Costilla Energy Inc. of Midland, TX, is examining its optionsafter lenders extended until June 1 a $10.2 million mandatoryprincipal payment due a bank credit facility. Petrie Parkman &ampCo. was hired to weigh potential deals.

The credit extension also provides for the sharing of proceedsfrom the sale of oil and gas properties. Costilla is marketingcertain assets to reduce bank debt. Chairman Cadell S. Liedtke,said “We have been working closely with our bankers and we are veryencouraged by their cooperation and support. We are also verypleased with the industry’s high level of interest in theproperties we are marketing.”

The company said it expects to announce shortly the execution ofpurchase and sale agreements for divestiture of its Rocky Mountainproperties. “The planned sale of Rocky Mountain properties coupledwith our recently announced transaction with Ballard Petroleum LLCwill effectively end our activities in the Rockies and allow ourteam to focus their full attentions where we have been mostsuccessful strategically,” said Henry G. Musselman, chief operatingofficer.

With negative first quarter cash flow of $1.5 million, or $0.12per share, the company recorded a net loss applicable to commonequity of $55.9 million, or $4.36 per share. That included anexpense of $47.5 million related to termination of a deal toacquire assets from Pioneer Natural Resources.

Costilla production for the quarter ended March 31, 1999increased 4% over the comparable three months of 1998 to 6.9 Bcfe,an average of 77.1 MMcfe/d, from 6.7 Bcfe, or about 74.4 MMcfe/d.”As intended, the gas component of our production has been steadilyrising even with the sale of some gas producing properties during1998,” Musselman said. In the first quarter of 1999, Costilla’s gascomponent of its total production was 69%, compared with 48% in thefirst quarter of 1998. Gas production in the first quarterincreased 39% over the same quarter of last year. Revenues from oiland gas sales for 1Q99 were about $12.8 million, compared to $15.3million for 1Q98. During the first quarter Costilla realized anaverage net gas price of $1.89/Mcf, including $0.32/Mcf fromhedging, 7% below the $2.03, net of a $0.02/Mcf hedging cost, infirst quarter of 1998.

Earlier this month, Costilla began a restructuring and cutoverhead by about $225,000/month, or about $675,000 on a projectedquarterly basis, as a result of job cuts and other cost savingsmeasures. In April Mike Grella stepped down as president and CEO,and was replaced by Liedtke and Musselman. Also in April, Costillasaid the previously announced purchase and sale agreement withPioneer Natural Resources was off and added asset dispositions werenecessary to meet debt repayment requirements. The company alsosaid capital expenditures for the remainder of 1999 would be”extremely limited” in order to meet required debt payments.

Joe Fisher, Houston

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