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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2001
OR

For the Transition Period from                              to                             

Commission File Number 0-9204

EXCO RESOURCES, INC.
(Exact name of Registrant as specified in its charter)

(Registrant's telephone number, including area code) (214) 368-2084

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.02 Per Share
5% Convertible Preferred Stock, Par Value $.01 Per Share
(Title of class)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES ý    NO o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

        The number of shares of Common Stock, par value $.02 per share, of the Registrant outstanding on February 28, 2002, was 7,183,137. The aggregate market value of the voting common equity held by non-affiliates (all directors and executive officers are presumed to be affiliates) of the Registrant on February 28, 2002, was approximately $87.8 million based on the average of the closing bid and ask prices per share of the Common Stock on such date.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders, filed on March 19, 2002, are incorporated by reference into Part III.

TABLE OF CONTENTS

EXCO RESOURCES, INC.

PART I

ITEM 1. BUSINESS

General

        EXCO Resources, Inc. is an independent energy company engaged in the acquisition, development and exploitation of oil and natural gas properties. Our primary areas of operations are onshore in Texas, Louisiana, Mississippi and Alberta, Canada.

        Since our present management team purchased a significant ownership interest in us in December 1997, we have achieved substantial growth through a strategy of acquiring proved oil and natural gas properties with development and exploitation potential. Since December 1997, we have completed 44 acquisitions for total net consideration of approximately $220.0 million, including 13 acquisitions for aggregate net consideration of approximately $114.0 million since January 1, 2001. Overall, our acquisitions have been made at an average cost of approximately $0.73 per Mcfe of proved reserves. We now own interests in a number of established oil and natural gas producing basins that we intend to use as a platform for further growth. In addition, we believe that our properties, coupled with our experienced oil and natural gas operating and technical team, provide us with significant growth potential from development and exploitation activities.

        Our Canadian results are converted for use in this report from Canadian dollars to U.S. dollars using an exchange rate of $0.628 per CDN $1.00 for balance sheet items including cash, oil and natural gas properties and bank debt (the rate at December 31, 2001). For income statement items such as revenue, production costs, general and administrative costs and interest, we convert Canadian dollars to U.S. dollars using the average exchange rate across the applicable period. The average exchange rate for the year 2001 was $0.644 per CDN $1.00.

Business Strategy

        We intend to become a leading independent oil and natural gas acquisition, exploitation and production company. We plan to achieve asset, revenue and cash flow growth as a result of the acquisition and further development of producing oil and natural gas properties by implementing the following business strategies:

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Acquire and Enhance Producing Oil and Natural Gas Properties. We plan to take advantage of     opportunities that currently exist in the United States and Canada to acquire producing oil and natural gas properties. We continue to focus our acquisition activities onshore in the mid-continent region of the United States and in Alberta, Canada to complement our existing properties and operations, while continuing to review potential acquisitions in other regions of the United States and Canada if we believe they represent an opportunity for exploration, exploitation and development. We believe that numerous opportunities exist for us to acquire additional energy assets and to enhance the value of these assets through improved operating practices and by developing reserve potential.

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Emphasize Exploitation and Development Activities. We continue to exploit existing oil and natural gas properties and we continue to conduct development evaluation and drilling on our oil and natural gas properties. We intend to concentrate on enhancement opportunities from activities such as infill drilling, recompletions, secondary recovery projects, repairs and equipment changes. We may participate, from time to time, in a limited number of exploratory wells.

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Corporate Efficiencies. We plan to further maximize our corporate efficiencies through the development and operation of a larger asset base with the potential to limit increases in overhead in the future while operating an expanded asset base.

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Financial Management. We will continue to analyze our existing capital structure and financing requirements for future acquisitions and development to maintain appropriate levels of debt and equity.

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Technology. We plan to increase exploitation efforts, focusing on established geological trends where we can employ geological, geophysical and engineering expertise. We utilize 3-D seismic and advanced drilling technologies.

        In 2001, we evaluated approximately 175 acquisition opportunities with an aggregate estimated market value of over $3.6 billion. We made offers on properties totaling more than $885 million and successfully completed the purchase of approximately $114 million of oil and natural gas properties and related assets. Offers varied in amounts from less than $10,000 to $150 million. We intend to pursue large acquisitions that will have a significant impact on our growth and smaller projects that have the potential for high levels of profitability. We prefer to acquire properties with shallow production, which offer lower geologic and mechanical risk of operations. In evaluating prospective acquisitions, we generally focus on estimates of future cash flows, rates of return and net present values expected to be generated by the acquired properties.

Developments During 2001

We acquired oil and natural gas properties in Texas and Oklahoma.

        In March 2001, we acquired from STB Energy, Inc. oil and natural gas properties located in Texas, Oklahoma, Louisiana and Nebraska. As of January 1, 2001, estimated total proved reserves net to our interest included 694,000 Bbls of oil and 9.5 Bcf of natural gas from 125 gross (78.3 net) wells. The purchase price consisted of $15.0 million in cash ($14.8 million after contractual adjustments).

We acquired Addison Energy Inc.

        On April 26, 2001, we acquired all of the outstanding common stock of Addison Energy Inc. (Addison), which is headquartered in Calgary, Alberta, Canada. At the time of acquisition, Addison owned interests in 95 gross (85.03 net) wells located in Alberta, and Addison operated 91 of these wells. The Addison properties included approximately 38,947 gross and 28,795 net undeveloped acres. As of January 1, 2001, estimated total proved reserves net to our interest acquired in this acquisition included 2.1 million Bbls of oil and NGLs and 36.9 Bcf of natural gas. After adjustments for working capital and long-term debt, we paid approximately $44.4 million (CDN $68.5 million) for Addison. We paid the adjusted purchase price from the proceeds of borrowings under our U.S. and Canadian credit agreements.

        We have also entered into employment agreements with the Addison management team to provide incentives for the continued growth of Addison. These incentives include a share appreciation rights plan which rewards the Addison managers for additions to Addison's reserves based upon certain established benchmarks. The incentives are payable in cash or our common stock at the election of the employee.

        The Addison managers also agreed to purchase shares of our common stock with a portion of the proceeds they received from the sale of their common shares of Addison to us. They purchased in the open market 24,940 shares worth $455,144. In addition, as part of the Addison purchase, we issued 49,880 shares worth $910,310 to the Addison managers. The resale of the shares is restricted.

We entered into new credit agreements.

        As a result of the acquisition of Addison, we revised our banking arrangements. On April 26, 2001, we repaid all outstanding indebtedness owed to a syndicate of banks lead by Bank of America, N.A. and canceled the credit agreement. At the same time, we entered into two new credit agreements, a U.S. credit agreement and a Canadian credit agreement. On December 18, 2001, the U.S. credit

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agreement and the Canadian credit agreement were restated as part of the financing of the acquisition of the PrimeWest properties (see "Our subsidiary, Addison Energy Inc., acquired additional oil and natural gas properties in Canada" below).

        The restated U.S. credit agreement, with Bank One, N.A., as administrative agent, provides for borrowings of up to $124.0 million under a revolving agreement with an initial borrowing base of $58.0 million. At December 31, 2001, we had approximately $3.5 million of outstanding indebtedness, letter of credit commitments of $310,000 and approximately $54.2 million available for borrowing under the restated U.S. credit agreement. The restated Canadian credit agreement, with Bank One, N.A. Canada Branch as administrative agent, provides for borrowings of up to $48.7 million under a revolving credit agreement with an initial borrowing base of $45.0 million. At December 31, 2001, we had approximately $41.5 million of outstanding indebtedness and approximately $3.5 million available for borrowing under the restated Canadian credit agreement.

        For more information about our credit agreements, please review "Our Liquidity and Capital Resources—Credit Agreements" in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations."

We issued over 5 million shares of 5% convertible preferred stock.

        On June 29, 2001, we sold 5,004,869 shares of 5% convertible preferred stock. We raised approximately $105.1 million in gross proceeds (approximately $101.2 million in net proceeds after fees and commissions). We applied approximately $97.6 million of the offering proceeds to repay bank loans with the remaining proceeds used for general corporate purposes.

        For more information about the 5% convertible preferred stock, please review "Our Liquidity and Capital Resources—Effects of the 5% Convertible Preferred Stock Offering" in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations."

We dissolved Pecos-Gomez, L.P. and acquired additional interest in the Pecos County Properties.

        On July 3, 2001, Pecos-Gomez, L.P. (the Partnership) distributed to its partners all of the interest in the Partnership's properties. At that time, we acquired additional working interests in the properties from two of the limited partners for $8.8 million (approximately $7.5 million after contractual adjustments). In addition, we received an assignment of the existing hedge agreement that was previously entered into by the Partnership. Borrowings under the Partnership credit agreement of $3.9 million were also repaid at the time of the acquisition and the credit agreement was canceled.

We terminated our existing hedge agreements and entered into new hedge agreements.

        In connection with the incurrence of debt related to our acquisition activities and to protect against commodity price fluctuations, management has adopted a policy of hedging oil and natural gas prices through the use of commodity futures, options and swap agreements. The counterparty of the swap agreements that we entered into during 2000 and through September 2001 was an affiliate of Enron Corp. (the Enron Hedges). On December 2, 2001, Enron Corp. and other Enron related entities (including the Enron affiliate that was the counterparty to our swap agreements) filed for bankruptcy under Chapter 11 of the United States Code in the United States Bankruptcy Court in the Southern District of New York. We terminated all of our hedging contracts with the Enron affiliate, effective as of December 5, 2001, as a result of the failure of the Enron affiliate to make payments totaling approximately $2.1 million due us on December 5, 2001, on hedged natural gas volumes and on December 7, 2001, on hedged oil volumes. Based upon oil and natural gas futures prices on December 5, 2001, we believe that we are owed approximately $15.3 million, including settlements already due, but the exact amount will be determined pursuant to the terms of the ISDA Master Agreement.

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        In December 2001, we entered into new, replacement hedge transactions with a new counterparty, BNP Paribas, (the BNP Paribas Hedges), a financial lending institution. BNP Paribas is a lender to us under our U.S. and Canadian credit agreements. For more information concerning the new hedging contracts as well as the accounting treatment of the terminated Enron Hedges, please review "Item 7A—Quantitative and Qualitative Disclosure about Market Risk".

Our subsidiary, Addison Energy Inc., acquired additional oil and natural gas properties in Canada.

        On December 18, 2001, Addison acquired oil and natural gas properties located in west central Alberta, Canada from PrimeWest Energy Inc. and PrimeWest Oil and Gas Corp. for $33.8 million ($33.6 million after contractual adjustments). The properties consisted of 96 gross (73.8 net) producing oil and natural gas wells. Under the terms of the acquisition, Addison became the operator of 78 of the wells. As of December 31, 2001, estimated total proved reserves net to our interest included 3.6 million Bbls of oil and NGLs and 27.1 Bcf of natural gas. Net daily production, as of December 2001, was approximately 600 Bbls of oil and NGLs and 4.1 Mmcf of natural gas.

Developments Since December 31, 2001

Our subsidiary, Addison Energy Inc., entered into an agreement to purchase oil and natural gas assets.

        On January 25, 2002, Addison entered into an agreement to purchase oil and natural gas assets in Alberta, Canada, from an independent producer totaling approximately $26.2 million (CDN $41.6 million). We estimate total proved reserves net to our interest of approximately 1.6 million Bbls of oil and NGLs and 19.0 Bcf of natural gas. We expect net daily production from these properties to be approximately 4.8 Mmcf of natural gas, 385 Bbls of oil and 195 Bbls of NGLs per day or 8.3 Mmcfe.

We entered into additional hedge agreements.

        On March 12, 2002, we entered into two agreements to hedge additional natural gas volumes on a portion of our expected production for 2002 and 2003. The counterparty to these agreements was BNP Paribas. For more information concerning the additional hedging contracts, please review "Item 7A-Quantitative and Qualitative Disclosure about Market Risk".

Investment Considerations and Risk Factors

        The risk factors noted in this section and other factors noted throughout this annual report, including those risks identified in "Item 7.—Management's Discussion and Analysis of Operations," provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those contained in any forward-looking statement. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual outcomes may vary materially from those included in this report.

Our revenue depends on oil and natural gas prices which fluctuate.

        Our future financial condition, access to capital, cash flow and results of operations depend upon the prices we receive for our oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are also beyond our control. In addition, natural gas prices in Canada have been and may continue to be subject to lower market prices than natural gas prices in the United States. Factors that affect the prices we receive for our oil and natural gas include:

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the level of domestic production;

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the availability of imported oil and natural gas;

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actions taken by foreign oil and natural gas producing nations;

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the cost and availability of transportation systems with adequate capacity;

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the cost and availability of other competitive fuels;

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fluctuating and seasonal demand for oil and natural gas;

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conservation and the extent of governmental regulation of production;

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weather;

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foreign and domestic government relations; and

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overall economic conditions.

        Our ability to maintain or increase our borrowing capacity, to repay current or future indebtedness and to obtain additional capital on attractive terms substantially depends upon oil and natural gas prices.

Hedging our production may cause us to forego additional future profits.

        To reduce our exposure to changes in the prices of oil and natural gas, we have entered into and may in the future enter into hedging arrangements for a portion of our oil and natural gas production. The hedges that we have entered into generally have the effect of providing us with a fixed price for a portion of our expected future oil and natural gas production over a fixed period of time. Hedging arrangements may expose us to the risk of financial loss in some circumstances, including the following:

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the other party to the hedging contract defaults on its contract obligations;

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there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received; or

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market prices may exceed the prices at which we are hedged, resulting in our need to make significant cash payments.

        Our hedging activities could have the effect of reducing our revenues which, in turn, could have an adverse effect on our financial condition. As discussed above in "Developments During 2001," we terminated the Enron Hedges due to the bankruptcy filing of Enron Corp. and certain of its affiliates and the failure of Enron North America to make payments totaling approximately $2.1 million due us on hedged oil and natural gas volumes. Based upon oil and natural gas futures prices on the effective date of termination, we believe that we are owed approximately $15.3 million, including settlements already due. For the year ended December 31, 2001, our revenues were increased by approximately $6.9 million as a result of cash settlements actually received on the Enron Hedges. As of December 31, 2001, the unrealized gain on the BNP Paribas Hedges was $696,000 and our hedged volumes represented approximately 57%—61% of our forecasted oil production and 50%—54% of our forecasted natural gas production during 2002. These hedging arrangements may limit the benefit we would otherwise receive from increases in the prices for oil and natural gas. For more information about our hedging risk and the accounting for the Enron Hedges, please review "Item 7A—Quantitative and Qualitative Disclosure about Market Risk".

We may be unable to acquire or develop additional reserves.

        As is generally the case in the oil and natural gas industry, our success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are profitable to produce. Factors which may hinder our ability to acquire additional oil and natural gas reserves include competition, access to capital, prevailing oil and natural gas prices and the number of properties for sale. If we are unable to conduct successful development activities or acquire properties containing proved reserves, our proved reserves will generally decline as they are produced. Also, our production will generally decline. If our production declines then our revenues will decline unless an increase in oil and natural gas prices offsets the declines. In addition, if our reserves and production decline then the amount we

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are able to borrow under our credit agreements will also decline. We cannot assure you that we will be able to locate additional reserves or that we will drill economically productive wells or acquire properties containing proved reserves.

We cannot assure you that we will be successful in managing our growth.

        We have recently completed several large acquisitions and our growth could strain our financial, technical, operational and administrative resources. Failure to manage our growth successfully could adversely affect our operations and net revenues through increased operating costs and revenues that do not meet our expectations. We cannot assure you that our recently acquired oil and natural gas properties will be successfully integrated into our operations or will achieve desired profitability.

We may encounter marketing obstacles.

        Our ability to market our oil and natural gas production will depend upon the availability and capacity of natural gas gathering systems, pipelines and other transportation facilities. With the exception of a few small gathering systems, we do not currently operate our own pipelines or transportation facilities. As a result, we are dependent on third parties to transport our products. Transportation space on the gathering systems and pipelines we utilize is occasionally limited and at times unavailable due to repairs or improvements to facilities or due to space being utilized by other companies with priority transportation agreements. Our access to transportation options can also be affected by U.S. federal and state and Canadian regulation of oil and natural gas production and transportation, general economic conditions and changes in supply and demand. These factors and, consequently, the availability of markets are beyond our control. If market factors dramatically change, the financial impact on our revenues could be substantial and could adversely affect our ability to produce and market oil and natural gas.

Our Canadian operations may be adversely affected by currency fluctuations and economic and political developments.

        We have significant oil and natural gas operations in Canada. As a result, our Canadian operations are subject to the risk of fluctuations in the relative value of the Canadian and U.S. dollars. We have not hedged any currency risk exposure associated with our Canadian operations. We are required to recognize foreign currency translation gains or losses related to our Canadian operations in our consolidated financial statements. Our Canadian operations may be adversely affected by political and economic developments, royalty and tax increases and other laws or policies in Canada, as well as U.S. policies affecting trade, taxation and investment in Canada.

Our Canadian properties and operations are subject to foreign regulations.

        The oil and natural gas industry in Canada is subject to extensive legislation and regulation governing its operations. This legislation and regulation, enacted by various levels of government, impacts a number of areas, including royalties, land tenure, exploration, development, production, refining, transportation, marketing, environmental protection, exports, taxes, labor standards and health and safety standards. In addition, extensive legislation and regulation exists with respect to pricing and taxation of oil and natural gas and related products. Canadian governmental legislation and regulation may have a material effect on the financial results of our operations and may have a material adverse effect on our results of operations and our financial condition.

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We may not identify all risks associated with the acquisition of oil and natural gas properties.

        Generally, it is not feasible for us to review in detail every individual property involved in an acquisition. Our business strategy focuses on acquisitions of producing oil and natural gas properties. Any future acquisitions will require an assessment of recoverable reserves, future oil and natural gas prices, operating costs, potential environmental hazards and other liabilities and other similar factors. Ordinarily, our review efforts are focused on the higher-valued properties. However, even a detailed review of these properties and records may not reveal existing or potential problems, nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. We do not inspect every well that we acquire. Potential problems, such as deficiencies in the mechanical integrity of equipment or environmental conditions that may require significant remedial expenditures, are not necessarily observable even when we inspect a well. Even if we are able to identify problems with an acquisition, the seller may be unwilling or unable to provide effective contractual protection or indemnity against all or part of these problems. Even if a seller agreed to provide indemnity, we cannot assure you that the indemnity would be fully enforceable.

We have incurred significant debt that we may be unable to repay.

        As of December 31, 2001, we have aggregate debt outstanding of approximately $45.0 million under our U.S. and Canadian credit agreements. This level of indebtedness could:

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increase our vulnerability to general adverse economic and industry conditions, especially declines in oil and natural gas prices;



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limit our ability to fund future acquisitions, capital expenditures and other general corporate requirements;



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require us to dedicate a material portion of our cash flow from operations to payments on our indebtedness;



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limit our flexibility in planning for, or reacting to, changes in our business and industry; or



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limit our ability to, among other things, borrow additional funds, sell assets and pay dividends.

Restrictive debt covenants limit our ability to finance our operations, fund our capital needs and engage in other business activities that may be in our interest.

        Our U.S. and Canadian credit agreements contain significant covenants that, among other things, restrict our ability to:

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dispose of assets;



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incur additional indebtedness;



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repay other indebtedness;



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pay dividends;



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enter into specified investments or acquisitions;



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repurchase or redeem capital stock;



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merge or consolidate; or



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engage in specified transactions with subsidiaries and affiliates and our other corporate activities.

        Also, our credit agreements require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. A breach of any of

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these covenants or our inability to comply with the required financial ratios could result in a default under our credit agreements.

We may be unable to obtain additional financing to implement our growth strategy.

        The growth of our business will require substantial capital on a continuing basis. Because we have pledged substantially all of our assets as collateral under our U.S. and Canadian credit agreements, it may be difficult for us in the foreseeable future to obtain financing on an unsecured basis or to obtain secured financing other than purchase money indebtedness. If we are unable to obtain additional capital on satisfactory terms and conditions, we may lose opportunities to acquire oil and natural gas properties and businesses. Our failure to obtain any required additional financing may have a material adverse effect on our growth, cash flow and earnings.

We may be unable to overcome risks associated with our drilling activity.

        Our drilling involves numerous risks, including the risk that we will not encounter commercially productive oil or natural gas reservoirs. We must incur significant expenditures to identify and acquire properties and to drill and complete wells. The costs of drilling and completing wells is often uncertain and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions and shortages or delays in the delivery of equipment. While we use advanced technology in our operations, this technology does not allow us to know conclusively prior to drilling a well that oil or natural gas is present or economically producible.

Acquisition, development and exploitation activities are associated with many uncertainties that could adversely affect our business, financial condition and results of operations.

        Our future success will depend on the success of our acquisition, development and exploitation activities. Our decisions to purchase, develop or otherwise exploit properties or prospects will depend in part on the evaluation of data obtained through production data and engineering studies, geophysical and geological analyses, and seismic and other data, the results of which are often inconclusive and subject to various interpretations.

We cannot control the development of a portion of our properties because our interests are in the form of non-operated working interests.

        We do not operate wells that represent approximately 20% of the PV-10 (as of December 31, 2001) of our proved reserves. As a result, the success and timing of our drilling and development activities on those properties operated by others depend upon a number of factors outside of our control, including:

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the timing and amount of capital expenditures;



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the operator's expertise and financial resources;



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the approval of other participants in drilling wells; and



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the selection of suitable technology.

        If drilling and development activities are not conducted on these properties, then we may not be able to increase our production or offset normal production declines on these properties.

Our estimates of oil, natural gas and NGL reserves involve inherent uncertainty.

        Numerous uncertainties are inherent in estimating quantities of proved oil, natural gas and NGL reserves, including many factors beyond our control. This annual report contains estimates of our

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proved oil, natural gas and NGL reserves and the PV-10 generated by the proved oil, natural gas and NGL reserves. These estimates are based upon reports of our independent petroleum engineers. These reports rely upon various assumptions, including assumptions required by the SEC, as to constant oil, natural gas and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. These estimates should not be construed as the current market value of our estimated proved reserves. The process of estimating oil, natural gas and NGL reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering and economic data for each reservoir. As a result, these estimates are an inherently imprecise evaluation of reserve quantities and future net revenues. Our actual future production, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil, natural gas and NGL reserves may vary substantially from those we have assumed in the estimates. Any significant variance in our assumptions could materially affect the quantity and value of reserves described in this annual report. In addition, our reserves may be revised downward or upward, based upon production history, results of future exploitation and development activities, prevailing oil and natural gas prices and other factors. A material decline in prices paid for our production can adversely impact the estimated volumes of our reserves.

We are exposed to operating hazards and uninsured risks.

        Our operations are subject to the risks inherent in the oil and natural gas industry, including the risks of:

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fire, explosions and blowouts;



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pipe failures;



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abnormally pressured formations; and



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environmental accidents such as oil spills, gas leaks, ruptures or discharges of toxic gases, brine or well fluids into the environment (including groundwater contamination).

        These events may result in substantial losses to us from:

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injury or loss of life;



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severe damage to or destruction of property, natural resources and equipment;



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pollution or other environmental damage;



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clean-up responsibilities;



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regulatory investigation; and



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penalties and suspension of operations.

        As is customary in our industry, we maintain insurance against some, but not all, of these risks. We cannot assure you that our insurance will be adequate to cover these losses or liabilities. Further, with the turmoil in the commercial insurance industry as a result of the events of September 11, 2001, we cannot predict the continued availability of insurance at commercially acceptable premium levels or at all. We do not carry business interruption insurance. Losses and liabilities arising from uninsured or under-insured events may have a material adverse effect on our financial condition and operations.

        The producing wells in which we own an interest have, from time to time, experienced reduced or terminated production. These curtailments are due primarily to mechanical failures, contract terms, pipeline and processing plant interruptions, market conditions and weather conditions, and these curtailments may last from a few days to many months.

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Our business exposes us to liability and extensive regulation on environmental matters.

        Our operations are subject to numerous federal, state and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. Such laws and regulations not only expose us to liability for our own negligence, but may also expose us to liability for the conduct of others or for our actions which were in compliance with all applicable laws at the time these actions were taken.

Our business depends on a limited number of key personnel.

        We are substantially dependent upon the skills of two key individuals within our management, Mr. Douglas H. Miller and Mr. T. W. Eubank. Both individuals have experience in acquiring, financing and restructuring oil and natural gas companies. They both previously served as senior management at Coda Energy, Inc., where they successfully implemented a strategy similar to our current strategy. We do not have employment agreements with these individuals or maintain key man insurance. The loss of the services of either one of these individuals could hinder our ability to successfully implement our business strategy.

We may have additional write-downs of our asset values.

        As a result of low oil and natural gas prices on September 30, 2001, we recorded a pre-tax non-cash ceiling test write-down of $45.9 million (of which $25.0 million was from the United States full cost pool and $20.9 million was from the Canadian full cost pool). We recorded an additional pre-tax non-cash ceiling test write-down of approximately $3.7 million from our United States full cost pool during the fourth quarter of 2001 as a result of low oil and natural gas prices on December 31, 2001. Depending upon oil and natural gas prices, we may be required to further write-down the value of our oil and natural gas properties if the present value of the after-tax future cash flows from our oil and natural gas properties falls below the net book value of these properties. Additional write-downs would negatively affect our earnings and net worth, and could result in a violation of our covenants under our credit agreements.

We may not be permitted to pay cash dividends on our convertible preferred stock in some circumstances. We could also be prevented in some circumstances from paying dividends in our common shares.

        The terms of our existing credit agreements restrict our ability to pay cash dividends. Our ability to pay cash dividends will depend on criteria set forth in our credit agreements. If there is a default under our credit agreements, we will not be able to pay dividends on the shares of convertible preferred stock. Even if our credit agreements permitted us to pay cash dividends, we can make those payments only from our surplus (the excess of the fair value of our total assets over the sum of our liabilities plus our total paid-in share capital). In addition, we can pay cash dividends only if after paying those dividends we would be able to pay our liabilities as they become due. We cannot assure you that we will have any surplus.

The convertible preferred stock is subordinated to all our existing indebtedness and other liabilities and will not limit our ability to incur future indebtedness that will rank senior to the convertible preferred stock.

        The convertible preferred stock is subordinated to all of our indebtedness with respect to the payments of interest and amounts distributable upon our dissolution, liquidation or winding up. The terms of the convertible preferred stock do not limit the amount of indebtedness or other obligations that we may incur. Any indebtedness under our existing credit agreements will rank senior to the convertible preferred stock.

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Sales, or the availability for sale, of substantial amounts of our common stock could adversely affect the value of the convertible preferred stock.

        Sales of substantial amounts of common stock in the public market, and the availability of shares for future sale, including shares of our common stock issuable upon the conversion of shares of convertible preferred stock or upon exercise of outstanding options and warrants or other rights to acquire shares of our common stock, could adversely affect the prevailing market price of our common stock. This would adversely affect the value of the convertible preferred stock and could impair our future ability to raise capital through an offering of our equity securities.

Our stock price may be volatile due to small public float.

        Because the number of shares of our common stock held by the public is relatively small, the sale of a substantial number of shares of our common stock, or conversion of another security into a substantial number of shares of our common stock, may adversely affect the market price of our common stock.

Our articles of incorporation may prevent a takeover attempt that you may favor.

        Provisions in our articles of incorporation may delay, defer or prevent a tender offer or takeover attempt that you may consider to be in the best interest of our shareholders, including attempts that might result in a premium to be paid over the market price for the stock held by our shareholders. Our articles of incorporation permit our board to issue up to 4,995,131 additional shares of preferred stock and to establish, by resolution, one or more series of preferred stock and the powers, designations, preferences and participating, optional or other special rights of each series of preferred stock. The preferred stock may be issued on terms that are unfavorable to the holders of our common stock, including the grant of superior voting rights, the grant of preferences in favor of preferred shareholders in the payment of dividends and upon our liquidation and the designation of conversion rights that entitle holders of our preferred stock to convert their shares into our common stock on terms that are dilutive to holders of our common stock. The issuance of preferred stock in future offerings may make a takeover or change in control of us more difficult.

Our Oil, Natural Gas and NGLs Reserves

        The term "proved reserves" refers to the estimated quantities of oil, natural gas and NGLs that we may be able to recover in the future from known reservoirs. "Proved developed reserves" are proved reserves that are recoverable from known oil or natural gas reservoirs with existing equipment and operating methods. "Proved undeveloped reserves" are proved reserves requiring a relatively large development expense to make them recoverable from existing wells, or are proved reserves located in our undeveloped acreage.

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        Other than the SEC, we have not filed any estimates or included estimates in reports to any other federal authority or agency since January 1, 2001. The following table summarizes our proved reserves at the dates shown, and was prepared according to the rules and regulations of the SEC:

        The reserve estimates presented as of December 31, 1999, 2000 and 2001, have been prepared by Lee Keeling and Associates, Inc., independent petroleum engineers, Tulsa, Oklahoma, and are a part of their report on our oil and natural gas properties. Estimates of oil, natural gas and NGL reserves are projections based on engineering data and are forward-looking in nature. These reports rely upon various assumptions, including assumptions required by the SEC, such as constant oil, natural gas and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. These reports should not be construed as the current market value of our estimated proved reserves. The process of estimating oil and natural gas reserves is also dependent on geological, engineering and economic data for each reservoir. Because of the uncertainties inherent in the interpretation of this data, we cannot ensure that the reserves will ultimately be realized. Our actual results could differ materially. See also Note 13 of the notes to our consolidated financial statements included in this annual report for additional information regarding our oil, natural gas and NGL reserves, including the present value of future net revenues.

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        The following table set forth our proved reserves and PV-10 by area as of December 31, 2001:

Our Production, Prices and Expenses

        The following table summarizes for the periods indicated, our revenues (including hedge settlements), net production of oil, natural gas and NGLs sold, the average sales price per unit of oil, natural gas and NGLs and costs and expenses associated with the production of oil, natural gas and NGLs:

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Our Interest in Productive Wells

        The following table sets forth our interest in productive wells (wells that are currently producing oil or natural gas or are capable of production), including temporarily shut-in wells on December 31, 2001. The number of total gross oil and natural gas wells excludes any multiple completions. Gross wells refers to the total number of physical wells that we hold any working interest in, regardless of our percentage interest. A net well is not a physical well, but is actually a concept that reflects the actual total working interests we hold in all wells. We compute the number of net wells we own by totaling the percentage interests we hold in all our gross wells.