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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

(MARK ONE)

    H          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                      FOR THE QUARTER ENDED MARCH 31, 1997

                                       OR
    H         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 1-12311

                            ------------------------

                            MONTEREY RESOURCES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        DELAWARE                                        76-0511993
(STATE OF INCORPORATION)                    (I.R.S. EMPLOYER IDENTIFICATION NO.)

                               5201 TRUXTUN AVENUE
                              BAKERSFIELD, CA 93309
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 322-3992

                            ------------------------

     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 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 90 days. Yes [ ]  No [ ]

        Shares of Common Stock outstanding at May 9, 1997 -- 54,769,499
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<PAGE>
                          PART I  FINANCIAL STATEMENTS

                                        PAGE
                                        ----
Statement of Operations
  Three Months Ended March 31, 1997
  and 1996...........................     2
Balance Sheet
  March 31, 1997 and December 31,
  1996...............................     3
Statement of Cash Flows
  Three Months Ended March 31, 1997
  and 1996...........................     4
Statement of Division Equity and
  Shareholders' Equity
  Three Months Ended March 31, 1997
  and 1996...........................     5
Notes to Financial Statements........     6
Management's Discussion and Analysis
  of Financial Condition
  and Results of Operations..........    10

                                       1
<PAGE>
                            MONTEREY RESOURCES, INC.
                      STATEMENT OF OPERATIONS (UNAUDITED)
                (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

                                        THREE MONTHS ENDED
                                            MARCH 31,
                                       --------------------
                                         1997       1996
                                       ---------  ---------
Revenues
     Sales of crude oil and liquids
       produced......................  $    74.7  $    59.0
     Sales of natural gas produced...        0.3        0.4
     Sales of crude oil purchased....        9.6         --
     Other...........................        0.2        0.2
                                       ---------  ---------
                                            84.8       59.6
                                       ---------  ---------
Costs and Expenses
     Production and operating........       31.1       24.5
     Cost of crude oil purchased.....       10.7         --
     Exploration, including dry hole
       costs.........................        0.3        0.3
     Depletion, depreciation and
       amortization..................        9.3        8.6
     General and administrative......        2.7        1.9
     Taxes (other than income).......        2.6        1.9
                                       ---------  ---------
                                            56.7       37.2
                                       ---------  ---------
Income from Operations...............       28.1       22.4
     Interest income.................        0.5     --
     Interest expense................       (4.7)      (6.4)
     Interest capitalized............        0.3        0.2
                                       ---------  ---------
Income Before Income Taxes...........       24.2       16.2
     Income taxes....................       (8.5)      (5.9)
                                       ---------  ---------
Net Income...........................  $    15.7  $    10.3
                                       =========  =========
Net Income Per Share.................  $    0.29  $  --
                                       =========  =========
Pro Forma Net Income Per Share.......  $  --      $    0.19
                                       =========  =========
Number of shares used in computing
  net income per share (in
  millions)..........................       54.8       54.8
                                       =========  =========

   The accompanying notes are an integral part of these financial statements.

                                       2
<PAGE>
                            MONTEREY RESOURCES, INC.
                                 BALANCE SHEET
                            (IN MILLIONS OF DOLLARS)

                                            MARCH 31,      DECEMBER 31,
                                               1997            1996
                                           ------------    ------------
                                           (UNAUDITED)
                 ASSETS
Current Assets
     Cash and cash equivalents..........     $   14.9        $    9.3
     Accounts receivable................         64.1            46.4
     Inventories........................          1.9             1.7
     Other current assets...............          9.0             9.3
                                           ------------    ------------
                                                 89.9            66.7
                                           ------------    ------------
Properties and Equipment, at cost
     Oil and gas (on the basis of
      successful efforts accounting)....      1,029.3         1,016.1
     Other..............................         15.0            14.2
                                           ------------    ------------
                                              1,044.3         1,030.3
     Accumulated depletion, depreciation
      and amortization..................       (660.6)         (651.3)
                                           ------------    ------------
                                                383.7           379.0
                                           ------------    ------------
Other Assets............................          1.5             1.5
                                           ------------    ------------
                                             $  475.1        $  447.2
                                           ============    ============
         LIABILITIES AND EQUITY
Current Liabilities
     Accounts payable...................     $   47.0        $   34.2
     Dividends payable..................         12.0          --
     Interest payable...................       --                 4.7
     Taxes payable......................          8.5             5.8
     Accrued employee benefits..........          1.1             1.1
     Other current liabilities..........          4.1             3.0
                                           ------------    ------------
                                                 72.7            48.8
                                           ------------    ------------
Long-Term Debt..........................        175.0           175.0
                                           ------------    ------------
Other Long-Term Obligations.............          3.6             3.5
                                           ------------    ------------
Deferred Income Taxes...................         43.3            43.2
                                           ------------    ------------
Commitments and Contingencies (Note
  4)....................................       --              --
                                           ------------    ------------
Shareholders' Equity
     Preferred stock, $0.01 par value,
      25,000,000 shares authorized, no
       shares issued or outstanding.....       --              --
     Common stock, $0.01 par value,
      100,000,000 shares authorized,
       54,769,499 shares issued and
      outstanding.......................          0.5             0.5
     Paid-in capital....................        171.0           170.8
     Unamortized restricted stock
      awards............................         (1.1)           (1.0)
     Retained earnings..................         10.1             6.4
                                           ------------    ------------
                                                180.5           176.7
                                           ------------    ------------
                                             $  475.1        $  447.2
                                           ============    ============

   The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>
                            MONTEREY RESOURCES, INC.
                      STATEMENT OF CASH FLOWS (UNAUDITED)
                            (IN MILLIONS OF DOLLARS)

                                        THREE MONTHS ENDED
                                            MARCH 31,
                                       --------------------
                                         1997       1996
                                       ---------  ---------
Operating Activities:
  Net income.........................  $    15.7  $    10.3
  Adjustments to reconcile net income
     to net cash provided by
     operating activities:
     Depreciation, depletion and
      amortization...................        9.3        8.6
     Deferred income taxes...........        0.1        2.3
     Other...........................        0.2     --
     Changes in operating assets and
      liabilities
       Decrease (increase) in
        accounts receivable..........      (17.7)      (6.2)
       Decrease (increase) in other
        current assets...............       (0.1)      (0.3)
       Increase (decrease) in
        accounts payable.............       16.3        2.4
       Increase (decrease) in
        interest payable.............       (4.6)      (6.4)
       Increase (decrease) in other
        current liabilities..........        2.7     --
       Net change in other assets and
        liabilities..................        1.3        1.0
                                       ---------  ---------
Net Cash Provided by Operating
  Activities.........................       23.2       11.7
                                       ---------  ---------
Investing Activities:
  Capital expenditures...............      (17.5)      (9.6)
  Acquisition of producing
     properties......................       (0.1)    --
                                       ---------  ---------
Net Cash Used in Investing
  Activities.........................      (17.6)      (9.6)
                                       ---------  ---------
Financing Activities:
  Dividends to parent................     --           (2.1)
                                       ---------  ---------
Net Cash Used in Financing
  Activities.........................     --           (2.1)
                                       ---------  ---------
Net Increase in Cash and Cash
  Equivalents........................        5.6     --
Cash and Cash Equivalents at
  Beginning of Period................        9.3     --
                                       ---------  ---------
Cash and Cash Equivalents at End of
  Period.............................  $    14.9  $  --
                                       =========  =========

   The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>
                            MONTEREY RESOURCES, INC.
       STATEMENT OF DIVISION EQUITY AND SHAREHOLDERS' EQUITY (UNAUDITED)
                        (SHARES AND DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>

                                                                                                                       TOTAL
                                                                                                                      DIVISION
                                                         COMMON STOCK                 UNAMORTIZED                    EQUITY AND
                                           DIVISION    ----------------    PAID-IN     RESTRICTED     RETAINED     SHAREHOLDERS'
                                            EQUITY     SHARES    AMOUNT    CAPITAL    STOCK AWARDS    EARNINGS         EQUITY
                                           --------    ------    ------    -------    ------------    ---------    --------------
<S>                                         <C>                  <C>       <C>           <C>            <C>            <C>   
Balance at December 31, 1995............    $  45.0      --      $--       $ --          $--            $--            $ 45.0
Net income..............................       10.3      --       --         --          --             --               10.3
Dividends to parent.....................       (2.1)     --       --         --          --             --               (2.1)
                                           --------    ------    ------    -------    ------------    ---------    --------------
Balance at March 31, 1996...............    $  53.2      --      $--       $ --          $--            $--            $ 53.2
                                           ========    ======    ======    =======    ============    =========    ==============
Balance at December 31, 1996............    $ --         54.8    $ 0.5     $ 170.8       $ (1.0)        $ 6.4          $176.7
Net income..............................      --         --       --         --          --              15.7            15.7
Dividends declared......................      --         --       --         --          --             (12.0)          (12.0)
Employee stock compensation.............      --         --       --           0.2         (0.1)        --                0.1
                                           --------    ------    ------    -------    ------------    ---------    --------------
Balance at March 31, 1997...............    $ --         54.8    $ 0.5     $ 171.0       $ (1.1)        $10.1          $180.5
                                           ========    ======    ======    =======    ============    =========    ==============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       5

<PAGE>
                            MONTEREY RESOURCES, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)

(1)  ACCOUNTING POLICIES

     Monterey Resources, Inc. (the "Company" or "Monterey") is an
independent oil and gas company engaged in the production, development and
acquisition of crude oil and natural gas in the State of California. The Company
conducted its operations as the Western Division of Santa Fe Energy Resources,
Inc. ("SFR") until the November 1996 initial public offering ("IPO") of its
common stock.

     The financial statements for the quarter ended March 31, 1996 include
proportional allocations from certain SFR income statement and balance sheet
accounts, which are considered reasonable and necessary by management to
properly reflect the actual costs of the Western Division's operations. The
Western Division's results of operations include corporate overhead allocations
as follows: (i) production and operating expense includes $0.6 million; (ii)
exploration expense includes $0.1 million; (iii) general and administrative
expense includes $1.6 million. If the Western Division had been a separate,
unaffiliated entity, the Company estimates that general and administrative
expense would have been higher by $0.5 million. SFR provided cash management
services to the Western Division through a centralized treasury system and
therefore all intercompany accounts were settled daily and no cash balances were
maintained by the Western Division. All cash generated by operations, after
considering revenues and deductions for expenses (including corporate
allocations), capital expenditures and working capital requirements, were deemed
to be cash dividends to SFR.

     The accompanying unaudited financial statements of Monterey reflect, in the
opinion of management, all adjustments, consisting only of normal and recurring
adjustments and the allocations noted above, necessary to present fairly the
Company's financial position at March 31, 1997 and the Company's results of
operations and cash flows for the three-month periods ended March 31, 1997 and
1996. Interim period results are not necessarily indicative of the results of
operations or cash flows for a full year period.

     These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1996.

     SFR currently owns approximately 83% of the outstanding shares of
Monterey's common stock and has announced that it intends to distribute pro rata
to its common shareholders all of its ownership interest in the Company by means
of a tax-free distribution. The proposed Spin Off is subject to certain
conditions including the approval of such distribution by SFR's common
shareholders and the final approval of the proposed Spin Off by SFR's Board of
Directors. SFR has received a ruling from the Internal Revenue Service that the
distribution will be tax-free. The proposed Spin Off is not expected to occur
prior to July 1997.

(2)  PRO FORMA PER SHARE DATA

     Common shares outstanding at November 19, 1996, the closing date of the
Company's IPO, have been included in the pro forma per share calculations as if
such shares were outstanding for all periods prior to November 19, 1996.

(3)  STATEMENT OF CASH FLOWS

     The Company made interest and income tax payments as follows during the
three months ended March 31, 1997 and 1996 (in millions of dollars):

                                          1997        1996
                                       -----------  ---------
     Interest payments...............         9.3        12.9
     Income tax payments.............         5.7          --

                                       6
<PAGE>
                            MONTEREY RESOURCES, INC.
            NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

(4)  COMMITMENTS AND CONTINGENCIES

  HEDGING

     The Company's 1996 financial statements include the impact of oil and gas
hedging losses which were allocated by SFR. SFR from time to time enters into
such transactions in order to reduce exposure to fluctuations in market prices
of oil and natural gas. Oil hedging losses were allocated to the Company based
upon relative hedged volumes and were recognized as a reduction of oil revenues
in the period in which the hedged production was sold. Such amounts totaled $1.7
million in the first quarter of 1996. Currently the Company has no oil hedges in
place and, going forward, the Company does not expect to hedge a substantial
portion of its oil production.

     Additionally, during the first quarter of 1996, SFR hedged 20 MMcf per day
of the natural gas purchased for use in the Company's steam generation
operations. Such hedges resulted in a $1.7 million increase in the Company's
production and operating costs. While the Company currently has no natural gas
hedges in place, the Company's management may determine that such arrangements
are appropriate in the future in order to reduce the Company's exposure to
increases in gas prices.

  SPIN OFF TAX INDEMNITY AGREEMENT.

     To protect SFR from Federal and state income taxes, penalties, interest and
additions to tax that would be incurred by it if the Spin Off by SFR were
determined to be a taxable event, the Company and SFR have entered into an
agreement under which the Company has agreed to indemnify SFR with respect to
tax liabilities resulting primarily from actions taken by the Company at any
time during the one-year period after the Spin Off (or if certain tax
legislation is enacted and is applicable to the Spin Off, such longer period as
is required for the Spin Off to be tax free to SFR) (the "Restricted Period").
The Company has also agreed that, unless it obtains an opinion of counsel or a
supplemental ruling from the Internal Revenue Service that such action will not
adversely affect the qualification of the Spin Off as tax-free, the Company will
not merge or consolidate with another corporation, liquidate or partially
liquidate, sell or transfer all or substantially all of its assets or redeem or
otherwise repurchase any of its stock or issue additional shares of the
Company's capital stock during such Restricted Period. The Company's obligations
under this agreement could possibly deter offers or other efforts by third
parties to obtain control of the Company during such Restricted Period, which
could deprive the Company's stockholders of opportunities to sell their shares
of Common Stock at prices higher than prevailing market prices.

     The indemnity agreement will apply if the Spin Off occurs prior to December
31, 1997. The Company believes that if the Company is required to make payments
pursuant to such agreement, the amount that the Company would pay to SFR would
have a material adverse effect on the Company's financial condition and results
of operations. The actions for which the Company is required to indemnify SFR
pursuant to this agreement are within the Company's control, and the Company has
no intention of taking any actions during the Restricted Period that would have
such effect.

  ENVIRONMENTAL REGULATION

     Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations. Set
forth below are descriptions of three sites for which the Company has been
identified as a potentially responsible party ("PRP") and for which the
Company may be held jointly and severally liable with other PRPs.

     The Company has been identified as one of over 250 PRPs at a superfund site
in Los Angeles County, California (the "OII site"). The site was operated by a
third party as a waste disposal facility from 1948 until 1983. The Environmental
Protection Agency ("EPA") is requiring the PRPs to undertake remediation of
the site in several phases, which include site monitoring and leachate control,
gas control and final remediation. In November 1988 the EPA and a group of PRPs
that includes the Company entered into a consent decree covering the site
monitoring and leachate control phases of remediation. The Company was

                                       7
<PAGE>
                            MONTEREY RESOURCES, INC.
            NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

a member of the group Coalition Undertaking Remediation Efforts ("CURE") which
was responsible for constructing and operating the leachate treatment plant.
This phase is now complete and the Company's share of costs with respect to this
phase was $0.9 million. Another consent decree provides for the predesign,
design and construction of a landfill gas treatment system to harness and market
methane gas emissions. The Company is a member of the New CURE group which is
responsible for the gas treatment system construction and operation and landfill
cover. Currently, New CURE is in the design stage of the gas treatment system.
The Company's share of costs of this phase is expected to be $1.6 million and
such costs have been provided for in the financial statements. Pursuant to
consent decrees settling lawsuits against the municipalities and transporters
not named by the EPA as PRPs, such parties are required to pay approximately $84
million of which approximately $76 million will be credited against future
expenses. The EPA and the PRPs are currently negotiating the final closure
requirements. After taking into consideration the credits from the
municipalities and transporters, the Company estimates that its share of final
costs of the closure will be approximately $0.8 million which amount has been
provided for by the Company in its financial statements. The Company has entered
into a Joint Defense Agreement with the other PRPs to defend against a lawsuit
filed in September 1994 by ninety-five homeowners alleging, among other things,
nuisance, trespass, strict liability and infliction of emotional distress. A
second lawsuit has been filed by thirty-three additional homeowners and the
Company and the other PRPs have entered into a Joint Defense Agreement. At this
stage of the lawsuit the Company is not able to estimate costs or potential
liability.

     In 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of CERCLA and a letter ordering the Company and seven
other PRPs to negotiate with the EPA regarding implementation of a remedial plan
for a site located in Santa Fe Springs, California (the "Santa Fe Springs
Site"). The Company owned the property on which the site is located from 1921
to 1932. During that time the property was leased to another company and in 1932
the property was sold to that company. During the time the other company leased
or owned the property and for a period thereafter, hazardous wastes were
allegedly disposed at the site. The Company filed its response to the Section
104(e) order setting forth its position and defenses based on the fact that the
other company was the lessee and operator of the site during the time the
Company was the owner of the property. However, the Company has also given its
Notice of Intent to comply with the EPA's order to prepare a remediation design
plan. In March, 1997 the EPA issued an Amended Order for Remedial Design to the
original eight PRPs plus an additional thirteen PRPs. The Amended Order directs
the twenty-one PRPs to complete certain work required under the original order,
plus additional remedial design and investigative work. The total cost to
complete this work and to complete the final remedy (including ongoing
operations and maintenance) is currently estimated to be $5 million. Past costs
incurred by the EPA for this site for which the EPA is seeking reimbursement
totals approximately $6 million. The Company has provided $250,000 in its
financial statements for its share of future costs at the Santa Fe Springs Site.

     In 1995 the Company and eleven other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill during its
fourteen-year operation from 1971 to 1985 (the "Eastside Site"). EPC has since
liquidated its assets and placed the proceeds in trust (the "EPC Trust") for
closure and post-closure activities. However, these monies may not be sufficient
to close the site. The PRPs have entered into an enforceable agreement with the
DTSC to characterize the contamination at the site and prepare a focused
remedial investigation and feasibility study. The cost of the remedial
investigation and feasibility study is estimated to be $1 million, the cost of
which will be shared by the PRPs and the EPC Trust. The ultimate costs of
subsequent phases will not be known until the remedial investigation and
feasibility study is completed and a remediation plan is accepted by the DTSC.
The Company currently estimates final remediation could cost $2 million to $6
million and believes the monies in the EPC Trust will be sufficient to fund the
lower end of

                                       8
<PAGE>
                            MONTEREY RESOURCES, INC.
            NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

this range of costs. The DTSC recently designated 27 new PRPs for the Eastside
Site. The Company has provided $80,000 in its financial statements for its share
of costs related to this site.

     Pursuant to the Contribution Agreement, the Company agreed to indemnify and
hold harmless SFR from and against any costs incurred in the future relating to
environmental liabilities of the Western Division assets (other than the assets
retained by SFR), including any costs or expenses incurred at any of the OII
Site, the Santa Fe Springs Site and the Eastside Site, and any costs or
liabilities that may arise in the future that are attributable to laws, rules or
regulations in respect of any property or interest therein located in California
and formerly owned or operated by the Western Division or its predecessors. SFR
agreed to indemnify the Company from and against any costs relating to
environmental liabilities of any assets or operations of SFR (whether or not
currently owned or operated by SFR) to the extent not attributable to the
Western Division (other than the assets retained by SFR).

  EMPLOYMENT AGREEMENTS

     The Company has entered into employment agreements ("Employment
Agreements") with eight key employees. The initial term of seven of the
agreements expire on December 31, 1998; however, beginning January 1, 1998 and
on each January 1 thereafter the term of the agreements will automatically be
extended for additional one-year periods, unless by September 30 of the
preceding year the Company gives notice that the agreement will not be so
extended. The term of each is automatically extended for a period of two years
following a Change in Control (as defined herein). The other employment
agreement has an initial term which expires on December 31, 1999, is
automatically extended for one-year periods beginning January 1, 1999 and is
automatically extended for a three-year period following a Change in Control.

     In the event that following a change in control employment is terminated
for reasons specified in the Employment Agreements, the agreements provide for
(i) payment of certain amounts to the employee based on the employee's salary
and bonus under the Company's Incentive Compensation Plan; (ii) payout of
nonvested restricted stock, phantom units, stock options, if any, and (iii)
continuation of certain insurance benefits for a period of up to 24 to 36
months. The payments and benefits are payable pursuant to the Employment
Agreements only to the extent they are not paid out under the terms of any other
plan of the Company. In addition, payments and benefits under certain employment
agreements are subject to further limitation based on certain provisions of the
Internal Revenue Code.

  OTHER MATTERS

     The Company has certain long-term contracts ranging up to eleven years for
the supply and transportation of approximately 20 million cubic feet per day of
natural gas to the Company's operations in Kern County, California. In the
aggregate, these contracts involve a minimum commitment on the part of the
Company of approximately $18.6 million per year (based on prices equal to 102%
of the applicable index and transportation charges in effect for December 1996).

     There are other claims and actions, including certain other environmental
matters, pending against the Company. While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the business,
financial condition or liquidity of the Company.

                                       9
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

     The Company reported net income of $15.7 million, or $0.29 per share for
the first quarter of 1997, compared to $10.3 million, or $0.19 per share on a
pro forma basis, in the first quarter of 1996. The increased earnings resulted
from higher prices and increased production, partially offset by higher steam
fuel costs. Crude oil and liquids production totaled 50,200 barrels per day in
the first quarter of 1997, compared to 43,700 barrels per day in the first
quarter of 1996. The Company's average sales price per barrel of $16.57 was
$1.68 higher than the first quarter of 1996. Natural gas production declined to
3.0 million cubic feet per day in the first quarter of 1997 from 3.6 million
cubic feet per day in the prior quarter, but sold at an average $1.23 per
thousand cubic feet ("Mcf"), up $0.06 per Mcf from the prior quarter.

GENERAL

     The discussion presented herein relates to the operations of the Company
for the first quarter of 1997, and to the operations of the Western Division for
the first quarter of 1996.

     As an independent oil and gas producer, the Company's results of operations
are dependent upon the difference between the prices received for oil and gas
and the costs of finding and producing such resources. The Company produces most
of its oil and gas from long-lived fields in the San Joaquin Valley of
California utilizing various thermally enhanced oil recovery ("EOR") methods.
The market price of heavy (i.e., low gravity, high viscosity) and sour (i.e.,
high sulfur content) crude oils produced in these fields is lower than sweeter,
light (i.e., low sulfur and low viscosity) crude oils, reflecting higher
transportation and refining costs. In addition, the lifting costs of heavy crude
oils are generally higher than the lifting costs of light crude oils. As a
result, even relatively modest changes in crude oil prices may significantly
affect the Company's revenues, results of operations, cash flows and proved
reserves. In addition, prolonged periods of high or low oil prices may have a
material effect on the Company's financial condition and results of operations.

     The average realized sales price of the Company's crude oil and liquids for
the first quarter of 1997 was $16.57 per barrel, or approximately 79% of the
average posted price of $21.05 per barrel for West Texas Intermediate ("WTI")
crude oil (an industry posted price generally indicative of prices for sweeter
light crude oil).

     Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other market
conditions, as well as the world political situation as it relates to OPEC, the
Middle East and various producing countries. Since the beginning of 1994, the
average sales price (unhedged) received by the Company ranged from a low of
$8.80 per barrel for the first quarter of 1994 to a high of $17.29 per barrel in
the fourth quarter of 1996. Based on operating results for the first quarter of
1997, the Company estimates that a $1.00 per barrel increase or decrease in its
average crude oil sales price would result in a corresponding $4.5 million
change in income from operations and a $2.9 million change in cash flow from
operating activities. The foregoing estimates do not give effect to changes in
any other factors that may result from a change in oil prices.

     The price of natural gas fluctuates due to supply and demand, which may be
affected by weather conditions, the level of natural gas in storage and other
economic factors. Increases in the price of natural gas adversely impact the
Company's results of operations because the natural gas consumed in the
Company's EOR operations exceeds the amount of natural gas produced by the
Company. Based on operating results for the first quarter of 1997, the Company
estimates that a $0.10 per Mcf increase (or decrease) in the average domestic
natural gas sales price would result in a $0.4 million decrease (or increase) in
income from operations and a $0.3 million decrease (or increase) in cash flow
from operating activities. The foregoing estimates do not give effect to changes
in any other factors that may result from a change in natural gas prices.

     In February 1996 the Bureau of Land Management ("BLM") of the United
States Department of the Interior (which oversees the Company's leases of
Federal lands) agreed, effective as of June 1, 1996, to reduce the royalties
payable on any Federal lease that produces crude oil with a weighted average API

                                       10
<PAGE>
gravity of less than 20 degrees. The reduced royalty rates are based upon the
weighted average API gravity of the heavy oil produced from the subject Federal
leases and are as low as 3.9%, compared to 12.5% before the reduction. The
reduced royalty rates continue in effect for 12-month periods, after which the
operator can establish a new reduced rate for continued heavy oil production by
submitting an application. As a result of this program, the Company's royalty
rate on its Federal leases has been reduced from 12.5% to an average of 4.8%,
resulting in a net increase in the production attributable to the Company's net
revenue interests in such leases of approximately 1.6 MBbls per day. During the
period that such royalty reduction is in effect, the Company (and other working
interests owners, if any) will bear all of the thermal EOR costs to produce the
heavy oil from such properties. The royalty reduction will be terminated upon
the first to occur of (i) the determination by the BLM that the WTI average oil
price (as adjusted for inflation) has remained above $24 per barrel for six
consecutive months and (ii) such time after September 10, 1999, as the Secretary
of the Interior determines that the heavy oil royalty rate reduction has not
produced the intended results (i.e., to reduce the loss of otherwise recoverable
reserves).

     The Company's first quarter 1996 financial statements include the impact of
oil and gas hedging losses which were allocated by SFR. SFR from time to time
enters into such transactions in order to reduce exposure to fluctuations in
market prices of oil and natural gas. Oil hedging losses were allocated to the
Company based upon relative hedged volumes and were recognized as a reduction of
oil revenues in the period in which the hedged production was sold. Such amounts
totaled $1.7 million in the first quarter 1996. Currently the Company has no oil
hedges in place and, going forward, the Company does not expect to hedge a
substantial portion of its oil production.

     Additionally, during the first quarter of 1996, SFR hedged 20 MMcf per day
of the natural gas purchased for use in the Company's steam generation
operations. Such hedges, which terminated at the end of the second quarter,
resulted in a $1.7 million increase in the Company's production and operating
costs. While the Company currently has no natural gas hedges in place, the
Company's management may determine that such arrangements are appropriate in the
future in order to reduce the Company's exposure to increase in gas prices.

                                       11
<PAGE>
RESULTS OF OPERATIONS

     The following table reflects certain components of the Company's revenues
(expressed in millions of dollars) and expenses (expressed in dollars per BOE)
for the periods indicated:

                                        THREE MONTHS ENDED
                                            MARCH 31,
                                       --------------------
                                         1997       1996
                                       ---------  ---------
REVENUES:
Crude Oil and Liquids Produced:
     Average realized sales prices
      ($/Bbl)
       Unhedged......................      16.57      15.32
       Hedged........................      16.57      14.89
     Sales volumes (MBbls/d).........       50.2       43.7
     Revenues ($ Millions)
       Sales.........................       74.9       61.0
       Hedging.......................     --           (1.7)
       Net profits payments..........       (0.2)      (0.3)
                                       ---------  ---------
          Total......................       74.7       59.0
                                       =========  =========
Natural Gas Produced:
     Average realized sales prices
      ($/Mcf)........................       1.23       1.17
     Sales volumes (MMcf/d)..........        3.0        3.6
     Revenues ($ Millions)...........        0.3        0.4
EXPENSES PER BOE:
Production and operating expenses:
     Steam generation................       3.19       2.47  
     Lease operating.................       3.62       3.61
          Total......................       6.81       6.08  
Exploration, including dry holes.....       0.07       0.07
Depletion, depreciation and
amortization.........................       2.04       2.13
General and administrative...........       0.58       0.47
Taxes (other than income)............       0.58       0.47
Interest, net........................       0.97       1.55

------------

(1) Includes $0.42 per BOE loss on hedging, see "-- General". Excluding such
    hedging losses, historical steam generation costs would have been $2.05 per
    BOE and historical total production costs would have been $5.67 per BOE.

     Revenues of $84.8 million for the first quarter of 1997 were $25.2 million,
or 42%, higher than the $59.6 million reported for the first quarter of 1996.
The variance primarily reflects greater sales volumes ($9.0 million) and higher
sales prices ($6.6 million). An increase in the sales of crude oil purchased
accounted for the remaining difference ($9.6 million) and represents purchases
of higher gravity third-party crude blended with the Company's heavy production
to enhance the available transportation and marketing opportunities. Such
activity varies directly with marketing conditions.

     Costs and expenses totaled $56.7 million for the quarter and were $19.5
million, or 52%, higher than the $37.2 million reported for the same quarter of
1996. Production and operating costs were higher due to the greater production
volumes, and included steam fuel cost increases ($4.6 million) and operating
costs ($2.3 million) for properties acquired since the corresponding 1996
quarter. The cost of third-party crude oil purchases increased due to greater
marketing activity ($10.7 million) and general and administrative expenses
include higher personnel costs than the prior quarter.

                                       12
<PAGE>
     Income taxes for the first quarter of 1997 were $8.5 million, up 44% over
the $5.9 million reported for the first quarter of 1996. The Company's effective
tax rate was 35.1% in 1997 compared with 36.4% in the prior quarter, reflecting
primarily the amount of EOR credits available to the Company relative to pre-tax
income.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash flow from operating activities is a function of the
volumes of oil and gas produced from the Company's properties and the sales
prices received therefor. Since crude oil and natural gas are depleting assets,
unless the Company replaces the oil and gas produced from its properties, the
Company's assets will be depleted over time and its ability to incur debt at
constant or declining prices will be reduced. The Company increased its proved
reserves (net of production and sales) by approximately 17% from December 31,
1991 to December 31, 1996; however, no assurances can be given that similar
increases will occur in the future. Historically, the Company has funded
development and exploration expenditures and working capital requirements
primarily from cash provided by operating activities; however, the future levels
of operating cash flows, which are significantly affected by oil and gas prices,
may limit the cash available for future exploration, development and acquisition
activities. Net cash provided by operating activities totaled $23.2 million in
the first quarter of 1997; net cash used for capital expenditures and producing
property acquisitions in such period totaled $17.6 million. The Company intends
to continue to meet its short-term (through 1997) and long-term (the foreseeable
future after 1997) liquidity needs with cash provided by operating activities,
supplemented from time to time with borrowings under the Credit Facility and, if
appropriate, debt and equity financing.

     The Company expects to increase its capital expenditures (including
acquisitions) from an average of $35.8 million per year over the five-year
period ended December 31, 1996 to approximately $78.2 million in 1997. However,
the actual amount expended by the Company in 1997 will be based upon numerous
factors, the majority of which are outside its control, including, without
limitation, prevailing oil and natural gas prices and the outlook therefor and
the availability of funds. The Company intends to fund such future capital
expenditures with cash provided by operating activities and borrowings under the
Credit Facility.

     In November 1996 the Company issued the Senior Notes which were exchanged
for $175.0 million of Series G Notes previously issued by SFR. The Senior Notes
bear interest at 10.61% per annum and mature $25 million per year in each of the
years 1999 through 2005.

     Effective November 13, 1996 the Company entered into the Credit Facility
which matures November 13, 2000. The Credit Facility permits the Company to
obtain revolving credit loans and issue letters of credit in an aggregate amount
of up to $75.0 million, with the aggregate amount of letters of credit
outstanding at any time limited to $15.0 million. Borrowings are unsecured and
interest rates are tied to the bank's prime rate or eurodollar rate, at the
option of the Company.

     The Credit Facility and Senior Notes include covenants that restrict the
Company's ability to take certain actions, including the ability to incur
additional indebtedness and to pay dividends on capital stock. To the extent
that the Company is restricted from incurring additional indebtedness under the
Senior Notes or the Credit Facility, the cash available for use in its
operations may be reduced. Under the most restrictive of these covenants, at
March 31, 1997, the Company could incur up to $245.2 million of additional
indebtedness, or incur a lesser amount and pay dividends of up to $65.5 million.
The Company's ability to pay dividends is limited by provisions in the Credit
Facility and the Senior Notes prohibiting the payment of more than $31.0 million
in dividends to SFR in any fiscal year prior to the Spin Off.

     At March 31, 1996, the Company had $2.3 million of outstanding letters of
credit.

DIVIDENDS

     The Company currently intends to pay to its stockholders a quarterly
dividend of $0.15 per share of common stock ($0.60 annually). The first dividend
was paid in April 1997, and consisted of a prorated dividend of $0.22 in respect
of the Company's first partial quarter ended December 31, 1996 and for its first
full quarter of operations ended March 31, 1997. Although the Company currently
intends to pay quarterly

                                       13
<PAGE>
dividends, the determination of the amount of future cash dividends, if any, to
be declared and paid will depend upon declaration by the Company's board of
directors and upon the Company's financial condition, earnings and funds from
operations, the level of its capital and exploration expenditures, dividend
restrictions contained in the Credit Facility and the Senior Notes as described
in " -- Liquidity and Capital Resources," future business prospects and such
other matters as the Company's directors deem relevant.

ENVIRONMENTAL MATTERS

     Almost all phases of the Company's oil and gas operations are subject to
stringent environmental regulation by governmental authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and other facilities. The Company has expended
significant financial and managerial resources to comply with such regulations.
These efforts include both Company employees responsible for environmental
compliance and paid consultants who have evaluated known sites for which the
Company may face environmental liability and who monitor the Company's
properties and waste handling and disposal practices. All oilfield wastes are
disposed of at facilities authorized to accept such wastes. Although the Company
believes its operations and facilities are in general compliance with applicable
environmental regulations, risks of substantial costs and liabilities are
inherent in oil and gas operations. It is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
or claims for damages to property, employees, other persons and the environment
resulting from the Company's operations, could result in significant costs and
liabilities in the future. As it has done in the past, the Company intends to
fund its cost of environmental compliance from operating cash flows.

PENDING ACCOUNTING CHANGE

     The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which
establishes new guidelines for calculating and reporting earnings per share in
financial statements for periods ending after December 15, 1997. This rule is
not expected to have a material effect on the Company's reported earnings per
share.

PROPOSED SPIN OFF

     SFR has announced that it intends to distribute pro rata to its common
shareholders all of its ownership interest in the Company by means of a tax-free
distribution. The proposed Spin Off is subject to certain conditions including
the approval of such distribution by SFR's common shareholders and the final
approval of the proposed Spin Off by SFR's Board of Directors. SFR has received
a ruling from the Internal Revenue Service that the distribution will be
tax-free. The proposed Spin Off is not expected to occur prior to July 1997.

FORWARD-LOOKING STATEMENTS

     In its discussion and analysis of financial condition and results of
operations, the Company has included 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," "anticipates," "expects," "believes," "seeks," "goals,"
"intends", "plans" or "projects" and similar expressions are intended to
identify forward-looking statements. It is important to note that the Company's
actual results could differ materially from those projected by such
forward-looking statements. Although the Company believes 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 time this
report is filed with the Securities and Exchange Commission, no assurance can be
given that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements include, but are not limited to, the following:
production variances from expectations, volatility of oil and gas prices,
environmental risks, uncertainties about estimates of reserves, competition,
government regulation or action, litigation, drilling and operations
performance, labor disputes, and the ability of the Company to implement its
business strategy. All such forward-looking statements in this document are
expressly qualified in their entirety by the cautionary statements in this
paragraph.

                                       14
<PAGE>
                                    PART II
                               OTHER INFORMATION

     Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits

               None

     (b)  Reports on Form 8-K

               None

                                       15
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                MONTEREY RESOURCES, INC.
                                                      (Registrant)

                                        By /s/     GERALD R. CARMAN
                                                   GERALD R. CARMAN
                                            VICE PRESIDENT, CHIEF FINANCIAL
                                                      OFFICER
                                                     AND TREASURER
                                           (PRINCIPAL FINANCIAL OFFICER AND
                                             PRINCIPAL ACCOUNTING OFFICER)

Dated: May 15, 1997

                                      16