item 9.01 — Financial Statements and Exhibits

(a)		Financial Statements of Businesses Acquired
		Audited consolidated balance sheet of Stroud Energy, Inc. and subsidiaries as of December 31, 2005 and the related statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005 is included herein.
		Unaudited consolidated balance sheet of Stroud Energy, Inc. and subsidiaries as of March 31, 2006 and the related statements of operations, stockholders’ equity and cash flows for the three months ended March 31, 2006 is included herein.
(b)		Pro Forma Financial Information
		Unaudited pro forma condensed statements of operations of Range Resources Corporation for the year ended December 31, 2005 and the six months ended June 30, 2006 are included herein.
(c)		Exhibits

Exhibit
Number		Description
**2.1		Agreement and Plan of Merger, dated May 10, 2006, by and among Range Resources Corporation, Range Acquisition Texas, Inc. and Stroud Energy, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K as filed with the SEC on May 16, 2006).
*23.1		Consent of PricewaterhouseCoopers LLP
**99.1		Press Release dated June 21, 2006

Certain information included in this report, including financial information included in Item 9.01, contains certain statements (other than statements of historical fact) that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used herein, the words “budget,” “budgeted,” “assumes,” “should,” “goal,” “anticipates,” “expects,” “believes,” “seeks,” “plans,” “estimates,” “intends,” “projects” or “targets” and similar expressions that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements. Where any forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that while we believe these assumptions or bases to be reasonable and to be made in good faith, assumed facts or bases almost always vary from actual results and the difference between assumed facts or bases and the actual results could be material, depending on the circumstances. It is important to note that our actual results could differ materially from those projected by such forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based upon the best data available at the date this report is filed with the SEC, we cannot assure you that such expectations will prove correct. Factors that could cause our results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: production variance from expectations, volatility of oil and gas prices, hedging results, the need to develop and replace reserves, the substantial capital expenditures required to fund operations, exploration risks, environmental risks, uncertainties about estimates of reserves, competition, litigation, government regulation, political risks, our ability to implement our business strategy, costs and results of drilling new projects, mechanical and other inherent risks associated with oil and gas production, weather, availability of drilling equipment and changes in interest rates. All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph, and the Company undertakes no obligation to publicly update or revise any forward-looking statements.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		RANGE RESOURCES CORPORATION
		By:		/s/ ROGER S. MANNY   Roger S. Manny
				Chief Financial Officer

Date: August 9, 2006

STROUD ENERGY, INC.

Consolidated Financial Statements

December 31, 2005

(With Independent Auditor’s Report Thereon)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Stroud Energy, Inc.:

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Stroud Energy, Inc. (formerly Stroud Oil Properties, Inc.) and its subsidiaries (the “Company”) at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Fort Worth, Texas
April 5, 2006

F-2

STROUD ENERGY, INC.
(formerly Stroud Oil Properties, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)

		At December 31,
		2004				2005
Assets
Current assets
Cash and equivalents		$	2,721			$	569
Accounts receivable—revenue			8,494				15,439
Accounts receivable—joint interest owners			563				6,673
Severance tax receivable			1,004				3,094
Prepaid expenses			14				230
Deferred tax asset			—				1,811
Fair value of derivative instruments			159				443
Total current assets			12,955				28,259
Property and equipment
Oil and gas properties, using the full cost method of accounting:
Properties being amortized			125,260				243,310
Unevaluated properties excluded from amortization			3,063				13,070
Other property and equipment			626				778
Less accumulated depreciation, depletion and amortization			(42,835	)			(41,575	)
Property and equipment, net			86,114				215,583
Fair value of derivative instruments			—				775
Severance tax receivable			1,556				113
Debt issuance costs, net			1,000				764
Other assets			6				19
Total assets		$	101,631			$	245,513
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	3,007			$	11,986
Accrued liabilities			1,050				10,517
Prepayments from joint interest owners			799				—
Royalties and revenues payable			4,120				9,768
Fair value of derivative instruments			1,761				5,617
Interest payable			135				5
Preferred distributions payable			729				—
Income taxes payable			—				265
Total current liabilities			11,601				38,158
Long-term debt			21,800				10,100
Fair value of derivative instruments			1,020				3,479
Asset retirement obligation			676				1,228
Mandatorily redeemable preferred units			20,546				—
Deferred tax liability			—				37,180
Total liabilities			55,643				90,145
Minority interest			17,161				—
Commitments and contingencies (See Notes 9, 11, 12)
Stockholders’ equity
Preferred stock ($.001 par value, 10,000,000 shares authorized, none issued and outstanding)			—				—
Common stock ($.001 par value; 12,976,450 and 75,000,000 shares authorized at December 31, 2004 and 2005, respectively; 6,012,412 and 16,066,824 shares issued and outstanding at December 31, 2004 and 2005, respectively)			6				16
Additional paid-in capital			15				169,488
Unearned stock compensation			(16	)			(8,553	)
Notes receivable from stockholders and employees			(27	)			—
Retained earnings (deficit)			28,849				(5,583	)
Total stockholders’ equity			28,827				155,368
Total liabilities and stockholders’ equity		$	101,631			$	245,513

See accompanying notes to consolidated financial statements.

F-3

STROUD ENERGY, INC.
(formerly Stroud Oil Properties, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share data)

		Year Ended December 31,
		2003				2004				2005
Revenues
Gas sales		$	34,859			$	43,710			$	62,061
Oil sales			2,807				2,701				2,757
Commodity price risk management activities			(1,143	)			(4,263	)			(9,517	)
Other			265				181				289
Total revenues			36,788				42,329				55,590
Expenses
Lease operating			2,731				3,227				5,011
General and administrative			2,471				3,551				6,161
Depreciation, depletion and amortization			12,900				17,515				20,089
Stock compensation expense			1,401				715				20,146
Litigation settlement expense			—				6,019				—
Total expenses			19,503				31,027				51,407
Operating income			17,285				11,302				4,183
Other income (expense)
Interest expense, net			(5,306	)			(4,370	)			(4,278	)
Gain (loss) on interest rate swap			14				40				(1	)
Gain (loss) on extinguishment of debt			36,330				(1,258	)			—
Loss on repurchase of mandatorily redeemable preferred units			—				—				(6,241	)
Total other income (expense)			31,038				(5,588	)			(10,520	)
Income (loss) before income taxes and minority interest			48,323				5,714				(6,337	)
Income tax provision
Current income taxes			—				—				265
Deferred income taxes			—				—				24,787
Income (loss) before minority interest			48,323				5,714				(31,389	)
Minority interest			(4,389	)			(4,262	)			(185	)
Net income (loss)		$	43,934			$	1,452			$	(31,574	)
Net income (loss) per common share:
Basic		$	9.17			$	0.26			$	(3.59	)
Diluted		$	7.84			$	0.25			$	(3.59	)
Weighted average shares outstanding:
Basic			4,793,461				5,543,483				8,806,752
Diluted			5,602,857				5,721,742				8,806,752

See accompanying notes to consolidated financial statements.

F-4

STROUD ENERGY, INC. (formerly Stroud Oil Properties, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

		Year Ended December 31,
		2003				2004				2005
Cash Flows from Operating Activities
Net income (loss)		$	43,934			$	1,452			$	(31,574	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization			12,900				17,515				20,089
Amortization of debt issuance costs and discounts			402				427				356
Accretion of discount on mandatorily redeemable preferred units			—				1,066				897
Accretion of discount on asset retirement obligation			37				37				66
Change in fair value of derivative instruments			902				1,339				5,255
(Gain) loss on extinguishment of debt			(36,330	)			1,258				—
Repayment of discount on manditorily redeemable preferred units			—				—				(7,790	)
Loss on purchase of mandatorily redeemable preferred units			—				—				6,241
Stock compensation expense			1,401				715				20,146
Deferred tax expense			—				—				24,787
Minority interest			4,389				4,262				185
Other			—				—				(10	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(3,870	)			(1,608	)			(11,103	)
Increase in severance tax receivable			(1,288	)			(1,111	)			(647	)
(Increase) decrease in prepaid expenses			(12	)			6				(216	)
Decrease in inventory			111				—				—
Decrease in other assets			(1	)			—				(13	)
Increase (decrease) in accounts payable and accrued liabilities			2,327				(876	)			10,034
Increase in royalties and revenues payable			2,730				513				5,648
Increase (decrease) in interest payable			430				(295	)			(130	)
Increase (decrease) in preferred return distribution payable			—				729				(729	)
Increase in taxes payable			—				—				265
Net cash provided by operating activities			28,062				25,429				41,757
Cash Flows from Investing Activities
Acquisition and development of natural gas and oil properties			(26,030	)			(31,999	)			(97,933	)
Proceeds from sales of natural gas and oil properties			807				644				99
Acquisition of other property and equipment			(22	)			(46	)			(142	)
Increase (decrease) in prepayments from joint owners			—				799				(799	)
Net cash used for investing activities			(25,245	)			(30,602	)			(98,775	)
Cash Flows from Financing Activities
Proceeds from note payable			6,000				—				—
Repayment of note payable			—				(6,000	)			—
Issuance of note payable—stockholder			400				—				—
Repayment of notes payable—stockholder			—				(625	)			—
Proceeds from repayment of notes receivable—stockholder			—				—				27
Net proceeds (retirement) of line of credit and warrant (prior lender)			(33,165	)			—				—
Net proceeds (repayment) on line of credit (current lender)			30,000				(8,200	)			(11,700	)
Treasury shares purchased			—				—				(28	)
Proceeds from issuance of common stock, net of fees and costs			2,015				4,665				91,194
Debt issuance costs			(1,325	)			(559	)			(534	)
Debt extinguishment costs			(81	)			—				—
Sale of preferred units and common ownership interest of subsidiary			—				27,000				—
Repayment of original investment of preferred units of subsidiary			—				—				(19,480	)
Exercise of warrants			—				—				41
Distributions to stockholders of SOP, Inc.			(111	)			(11,351	)			(2,858	)
Distributions to minority interest owners			—				(2,505	)			(1,796	)
Redemption of limited partner interests in subsidiary			(844	)			(1,435	)			—
Net cash provided by financing activities			2,889				990				54,866
Net increase (decrease) in cash and cash equivalents			5,706				(4,183	)			(2,152	)
Cash and cash equivalents at beginning of period			1,198				6,904				2,721
Cash and cash equivalents at end of period		$	6,904			$	2,721			$	569
Supplemental disclosure of cash flow information:
Cash paid for interest		$	4,598			$	1,062			$	1,595
Cash paid for preferred distributions		$	—			$	1,372			$	2,297
Supplemental disclosure of non-cash investing and financing activities:
Increase (decrease) in accrued capital expenditures		$	(2,154	)		$	(983	)		$	5,870
Additions to natural gas and oil properties arising from $34.0 million non-cash minority interest purchase		$	—			$	—			$	44,626
Cancellation of treasury stock		$	—			$	—			$	28
Cancellation of note receivable from stockholders and employees		$	—			$	13			$	—
Assignment of overriding royalty interests		$	—			$	384			$	—

See accompanying notes to consolidated financial statements.

F-5

STROUD ENERGY, INC.
(formerly Stroud Oil Properties, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2003, 2004 and 2005
(in thousands, except shares)

																										Notes
																										Receivable
																										from
										Additional																Stockholders
		Common Stock								Paid in				Treasury Stock								Unearned				and				Retained
		Shares				Amount				Capital				Shares				Amount				Stock Compensation				Employees				Earnings				Total
Balance at December 31, 2002			4,042,071			$	4			$	948				—			$	—				—				—			$	(3,842	)		$	(2,890	)
Common shares issued			1,362,527				1				3,411				—				—				—				—				—				3,412
Unearned compensation-stock options			—				—				50				—				—				(46	)			—				—				4
Warrant extinguishment			—				—				(3,394	)			—				—				—				—				—				(3,394	)
Reduction ownership interest in partnership			—				—				(1,015	)			—				—				—				—				(209	)			(1,224	)
Net income			—				—				—				—				—				—				—				43,934				43,934
Balance December 31, 2003			5,404,598				5				—				—				—				(46	)			—				39,883				39,842
Common shares issued			605,222				1				5,349				—				—				—				—				—				5,350
Options exercised			2,592				—				—				—				—				—				—				—				—
Notes receivable-stockholders and employees			—				—				—				—				—				—				(40	)			—				(40	)
Amortization of unearned stock compensation			—				—				—				—				—				30				—				—				30
Distribution to common stockholders			—				—				—				—				—				—				—				(10,433	)			(10,433	)
Reduction in ownership interest in partnership, net of costs			—				—				(5,349	)			—				—				—				—				(2,053	)			(7,402	)
Increase in ownership interest in partnership			—				—				15				—				—				—				—				—				15
Cancellation of notes receivable from employees			—				—				—				—				—				—				13				—				13
Net income			—				—				—				—				—				—				—				1,452				1,452
Balance at December 31, 2004			6,012,412				6				15				—				—				(16	)			(27	)			28,849				28,827
Exercise of warrants			106,371				—				41				—				—				—				—				—				41
Purchase of SOP, Inc. treasury shares			—				—								(2,595	)			(28	)			—				—				—				(28	)
Distribution to stockholders of SOP, Inc.			—				—				—				—				—				—				—				(2,858	)			(2,858	)
Cancellation of treasury stock			—				—				(28	)			2,595				28				—				—				—				—
Cancellation of SOP, Inc. shares in reorganization			(6,118,783	)			(6	)			6				—				—				—				—				—				—
Issuance of common stock reorganization			8,022,761				8				49,584				—				—				—				—				—				49,592
Issuance of common stock to management and employees			1,783,297				2				28,531				—				—				(10,260	)			27				—				18,300
Issuance of common stock to non-employee Directors			9,375				—				150				—				—				—				—				—				150
Proceeds from issuance of common stock, net of fees and costs of $8,806			6,250,000				6				91,188				—				—				—				—				—				91,194
Options exercised			1,391				—				1				—				—				—				—				—				1
Amortization of unearned compensation			—				—				—				—				—				1,723				—				—				1,723
Net loss			—				—				—				—				—				—				—				(31,574	)			(31,574	)
Balance at December 31, 2005			16,066,824			$	16			$	169,488				—			$	—			$	(8,553	)		$	—			$	(5,583	)		$	155,368

See accompanying notes to consolidated financial statements.

F-6

STROUD ENERGY, INC.
(formerly Stroud Oil Properties, Inc.)
Notes to Consolidated Financial Statements
December 31, 2003, 2004 and 2005
(amounts in thousands, except shares and per unit amounts)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

     Stroud Energy, Inc. (“Stroud,” together with its subsidiaries “the Company”) is a corporation organized under the General Corporation Law of the State of Delaware. Stroud was formerly known as Stroud Oil Properties, Inc. (“SOP”) before the reorganization that occurred on September 23, 2005 (see Note 2). The Company is engaged in the development, exploitation and exploration of natural gas and oil properties, primarily in the state of Texas, with minor interests in Oklahoma. The two principal subsidiaries are Stroud Energy, Ltd. (“SE”), which owns the natural gas and oil properties and is the operator of record, and Stroud Oil Properties, LP (“SOPLP”), which is the employer of the Company’s personnel.

Principles of Consolidation and Reporting

     The accompanying consolidated financial statements of the Company include the accounts of Stroud and its subsidiaries, after recognition of minority interests and elimination of all significant intercompany accounts, transactions, and profits. Prior to the reorganization discussed in Note 2, the management of the Company concluded that SE, which was partly owned by others, was a variable interest entity that required consolidation in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, and there was a recognition of minority interests. Following the reorganization, the Company owns 100% of SE.

Comprehensive Income

     The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income. In addition to net income, comprehensive income includes all changes in equity during a period, except those resulting from investments and distributions to stockholders of the Company. For the three years ended December 31, 2005, there were no differences between net income and comprehensive income.

Cash and Cash Equivalents

     Investments in highly liquid securities with original maturities of three months or less are considered to be cash equivalents.

Accounts Receivable

     Accounts receivable consist of amounts due from natural gas and oil purchasers and joint interest partners. The Company is able to closely monitor each account due to the low number of accounts. Should management believe that an individual account may be uncollectible, an allowance for it would be established. If further efforts to collect such an account proved unsuccessful, management would write off the receivable against the allowance account. At December 31, 2004 and 2005, management did not believe any allowance was necessary and, for each of the years ended December 31, 2003, 2004 and 2005, had not written off any receivables. See also Note 16 for concentrations of credit.

Property and Equipment

     The Company follows the full cost method of accounting for natural gas and oil properties. Accordingly, all external costs associated with the acquisition, exploration and development of natural gas and oil properties are capitalized as incurred. Internal costs are capitalized only to the extent they are directly related to acquisition, exploration or development activities and do not include any costs related to production, selling or general and administrative activities. During the years ended December 31, 2003, 2004 and 2005, internal costs of approximately $633, $999 and $687 respectively, were capitalized into the full cost pool. If the net capitalized costs of evaluated natural gas and oil properties exceed the estimated present value of future net cash flows from proved natural gas and oil properties, discounted at 10%, such excess is charged to operations as a ceiling write-down. For the years ended December 31, 2003, 2004 and 2005, the Company was not required to recognize a ceiling write-down of its net capitalized costs.

F-7

     Capitalized costs of natural gas and oil properties, including the estimated future costs to develop proved reserves, are amortized on the units-of-production method based on production and estimates of proved reserve quantities. The depreciation, depletion and amortization rate per Mcfe was $1.64, $2.01 and $2.30 for the years ended December 31, 2003, 2004 and 2005, respectively. Unevaluated properties are assessed for impairment on an annual basis at the balance sheet date, or more often as deemed necessary based upon changes in operating or economic conditions. Upon impairment, the costs of unevaluated properties are immediately included in the amortization base. Geological and geophysical costs not associated with a specific unevaluated property are included in the amortization base as incurred.

     Sales of natural gas and oil properties, except those held for resale, of which there were none at December 31, 2004 and 2005, are accounted for as adjustments to net capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between net capitalized costs and proved reserves of natural gas and oil. All costs relating to production activities and maintenance and repairs are charged to expense when incurred.

     Other property and equipment is stated at cost and is depreciated using the straight-line method over the following estimated useful lives of the assets:

Computer equipment		5 years
Automobiles		5 years
Furniture and Fixtures		5 years
Leasehold Improvements		Life of lease

Asset Retirement Obligation

     The Company accounts for future asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”), FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—An Interpretation of SFAS No. 143 and Staff Accounting Bulletin No. 106 (“SAB No. 106”). In general, the Company’s future asset retirement obligations relate to future costs associated with plugging and abandonment of the Company’s natural gas and oil wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using the Company’s credit adjusted risk-free interest rate ranging from 4.0% to 11.0%, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. Revisions to estimated retirement obligations will result in an adjustment to the related capitalized asset and corresponding liability. If the liability is settled for an amount other than the recorded amount, the difference is recorded to the full cost pool, unless significant. In accordance with SAB No. 106, undiscounted abandonment costs for future wells, net of related salvage value, are added to the capitalized costs of natural gas and oil properties for purposes of computing amortization expense. There was no material impact to the Consolidated Statement of Operations for the adoption of SFAS No. 143 and, accordingly, no cumulative impact for adoption has been presented.

Contingencies

     The Company accounts for loss contingencies in accordance with SFAS No. 5, Accounting for Contingencies. Accordingly, when management determines that it is probable that an asset has been impaired or a liability has been incurred, management records the best estimate of the loss if it can be reasonably estimated. The Company’s legal costs related to litigation are expensed as incurred.

Earnings per Common Share

     In accordance with SFAS No. 128, Earnings Per Share, the Company reports basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The following is a reconciliation of the weighted average shares used in the basic and diluted earnings per common share computations:

F-8

		2003				2004				2005
Basic weighted average common shares			4,793,461				5,543,483				8,806,752
Effect of dilutive securities:
Stock options			709,294				76,260				—
Warrants			100,102				101,999				—
Diluted weighted average common share			5,602,857				5,721,742				8,806,752

     For 2005, there were 773,842 stock options that were antidilutive and excluded from the calculations above. For 2005, there were warrants covering 106,371 shares of common stock exercised in January 2005 with none outstanding as of December 31, 2005, that would have been antidilutive and were excluded from the calculations above.

Segment Reporting

     In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, management evaluated how the Company is organized and managed, and identified only one operating segment, which is the exploration for and production of natural gas and oil. All of the Company’s assets are located in the United States of America, and all revenues are attributable to United States customers.

Derivative Instruments

     The Company utilizes swaps, swaptions and collars to reduce its exposure to unfavorable changes in natural gas and oil prices. The Company also utilizes interest rate swaps to reduce its exposure to unfavorable changes in interest rates related to its long-term debt. The Company recognizes all derivative instruments on the consolidated balance sheet as either an asset or liability based on fair value and recognizes subsequent changes in fair value in earnings since they do not meet the requirements for hedge accounting, as required by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, The fair value of the derivative instruments are confirmed monthly by the counterparties to the agreement.

     Changes in the fair value of commodity derivatives are recognized monthly as gains and losses and are set out in a separate revenue line, and changes in the fair value of interest derivatives are recognized monthly as gains and losses in a separate line in other income (expense) in the Company’s accompanying consolidated statement of operations. Settlements of derivatives are included in cash flows from operating activities. Based upon the credit ratings of the counterparties, management believes that credit and performance risk with its counterparties is minimal. In June 2003, the Company terminated its outstanding derivative contracts in conjunction with the extinguishment of debt discussed in Note 9. The Company recognized a loss on that termination of $1,806 for the year ended December 31, 2003, which is included as part of the commodity price risk management activities in the consolidated statement of operations.

Debt Issuance Costs

     Debt issuance costs are capitalized and amortized over the term of the related debt using the effective interest method. Accumulated amortization at December 31, 2004 and 2005, was $601 and $814, respectively. Amortization of deferred financing costs charged to operations was $222, $427 and $356 for the years ended December 31, 2003, 2004 and 2005, respectively. When the related debt was extinguished as defined by SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, unamortized financing costs were removed from the related accounts and charged to operations. The Company expensed unamortized debt issuance costs of $414 in 2005 relating to the redemption of the Mandatorily Redeemable Preferred Units and $255 in 2004 relating to the extinguishment of the loan from another prior lender (See Note 9).

Income Taxes

     Prior to September 23, 2005, the Company had elected by consent of its stockholders to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under these provisions, the Company did not pay federal or state corporate income tax on its taxable income. Instead, the stockholders were liable for individual federal and state income taxes on the Company’s taxable income. Accordingly, there was no provision for federal or state income tax in the accompanying consolidated financial statements prior to September 23, 2005.

F-9

     Subsequent to the reorganization on September 23, 2005, income taxes are accounted for using the liability method, as prescribed by SFAS No. 109, Accounting for Income Taxes, under which deferred income taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at year-end. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from the estimates used. Estimates and assumptions are periodically reviewed and the effects of the revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates include natural gas and oil reserves and related depletion and amortization, impairment of gas and oil properties, severance taxes receivable, estimates of asset retirement obligations, fair value of financial derivative instruments, estimates made in the calculation of income taxes, stock compensation and accruals related to natural gas and oil production and revenues, capital expenditures and lease operating expense.

Revenue Recognition

     Natural gas and oil revenues are recognized when the products are sold and delivery to the purchaser has occurred. Any amounts due from purchasers of natural gas and oil are included in accounts receivable in the accompanying consolidated balance sheet.

     At times the Company may sell more or less than its entitled share of gas production. When this happens, the Company uses the entitlement method of accounting for gas sales, based on its net revenue interest in production. Accordingly, revenue would be deferred for gas deliveries in excess of its net revenue interest, while revenue would be accrued for any undelivered volumes. At December 31, 2003, 2004 and 2005, the Company had no production imbalances, and at December 31, 2005, the Company’s aggregate pipeline imbalance liability was $231, which is included in royalties and revenues payable in the accompanying consolidated balance sheet.

Fair Value of Financial Instruments

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments and does not purport to represent the aggregate net fair value of the Company.

     Derivative Instruments. Derivative instruments are recorded at their estimated fair values based on current natural gas and oil prices and interest rates.

     Mandatorily Redeemable Preferred Units. The Mandatorily Redeemable Preferred Units were recorded at their estimated fair value. The estimated fair value was determined using yield analysis and a retrospective valuation performed by a third party.

     Revolving Line of Credit. The revolving line of credit approximates its fair value due to its variable LIBOR-based interest rate.

		2004								2005
						Carrying								Carrying
		Fair Value				Amount				Fair Value				Amount
Financial assets:
Derivative instruments		$	159			$	159			$	1,218			$	1,218
Financial liabilities:
Mandatorily redeemable preferred units			24,918				20,546				—				—
Revolving line of credit			21,800				21,800				10,100				10,100
Derivative instruments			2,781				2,781				9,096				9,096

F-10

     Due to their short-term maturity, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value at December 31, 2004 and 2005.

New Accounting Pronouncements

     In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”). This new standard replaces Accounting Principles Bulletin (“APB”) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle to be applied retrospectively with all prior period financial statements presented on a new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company believes the adoption of the provisions of SFAS No. 154 will not have a material impact on its results of operations, financial positions or liquidity.

     In December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which requires that compensation related to all stock-based awards, including stock options, be recognized in the financial statements. This pronouncement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and is effective beginning January 1, 2006. The Company previously recorded stock compensation pursuant to the intrinsic value method under APB No. 25, whereby no compensation was recognized for stock option awards as long as the exercise price equaled or exceeded the stock price on the date of grant. The Company recognized stock compensation expense for awards whereby the exercise price was less than the estimated stock price at the date of grant. For the pro forma effect of recording compensation for all stock awards at fair value, utilizing the Black-Scholes method, see Note 3.

     The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective application method described in the statement. Under the modified prospective application method, the Company applies the standard to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the unvested portion of awards outstanding as of the required effective date will be recognized as compensation expense as the requisite service is rendered after the required effective date. SFAS No. 123(R) allows for the use of Black-Scholes or a lattice option-pricing model to value the options for determining compensation cost. The Company has chosen to use the Black-Scholes option-pricing model. Adoption of this statement will result in the Company recognizing compensation costs of approximately $1.6 million in 2006 related to unvested stock options granted prior to January 1, 2006.

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29 (“SFAS No. 153”), which provides that all nonmonetary asset exchanges that have commercial substance must be measured based on the fair value of the assets exchanged, and any resulting gain or loss recorded. An exchange is defined as having commercial substance if it results in a significant change in expected future cash flows. Exchanges of operating interests by oil and gas producing companies to form a joint venture continue to be exempted. APB Opinion No. 29 previously exempted all exchanges of similar productive assets from fair value accounting, therefore resulting in no gain or loss recorded for such exchanges. The Company must implement SFAS No. 153 for any nonmonetary asset exchanges occurring on or after January 1, 2006. This change in accounting is currently not expected to have a significant effect on the reported financial position or statement of operations of the Company.

NOTE 2. REORGANIZATION

     Stroud was incorporated on July 18, 2005 in the state of Delaware to effect a reorganization of ownership of two partnerships (SE and Stroud Energy Management, Ltd.) and an S-corporation (SOP) in anticipation of a private equity offering (the “Reorganization”). The Reorganization took place on September 23, 2005, immediately after which the private equity offering closed. Stroud Energy Management, Ltd. was converted to a limited liability company (“SEM”), and SOP was merged with and into a newly formed limited partnership, SOPLP. All subsidiaries are now consolidated and are directly or indirectly owned 100% by Stroud.

     Prior to the Reorganization, SE was partly owned by others. This ownership was historically presented as minority interest.

F-11

     On September 23, 2005, Stroud issued 8,022,761 shares of common stock to the owners of 100% of the various interests in the two partnerships and SOP.

		Common Stock								Paid-in
		Shares				Amount				Capital
Retirement of SOP common shares at par value			(6,118,783	)		$	(6	)		$	6
Issuance of new Stroud shares:
To previous majority stockholders(a)			4,923,284			$	5			$	(5	)
To previous minority stockholders			3,099,477			$	3			$	49,589
Total			8,022,761			$	8			$	49,584

     The issuance of shares to the previous minority owners has been accounted for as a purchase, recorded at the value of the shares issued. The value used for the shares issued was $16 per share, based on the price for which new shares were sold to third parties in the private equity offering. Accordingly, the purchase value for the shares issued to the previous minority owners of $49,592 was reduced by the outstanding minority interest of $15,548 and then tax-effected to $44,626, which has been allocated to the fair value of the assets acquired and liabilities assumed, with natural gas and oil properties, net, being increased by $44,626 and recognition of deferred tax liabilities of $10,582. The increase to natural gas and oil properties was allocated as follows:

Increase in gross value of natural gas and oil properties
Properties being amortized		$	14,584
Unevaluated properties excluded from amortization			9,054
Accumulated depreciation, depletion and amortization			20,988
		$	44,626

     The adjustment of $20,988 to accumulated depreciation, depletion and amortization, above, represents the percentage of the total accumulated depreciation, depletion and amortization attributable to the minority interest purchased.

     During 2005, the Company repurchased 2,595 shares of its stock for $28. In conjunction with the Reorganization, these shares held in treasury were cancelled.

     Following the Reorganization, Stroud completed the sale of 6,064,359 newly-issued shares of stock to new investors for cash on September 23, 2005 in a private equity offering. Gross proceeds were $97,030, and expenses were $8,451 resulting in net proceeds of $88,579. On October 18, 2005, Stroud sold an additional 185,641 shares of stock to new investors for cash in the completion of the over-allotment in the private equity offering. Gross proceeds were $2,970, and expenses were $355 resulting in net proceeds of $2,615. Net proceeds were used to repurchase the Mandatorily Redeemable Preferred Units from EnCap Partners for $27,270 on September 23, 2005, pay down approximately $54,500 of the Company’s bank debt, and for working capital. The repurchase of the Mandatorily Redeemable Preferred Units resulted in a loss of $6,241 which is reflected in the consolidated statement of operations as loss on repurchase of mandatorily redeemable preferred units. As a result of the purchase of the Mandatorily Redeemable Preferred Units and the Reorganization during the third quarter of 2005, all of EnCap’s governance rights were terminated by amendment of the subsidiary partnership agreement, converting EnCap to a common stock owner of Stroud with no special rights or privileges.

F-12

     As a result of the Reorganization and the successful completion of the private equity offering and in satisfaction of the distribution of Promote Interest required by the SE partnership agreement (See Note 12), Stroud issued restricted and unrestricted shares to management and employees as follows:

										Additional								Stock
						Common Stock				Paid-in				Unearned				Compensation
Shares						$.001 par				Capital				Compensation				Expense
	641,253			restricted shares (see Note 3)		$	1			$	10,259			$	(10,260	)		$	—
	1,142,044			unrestricted shares			1				18,272				—				(18,273	)
	1,783,297			shares		$	2			$	28,531			$	(10,260	)		$	(18,273	)

     The restricted shares vest over a three-year period. For the period from September 23, 2005 through December 31, 2005, the Company recognized $1,707 of stock compensation expense for the restricted shares. The Company also collected notes receivable from stockholders and employees of $27.

     Prior to the Reorganization, SOP was a subchapter “S” corporation formed under the laws of Oklahoma. SE and SEM were consolidated subsidiaries of SOP. SOP was the general partner (“GP”) of SEM. SE was the primary business entity and was the owner and operator of the natural gas and oil properties.

     SEM was formed in 2004 and served as the GP of SE. SEM’s ownership interest was 0.90% of SE. SEM was the holding company which was 96% owned by SOP with the remainder owned by the senior management of SOP.

     SE was formed in 2001 with the contribution of natural gas and oil properties from SOP and others in connection with the beginning of its activities in the Austin Chalk area in the Central Gulf Coast of Texas. In exchange for its contribution, SOP received a 74% limited partner interest and a wholly-owned subsidiary received a 1% general partner interest. In 2001, subsequent to the formation, SOP sold 7.03% of its limited partner interest to other minority owners. The level of drilling activity in the Austin Chalk in 2001, 2002 and early 2003 created a high degree of leverage for SOP. In May 2003, SE redeemed two additional limited partners who held approximately 1.85% partnership interests for approximately $237. In September 2003, SE redeemed an additional 2.22% limited partnership interest for approximately $775. Each of these redemptions, at the time of each respective redemption, resulted in an increase in the ownership of the remaining partners, including SOP. In January 2004, EnCap Energy Capital Fund IV, L.P. and EnCap IV-B Acquisitions, L.P. (the “EnCap Partners”) made an investment in SE, diluting all of the partners, including SOP (See Note 11). The ownership of SE at December 31, 2003 and 2004 reflective of the above transactions is set out below:

			2003			2004
SOP			95.83	%			60.50	%
SEM			—				0.90
EnCap Partners			—				36.95
Others			4.17				1.65
Total			100.00	%			100.00	%

     In 2004 management concluded that SE was a variable interest entity that required consolidation in accordance with FASB Interpretation No. 46, Consolidation of Variable Interest Entities. Following the Reorganization, the Company owns 100% of SE and consolidates SE pursuant to SFAS No. 94 Consolidation of All Majority-Owned Subsidiaries.

     Additionally, in 2003 and 2004 sales of ownership interests of SE were accounted for as capital transactions pursuant to the Securities and Exchange Commission’s Staff Accounting Bulletin No. 51, Accounting for Sales of Stock by a Subsidiary.

F-13

NOTE 3. STOCK BASED COMPENSATION

Issuance of Shares

     During 2003, the Company issued 1,362,527 unrestricted shares to existing stockholders and members of management for prices varying from $0.00 to $1.54 per share with an estimated fair value of $2.50 per share. The excess of fair value over the issue price was recorded as stock compensation expense ($1,397).

     During 2004, the Company issued 410,575 unrestricted shares to existing stockholders and members of management at a price of $7.71 per share with a fair value of $9.37 per share. The excess of fair value over issue price is recorded as stock compensation expense ($685).

     During 2005, as part of the Reorganization (see Note 2), in partial settlement of the Promote Interest (see Note 12), the Company issued 1,142,044 unrestricted shares to existing members of management and employees at a price of $0.00 per share with a fair value of $16.00 per share. The excess of fair value over issue price is recorded as stock compensation expense ($18,273).

     On October 26, 2005, the Company granted 9,375 common shares (1,875 shares each) to Stroud’s five non-employee directors under the Stroud Incentive Plan. The shares were granted when the estimated fair value of the stock was $16.00 and was recorded as stock compensation expense ($150).

Incentive Plan

     In 2001, SOP established the 2001 Stock Incentive Plan (the “SOP Incentive Plan”), whereby, at the discretion of the Board of Directors, incentive stock options, restricted stock purchase rights or stock appreciation rights could be granted to employees, officers, directors, consultants and advisors of the Company. The Company has reserved 830,493 shares of its common stock as the maximum number of shares designated for issuance under the Incentive Plan as restricted stock or through stock options.

     In 2003, the Company granted options for 51,906 shares with an exercise price of $1.54 per share under the SOP Incentive Plan, when the estimated fair value of the stock was $2.50 per share. The options had a vesting period of five years and a term of ten years. The Company recorded approximately $4 and $30 of stock compensation expense in 2003 and 2004, respectively, for these options and, in connection with the Reorganization, the Company expensed the remaining $16 in 2005.

     Effective as of September 23, 2005, the Board of Directors approved and adopted the Stroud Energy, Inc. 2005 Stock Incentive Plan (the “Stroud Incentive Plan”), which is an amendment and restatement of the SOP Incentive Plan. Under the Stroud Incentive Plan, the Board of Directors may grant incentive stock options, stock awards, restricted stock, restricted stock units, performance awards and other incentive awards to employees, directors, and other service providers of the Company. The Company has reserved 1,500,000 shares of its common stock as the maximum number of shares designated for issuance under the Stroud Incentive Plan as awards under the Stroud Incentive Plan. Under the Stroud Incentive Plan, options generally become exercisable over a three-year vesting period with the specific terms of vesting determined by the board of directors at the time of grant. The options expire over terms not to exceed ten years from the date of grant. The options are granted at the fair market value at the time of grant. These plans are administered by the Compensation Committee of Stroud’s Board of Directors.

Restricted Stock Plan

     Effective as of September 23, 2005, the Board of Directors approved and adopted the Stroud Energy, Inc. Restricted Stock Plan (the “Restricted Stock Plan”). Under this plan, the Board of Directors may grant restricted stock to senior management and other employees. The number of shares available for grant under the plan is 801,861 shares of common stock plus any shares of common stock that become available under the plan due to cancellation, forfeiture or termination, plus any shares of common stock that are used to pay withholding taxes upon vesting or payment of an award.

     In connection with the Company’s Reorganization and private equity offering, 575,253 restricted shares of common stock were issued to senior management in exchange for the Class B Partnership Interests in SEM. In addition, 66,000 restricted shares of common stock were issued to other employees in partial settlement of the Promote Interest (see Note 12). Pursuant to the Restricted Stock Plan, these shares of restricted stock vest over a three year period from the date of issuance. Upon issuance of the 641,253 shares of restricted stock pursuant to the Restricted Stock Plan, the Company recorded deferred compensation expense of $10,260, the market value of the shares on the grant dates as a reduction to stockholders’ equity. This expense will be amortized over the applicable three year vesting period. The compensation expense recorded with respect to the restricted stock for the year ended December 31, 2005, was $1,707.

F-14

     SFAS No. 123, encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair-value. For the years through 2005, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25, and the related interpretations in accounting for the Stroud Incentive Plan and the Restricted Stock Plan. Accordingly, compensation costs for stock options and other stock-based awards are measured as the excess, if any, of the estimated market price of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the stock. The following is the pro forma effect of recording stock-based compensation at the estimated fair value of awards on the grant date if the Company had applied the fair value provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transaction and Disclosure:

		2003				2004				2005
		(in thousands, except per share data)
Net income (loss) as reported		$	43,934			$	1,452			$	(31,574	)
Add stock-based compensation expense included in the income statement			1,401				715				20,146
Deduct stock-based employee compensation expense determined under fair value method for all awards			(1,413	)			(772	)			(20,675	)
Pro forma net income (loss)		$	43,922			$	1,395			$	(32,103	)
Earnings (loss) per common share:
Basic—as reported		$	9.17			$	0.26			$	(3.59	)
Basic—pro forma			9.16				0.25				(3.65	)
Diluted—as reported			7.84				0.25				(3.59	)
Diluted—pro forma			7.84				0.24				(3.65	)

     The weighted average fair value of options granted using the Black-Scholes option-pricing model and the weighted average assumptions used in determining these fair values are as follows:

		2003				2004				2005
		(in thousands, except per share data)
Weighted average fair value of options granted		$	0.12			$	0.38			$	4.50
Risk-free interest rate			2.74	%			3.56	%			4.07	%
Expected life		4 years				4 years				4 years
Expected volatility			—				—				27	%
Dividend yield			—				—				—

F-15

     Summarized information about the Company’s stock options follows:

		2003								2004								2005
						Weighted								Weighted								Weighted
						Average								Average								Average
		Number of				Exercise				Number of				Exercise				Number of				Exercise
		Options				Price				Options				Price				Options				Price
Outstanding at beginning of year			347,769			$	0.39				786,373			$	0.58				85,647			$	0.74
Granted			524,249			$	0.67				—			$	—				730,000			$	16.00
Exercised			—			$	—				(2,593	)		$	0.39				(1,391	)		$	0.48
Forfeited			(85,645	)		$	0.39				(7,786	)		$	0.39				(29,414	)		$	0.39
Cancelled(1)(2)			—			$	—				(690,347	)		$	0.56				(11,000	)		$	1.15
Outstanding at end of year			786,373			$	0.58				85,647			$	0.74				773,842			$	15.16
Exercisable at year-end			—								864			$	0.39				7,655			$	0.48

     As of December 31, 2005:

		Options Outstanding												Options Exercisable
						Weighted								Number of
		Number of				Average								Options
Exercise		Options Outstanding				Remaining Life				Weighted Average				Exercisable				Weighted Average
Price		at 12/31/05				(Years)				Exercise Price				at 12/31/05				Exercise Price
$  0.48			22,965				3.73			$	0.48				7,655			$	0.48
$  1.92			20,877				3.73			$	1.92				—				—
$16.00			730,000				3.73			$	16.00				—				—
			773,842				3.73			$	15.16				7,655			$	0.48

     During 2003 the Company granted options with a weighted average grant-date fair value of $1.90, all at option prices below fair value. During 2005 the Company granted options with a weighted average grant-date fair market value of $4.50, all at option prices representing fair market value.

NOTE 4. SEVERANCE TAX RECEIVABLE

     Severance tax receivable represents the payment of severance taxes on certain Texas wells that have qualified for a tax rate deduction or complete abatement, based on the cost of the well. The duration of such abatement or reduction on each well will be the lesser of ten years or until taxes that would have been paid at the statutory rate have equaled a statutorily deferred portion of the costs to drill the applicable well. In anticipation of the reduced rate to be realized on each well that qualifies, the Company has recorded severance tax expense at the applicable reduced rate and established a receivable for the excess paid. The state’s program currently generally allows the collection of a maximum of $250 per well as a cash refund, with the excess required to be collected as credits against severance or other taxes owed. Because the Company’s Texas production is almost all from wells that were drilled by the Company and that qualify for some reduction or complete abatement, the Company has current and long-term receivables aggregating $2,560 and $3,207 at December 31, 2004 and 2005, respectively. The portion carried as current is expected to be realized within one year.

F-16

NOTE 5. PROPERTY AND EQUIPMENT

     At December 31, 2004 and 2005, property and equipment consisted of the following:

		2004				2005
		(in thousands)
Natural gas and oil properties:
Properties being amortized		$	125,260			$	243,310
Unevaluated properties excluded from amortization			3,063				13,070
Total			128,323				256,380
Accumulated depreciation, depletion and amortization			(42,495	)			(41,260	)
Net natural gas and oil properties			85,828				215,120
Other			626				778
Accumulated depreciation, depletion and amortization			(340	)			(315	)
Net other			286				463
		$	86,114			$	215,583

     At December 31, 2004 and 2005, unevaluated property acquisition costs of $3,063 and $13,070, respectively, were excluded from the amortization base, of which $3,063 and $12,429 were incurred during the years ended December 31, 2004 and 2005, respectively. In connection with the Reorganization, $9,054 of the 2005 unevaluated property additions were associated with the purchase of minority interests (see Note 2). Costs excluded from amortization are expected to be evaluated within three years.

NOTE 6. DAN HUGHES ACQUISITION

     During May, 2005, the Company entered into a purchase and sale agreement with multiple parties to acquire their interests in certain natural gas and oil properties located in North Texas, all tangible personal property, equipment and water wells used in connection with operating the properties, and a gathering system for approximately $29,600, subject to normal closing adjustments. The transaction had an effective date of March 1, 2005 and was closed on July 27, 2005 with the Company paying an additional $5,620 in closing adjustments. This acquisition was recorded using the purchase method of accounting, and the results of operations from July 27, 2005 are included in the consolidated financial statements. The entire purchase price of $35,220 was allocated to proved natural gas properties.

     The following presents the unaudited pro forma results of operations for the twelve months ended December 31, 2004 and 2005, as if the acquisition had occurred at January 1, 2004. The pro forma data are not necessarily indicative of the financial results that would have been attained had the transactions occurred at the beginning of each period and should not be viewed as indicative of future operations.

		Year Ended December 31,
		2004				2005
Revenues—pro forma		$	46,830			$	58,669
Net income (loss)—pro forma		$	1,335			$	(31,625	)
Earnings (loss) per common share:
Basic—pro forma		$	0.24			$	(3.59	)
Diluted—pro forma		$	0.23			$	(3.59	)
Weighted average shares outstanding:
Basic—pro forma			5,543,483				8,806,752
Diluted—pro forma			5,721,742				8,806,752

F-17

NOTE 7. ASSET RETIREMENT OBLIGATION

     The Company’s asset retirement obligation represents the present value of the estimated cost to plug, abandon and remediate its producing properties at the end of their productive lives. The asset retirement obligation was determined by calculating the present value of estimated cash flows related to the liability. Upon the adoption of SFAS No. 143 on January 1, 2003, the Company recorded a long-term liability for asset retirement obligations of $199, an increase in property cost of $190, an addition to accumulated depreciation, depletion and amortization of $3, and an immaterial charge representing the cumulative effect of accounting change in the consolidated statement of operations of approximately $12 which has been reflected in costs and expenses in the accompanying consolidated financial statements.

     The following is a reconciliation of the asset retirement obligation for the year ended December 31, 2004 and 2005:

		2004				2005
		(in thousands)
Asset retirement obligation, January 1		$	340			$	676
Liabilities incurred on wells drilled and wells acquired			244				398
Accretion of discount			37				66
Liabilities settled			—				(95	)
Revisions in estimated cash flows			55				302
Asset retirement obligation, December 31		$	676			$	1,347

NOTE 8. ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

		At December 31,
		2004				2005
Capital expenditures		$	642			$	8,748
Lease operating			26				768
Accounting and legal			41				371
Other property and equipment			—				185
Derivative settlement			—				194
Bonus and vacation			300				104
Current portion of asset retirement obligation			—				119
Other			41				28
Totals		$	1,050			$	10,517

NOTE 9. LONG-TERM DEBT

     At December 31, 2004 and 2005, long-term debt consisted of the following:

		2004				2005
Borrowings under a revolving line of credit		$	21,800			$	10,100
		$	21,800			$	10,100

F-18

Revolving Line of Credit

     The line of credit was entered into in June 2003 and was amended in the third quarter of 2005. The line of credit is collateralized by all of the natural gas and oil properties of the Company. As of December 31, 2004 and 2005, the borrowing base was $30,000 and $72,000, respectively. On March 2, 2006, the Company entered into an amended and restated line of credit with an initial conforming borrowing base of $134,000 and a borrowing base of $147,000. The borrowing base under this credit facility is subject to redetermination twice a year on April 1 and October 1. The Company has the option of selecting interest rates for portions of debt, either a base reference rate (the higher of the agent bank’s reference rate or 0.5% above the federal funds rate) plus 0.0% to 1.0% or the London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.5%, depending on leverage. Interest is paid not less than quarterly. The line of credit matures on September 23, 2009. Amounts available to be borrowed at December 31, 2004 and 2005 were $8,200 and $61,900, respectively. The Company pays a quarterly commitment fee, which varies from 0.25% to 0.50% per annum, based on the unused portion of the borrowing base. Outstanding debt carried a weighted average interest rate of 4.25% and 6.63% at December 31, 2004 and 2005, respectively.

Debt Extinguishment (2003)

     At December 31, 2002, SE had approximately $64,000 outstanding under a credit facility entered into in May 2001. This agreement was a mezzanine facility that required a collateral cash account, carried an interest rate of 11% and required SE to convey a warrant for 35% of SE’s limited partnership interest, plus a 5% ORRI on all of SE’s natural gas and oil properties, proportionately reduced for SE’s ownership. The credit facility had a maturity of June 2006. The warrant had an exercise price of $100 and was exercisable upon default, sale of SE or within 30 days after the repayment of the credit facility. The ORRI, valued initially at approximately $219, and the warrant, valued initially at approximately $557, were recorded as debt discount, which was amortized as additional interest expense over the expected term of the loan.

     SE made draws under this agreement that reached a maximum of approximately $70,000 during the period from May 2001 through April 2003 as SE drilling activity increased. In March, 2003, the lender sold its energy portfolio, including SE’s credit facility, warrant and ORRI to an assignee. In June, 2003, the Company agreed to purchase this note, warrant and ORRI for a cash payment of $38,228. SE funded this payment through a new line of credit ($30,000), a subordinated note ($6,000) and the sale of Company stock ($2,000). In connection with this repurchase, the Company recognized a debt extinguishment gain of $36,330, net of the write-off of the debt discount of approximately $455, a decrease in equity and minority interest of $4,210 for the repurchase of the warrant and an increase to the full cost pool of approximately $1,447 for the purchase of the ORRI. SE also unwound commodity derivatives with the prior lender, recognizing a loss of $1,806. The amount of the consideration allocated to the retirement of the debt, the purchase of the warrant and the ORRI was based on the relative fair value of each instrument at the date of extinguishment.

Debt Extinguishment (2004)

     In June, 2003, the Company executed a revolving credit agreement and a subordinated note, drawing $30,000 and $6,000, respectively, to refinance the debt discussed above. In January 2004, upon receipt of a $27,000 capital contribution from the EnCap Partners (See Note 11), the Company terminated and repaid in full the subordinated note.

     A loss on debt extinguishment of $1,258 was recorded and included the write-off of the debt discount and debt issuance costs related to the subordinated note.

Covenants and Restrictions

     The revolving credit agreement contains financial covenants that apply to SE, specifically a required current ratio and a maximum leverage ratio. In addition, the agreement restricts the payment of dividends. At December 31, 2004 and 2005, SE was in compliance with all covenants.

     In addition, the revolving credit agreement provides that an event of default occurs if there is a material adverse change in the operations, business, properties or financial condition of SE, a material impairment of the ability of SE to perform under any loan document and to avoid any default, a material adverse effect upon the legality, validity, binding effect or enforceability against SE of any loan document or if certain other events occur. As stated above, SE is in compliance with all financial covenants at December 31, 2005 and it believes that no event of default has occurred. Accordingly, the outstanding debt balance has been classified as a long-term liability in the accompanying consolidated balance sheet.

F-19

NOTE 10. RELATED PARTY TRANSACTIONS

     From time to time, certain significant stockholders of the Company, including certain of its directors, have extended loans to the Company. In 2002, a former director loaned the Company $225. In July, 2003 director Christopher A. Wright and others advanced a total of $400 to the Company for its use in repaying an obligation owed to SE. Mr. Wright then owned over 5% of the Company common stock and was a limited partner in SE. The obligation was due December 31, 2007 and had an interest rate of prime plus 1%. Also in July 2003 SOP transferred its operating assets to SE. In connection with this transfer, SE assumed the foregoing obligations. SE discharged these obligations in January 2004, paying the principal of $625 and related interest of $28.

     In 2003, Mr. Wright and others provided personal guarantees of limited amounts totaling $8,000 of SE’s indebtedness. Each guarantor secured his or its guaranty with a pledge of certain assets. At the lenders’ request, the guarantors also agreed to hold SE harmless from losses in excess of $2,000 in litigation pending against SE and the Company. The limited guarantees were released in January 2004, but the obligation to hold SE harmless for litigation losses in excess of $2,000 remained.

     In 2004, SOP filed suit against and was countersued by a former operating partner for breach of contract under a joint development agreement. In October 2004, this litigation was settled (See Note 12). To fund the obligation to hold SE harmless, certain existing stockholders and a new stockholder invested a total of $4,600 through the purchase of 596,917 shares of the Company. In connection with the issuance of these shares to persons who were then directors, the Company also recognized $685 of stock compensation expense.

     On January 12, 2004, the Company loaned approximately $40 to certain members of management. These non-recourse notes had interest rates of 5.01 % per annum and were scheduled to mature on January 12, 2014. The loans were made to finance the purchase of limited partnership interests in SEM. These notes were paid in full at the time of the Reorganization.

     At December 31, 2005, no related party notes payable or receivable were outstanding.

NOTE 11. UNITS SUBJECT TO MANDATORY REDEMPTION AND MINORITY INTEREST

     Effective January 1, 2004, EnCap Partners advanced $27,000 to SE in exchange for 270,000 of mandatorily redeemable preferred partnership units of SE (the “Preferred Units”) and 369,460 common limited partnership units, representing 36.946% of the ownership of SE. SE paid $1,718 as placement fees and reimbursement of expenses. This amount was allocated to the purchase of the common limited partnership units ($1,161) and as a debt discount against the value of the Preferred Units ($557). The discount has been amortized using the effective interest method. In connection with this transaction, the Company contributed its general partner interest in SE to SEM, which contributed an additional $40 to SE. In addition, 1.018% of interests of two SE limited partners were partially redeemed for $350. The resulting ownership of SE common units subsequent to these transactions was as follows:

SEM		common general partnership interest			0.90	%
Stroud Oil		common limited partnership interest			60.50	%
EnCap Partners		common limited partnership interests			36.95	%
Other limited partners		common limited partnership interests			1.65	%

     The interests of SE not owned by the Company or SEM gave rise to the minority interest in the consolidated financial statements of the Company. As a result of the Reorganization, 100% of SE was owned by the Company, eliminating the minority interest in the consolidated financial statements at December 31, 2005 (see Note 2).

     As prescribed under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, the Company recorded the Preferred Units as a liability at its estimated fair value. The Company recorded the Preferred Units at an amount of $19,480, such amount representing their estimated fair value as determined by the Company, using yield analysis and a retrospective valuation performed by an independent third party. The balance of the $27,000 investment, less the fees and expenses allocated to the common limited partnership units was recorded as contributed capital by SE representing the purchase by the EnCap Partners of its 36.9% ownership interest in SE.

     As a result of this transaction, the Company recorded a loss in 2004 of approximately $7,149 through its equity accounts. This amount represented the difference between its carrying value of SE and the estimated $7,520 purchase price (before $1,160 of related expenses) paid by EnCap for its interest. The common units purchased by the EnCap Partners diluted the Company interests from 95.8% to 61.4%, including its GP interest. The difference between the redemption amount of $27,000 and the estimated fair value of $19,480 was to be accreted over the five year term of the Preferred Units as additional interest expense.

F-20

     Following the Reorganization, Stroud completed the sale of shares of stock to new investors for cash on September 23, 2005 in a private equity offering, with the remaining over allotment stock sale closing on October 18, 2005, resulting in net proceeds of $91,194. A portion of these net proceeds were used to repurchase the Preferred Units from EnCap Partners for $27,270. The repurchase of the Preferred Units resulted in a loss of $6,241 which is reflected in the consolidated statement of operations as loss on repurchase of mandatorily redeemable preferred units. As a result of the purchase of the Preferred Units and the Reorganization during the third quarter of 2005, all of EnCap’s governance rights were terminated by amendment of the subsidiary partnership agreement, converting EnCap to a common stock owner of Stroud with no special rights or privileges.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Leases

     The Company leases corporate office facilities and office machinery under operating lease agreements expiring at various times through 2011. The Company has entered into a sublease agreement for a portion of its office space, which also expires in July 2011.

     Minimum annual rental commitments under noncancellable agreements at December 31, 2005 follow:

		Minimum
Year Ending December 31,		Lease
2006		$	166
2007			275
2008			278
2009			285
2010			293
Remaining			122
		$	1,419

     Rental expense included in general and administrative expense was approximately $197, $188 and $272 for the years ended December 31, 2003, 2004 and 2005, respectively.

F-21

Derivatives

     The Company has the following open natural gas commodity derivatives in place as of December 31, 2005:

						Floor Price				Ceiling																Fair Value
						Fixed Price				Price				Start				Maturity				Total Volume				Of Net
Type				Base		(Mmbtu)				(Mmbtu)				Date				Date				(Mmbtu)				(Asset) Liability
Collar				Houston Ship Channel			6.83				10.50				1/1/06				3/31/06				457			$	105
Collar				Houston Ship Channel			6.00				8.09				4/1/06				6/30/06				402				687
Collar				Houston Ship Channel			6.00				8.32				7/1/06				9/30/06				543				1,195
Collar				Houston Ship Channel			6.04				8.75				10/1/06				12/31/06				508				957
Collar				Houston Ship Channel			6.31				9.27				1/1/07				3/31/07				479				1,119
Collar				Houston Ship Channel			7.00				15.47				1/1/06				3/31/06				299				(26	)
Collar				Houston Ship Channel			7.00				10.46				4/1/06				6/30/06				250				119
Collar				Houston Ship Channel			7.00				10.63				7/1/06				9/30/06				214				197
Collar				Houston Ship Channel			7.00				11.71				10/1/06				12/31/06				190				110
Collar				Houston Ship Channel			7.00				13.63				1/1/07				3/31/07				171				119
Collar				Houston Ship Channel			7.00				8.26				4/1/07				6/30/07				608				723
Collar				Houston Ship Channel			7.00				8.33				7/1/07				8/31/07				386				552
Swap				Houston Ship Channel			4.75				—				9/30/05				6/30/06				362				1,604
Collar				NGPL Mid-Continent			7.00				12.30				1/1/06				3/31/06				136				9
Collar				NGPL Mid-Continent			7.00				10.58				4/1/06				6/30/06				126				47
Collar				NGPL Mid-Continent			7.00				10.60				7/1/06				9/30/06				117				73
Collar				NGPL Mid-Continent			7.00				10.90				10/1/06				12/31/06				108				96
Collar				NGPL Mid-Continent			7.00				11.35				1/1/07				3/31/07				102				138
Collar				NGPL Mid-Continent			7.00				9.80				4/1/07				6/30/07				97				28
Collar				NGPL Mid-Continent			7.00				9.90				7/1/07				8/31/07				62				26
																							5,617			$	7,878