From 1994 to 2003, demand for natural gas in the United States grew at an annual rate of 0.6% while the U.S. domestic supply grew at an annual rate of 0.2%. The Energy Information Administration, or EIA, recently estimated that U.S. domestic consumption of natural gas exceeded domestic production by 17% in 2004, a gap that the EIA forecasts will expand to 24% in 2010.

Even though the number of U.S. natural gas wells drilled has increased significantly, a corresponding increase in production has not been realized. It is believed that a significant reason for the limited supply response, even as drilling activities have increased, is the accelerating decline rates of production from new natural gas wells drilled. A study published by the National Petroleum Council in September 2003 concluded, from analysis of production data over the preceding ten years, that as a result of domestic natural gas decline rates of 25% to 30% per year, 80% of natural gas production in ten years will be from wells that have not yet been drilled. In addition, IHS Energy estimates decline rates of 29% in 2005. It is believed that this tends to support a sustained higher natural gas price environment, which should create incentives for oil and natural gas exploration and production companies to increase drilling activities in the U.S.

As a result of improvements in extraction technologies along with general increases in natural gas prices, oil and natural gas companies increasingly are exploring for and developing “unconventional” natural gas resources, such as natural gas from tight sands, shales and coalbed methane. This type of drilling activity is frequently done on tighter acreage spacing, and requires that more wells be drilled. It also requires higher horsepower rigs for techniques such as horizontal drilling.

The Company has an inventory of excess rig equipment that includes 37 drawworks (30 of which are 1,000 horsepower or higher), 68 blocks, 65 blow out preventers, 14 electric brakes, 52 hydromatic brakes, 44 rotary tables and 28 swivels. This inventoried equipment could be used with newly ordered or purchased parts to build additional rigs. As of March 31, 2005, the Company owned a fleet of 14 trucks and related transportation equipment that it uses to transport its drilling rigs to and from drilling sites. By owning its own trucks, the Company reduces the cost of rig moves and reduce downtime between rig moves.

The Company obtains its contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with customers. The Company’s drilling contracts generally provide for compensation on either a daywork or footage basis. The contract terms the Company offers generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used and the anticipated duration of the work to be performed.

Under daywork drilling contracts, the Company provides a drilling rig with required personnel to its customer who supervises the drilling of the well. The Company is paid based on a negotiated fixed rate per day while the rig is used. Daywork drilling contracts specify the equipment to be used, the size of the hole and the depth of the well. Under a daywork drilling contract, the customer bears a large portion of the out-of-pocket drilling costs and the Company generally bears no part of the usual risks associated with drilling, such as time delays and unanticipated costs.

Under footage contracts, the Company is paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. The Company typically pays more of the out-of-pocket costs associated with footage contracts as compared to daywork contracts. The risks to the Company on a footage contract is greater because it assumes most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalation and personnel. The Company manages this additional risk through the use of engineering expertise and bid the footage contracts accordingly, and it maintains insurance coverage against some, but not all, drilling hazards.

Direct rig cost increased $2.8 million to $5.9 million for the three months ended March 31, 2005 from $3.1 million for the three months ended March 31, 2004, an increase of 90%.

Depreciation expense increased $685.0 thousand to $1.4 million for the three months ended March 31, 2005 from $675.0 thousand for the three months ended March 31, 2004.

Interest expense increased to $58.0 thousand for the three months ended March 31, 2005 from $0 for the three months ended March 31, 2004.

Deferred tax benefit was $115.0 thousand for the three months ended March 31, 2005, an increase of $87.0 thousand from a deferred tax benefit of $28.0 thousand for the three months ended March 31, 2004.