<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K
(Mark One)
(X)                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998

                                      OR

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

For the transition period from _____________________ to_______________________

                        Commission File Number 1-10537

                             NUEVO ENERGY COMPANY
            (Exact name of registrant as specified in its charter)

             Delaware                                 76-0304436
   (State or other jurisdiction of       (I.R.S. Employer Identification No.)
   incorporation or organization)

1331 Lamar, Suite 1650, Houston, Texas                    77010
(Address of principal executive offices)               (Zip Code)

      Registrant's telephone number, including area code: (713) 652-0706

          Securities registered pursuant to Section 12(b) of the Act:
<TABLE> 
<CAPTION> 
<S>                                                  <C> 
       Title of each class                           Name of each exchange on which registered
Common Stock, par value $.01 per share                       New York Stock Exchange
$2.875 Term Convertible Securities, Series A                 New York Stock Exchange
</TABLE> 

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

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  X   No  
                                         ----    ----

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 to this
Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1999, was approximately $215,855,515.

As of March 15, 1999, the number of outstanding shares of the registrant's
common stock was 19,848,783.

Documents Incorporated by Reference:

Portions of the registrant's annual proxy statement, to be filed within 120 days
after December 31, 1998, are incorporated by reference into Part III.
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

                          ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                                   NUMBER
<S>           <C>                                                                                   <C>
 
PART I
 
   Item 1.    Business...........................................................................    2
   Item 2.    Properties.........................................................................   12
   Item 3.    Legal Proceedings..................................................................   20
   Item 4.    Submission of Matters to a Vote of Security Holders................................   20
 
PART II
   Item 5.    Market for the Registrant's Common Equity
                and Related Stockholder Matters..................................................   21
   Item 6.    Selected Financial Data............................................................   23
   Item 7.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations..............................................   24
   Item 7a.   Quantitative and Qualitative Disclosures About Market Risk.........................   38
   Item 8.    Financial Statements and Supplementary Data........................................   40
   Item 9.    Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure..............................................   75
 
PART III
   Item 10.   Directors and Executive Officers of the Registrant.................................   75
   Item 11.   Executive Compensation.............................................................   75
   Item 12.   Security Ownership of Certain Beneficial Owners and Management.....................   75
   Item 13.   Certain Relationships and Related Transactions.....................................   75
 
PART IV
   Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K....................   75
 
              Signatures
</TABLE>


                                       i
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------
                                        
                                        
                                    PART I
                                    ------

This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act").  All
statements other than statements of historical facts included in this document,
including without limitation, statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, estimated quantities and net present values of
reserves, business strategy, plans and objectives of management of the Company
for future operations and covenant compliance, are forward looking statements.
The Company can give no assurances that the assumptions upon which such forward
looking statements are based will prove to be correct.  Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are set forth throughout this document. All subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified by the Cautionary
Statements.

ITEM 1. BUSINESS
----------------

General
-------

     Nuevo Energy Company ("Nuevo") was formed as a Delaware corporation on
March 2, 1990, to acquire the businesses of certain public and private
partnerships (collectively "Predecessor Partnerships"). On July 9, 1990, the
plan of consolidation ("Plan of Consolidation") was approved by limited partners
owning a majority of units of limited partner interests in the Predecessor
Partnerships. Such Plan of Consolidation provided for the exchange of the net
assets of the Predecessor Partnerships for common stock of Nuevo ("Common
Stock"). The Common Stock began trading on the New York Stock Exchange on
July 10, 1990, under the symbol "NEV." All references to the "Company" include
Nuevo and its majority and wholly-owned subsidiaries, unless otherwise indicated
or the context indicates otherwise.

     Nuevo, headquartered in Houston, Texas, is primarily engaged in the
exploration for, and the acquisition, exploitation, development and production
of crude oil and natural gas.  The Company's strategy to differentiate itself
versus its numerous peer group competitors and to generate long term shareholder
value consists of: (i) a unique management philosophy that frames all important
decisions in terms of anticipated impact on per share (rather than absolute)
growth of reserves, production, cash flow and earnings; (ii) a contrarian
investment and financing orientation; (iii) the outsourcing of non-strategic
functions; (iv) the alignment of employee compensation structures with
shareholder objectives; and (v) a commitment to an exemplary governance
structure which reinforces the overarching view of Nuevo as merely a conduit for
shareholders to achieve superior long term capital gains.

     The Company accumulates oil and gas reserves through the drilling of
exploratory wells on acreage owned by or leased to the Company, or through the
purchase of reserves from others.  The Company maximizes production from these
reserves through the drilling of developmental wells and through other
exploitative techniques.  The Company also owns and operates gas plants and
other facilities, which are ancillary to the primary business of producing oil
and natural gas.  The Company also owns certain adjacent surface real estate
parcels that are candidates for sale and/or development in future years.

Oil and Gas Activities
----------------------

     Since its inception in 1990, Nuevo has grown and diversified its operations
through a series of contrarian acquisitions of oil and gas properties and the
subsequent exploitation and development of these properties.  The Company has
complemented these efforts with an active exploration program, which provides
exposure to high-potential prospects.  The Company's primary strengths are its
track record of rapid reserve growth on a per share basis, achieved at extremely
low cost relative to industry averages; its inventory of exploitation and
exploration projects in its core areas of operation which the Company believes
will support future growth in reserves and production per share; its
demonstrated ability to significantly reduce operating costs on acquired
properties from levels experienced by prior operators; its ability to identify
and acquire, at attractive prices, producing properties which have significant
potential for further exploration, exploitation and development; and a capital
structure supportive of a growing investment program and future acquisitions.
During the five years ended December 31,

                                       2
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


1998, the Company invested $567.7 million in 16 acquisitions that added
estimated net proved reserves of 190.0 million barrels ("MMBBLS") of oil and
187.6 billion cubic feet ("BCF") of natural gas and replaced 375% of its
production at an average cost of $3.53 per barrel of oil equivalent ("BOE"). As
a result, the Company's estimated net proved equivalent reserves have increased
by approximately 376% since 1994.

Domestic Operations
-------------------

     As of December 31, 1998, the Company's estimated net U.S. proved reserves
totaled 231.5 million barrels of oil equivalent ("MMBOE") or 90% of Nuevo's
total proved reserve base.  During 1998, the Company's domestic production was
22.8 MMBOE, or 94% of total production.

WEST:

     The majority of the Company's domestic properties are located in the state
of California, where the Company operates from district offices in Bakersfield
and Santa Maria.  The Company's properties in California are categorized by
district as either Bakersfield, Pacific Onshore or Pacific Offshore.

     Nuevo's Bakersfield district operations encompass an estimated net proved
reserve base of 107.8 MMBOE as of December 31, 1998, and produced 8.7 MMBOE in
1998.  Bakersfield district properties include the Company's interests in the
Cymric, Midway-Sunset and Belridge oil fields in the Western San Joaquin Basin
in Kern County, California, and in the Coalinga gas field in the North San
Joaquin Valley.  The Company's Bakersfield properties utilize thermal operations
to maximize current production and the ultimate recovery of reserves.  The
Company owns an average 100% working interest (87% net revenue) in its
properties in the Cymric field and the entire working interest and an average
net revenue interest of approximately 97% in its properties in the Midway-Sunset
field.  Production is from two zones in the Cymric field, the Tulare formation
and the Antelope Shale.  The Midway-Sunset field produces from five zones with
the Potter Sand and the thermal Diatomite accounting for the majority of the
total production.  The productive zones of the Belridge field above 2,000 feet
in which the Company owns royalty interest are operated by another independent
energy company. The remaining deeper zones of the Belridge field are operated
and owned by the Company in fee with 100% working and net revenue interests.
The Coalinga gas field is operated by Texaco and the Company owns an average 27%
working interest (24% net revenue).  Production is from the Gatchell formation.

     Nuevo's Pacific Onshore district operations encompass an estimated net
proved reserve base of 41.0 MMBOE as of December 31, 1998, and produced 3.0
MMBOE in 1998. Los Angeles district properties include the Company's interests
in the Brea Olinda oil field in northern Orange County, and in the Huntington
Beach and Belmont oil fields in the federal OCS leases, offshore Long Beach. The
Company operates three fee properties in the Brea Olinda field with a 100%
working and 90% net revenue interest. The Company also has royalty interests in
additional wells in the Brea Olinda field. Brea Olinda production is from
multiple-pay zones in the Miocene and Pliocene sandstones at depths up to 6,500
feet.

     Nuevo's Pacific Offshore district operations encompass an estimated net
proved reserve base of 23.8 MMBOE as of December 31, 1998, and resulted in
production of 7.0 MMBOE in 1998. Santa Maria district properties include the
Company's interests in the Point Pedernales, Dos Cuadras and Santa Clara oil
fields in federal OCS leases, offshore Santa Barbara and Ventura Counties, and
in a number of smaller onshore oil fields in Santa Barbara and Ventura Counties.
The Company acquired a 12% working interest (10% net revenue) in the Point
Pedernales field in July 1994 and an additional 68% working interest (57% net
revenue) in the field as part of the acquisition of the California properties
from Torch Energy Advisors Incorporated ("Torch") in 1996. (See Note 3 to the
Notes to Consolidated Financial Statements). The Point Pedernales field is
operated by the Company, and is located 3.5 miles offshore Santa Barbara County,
California, in federal waters. Production is from the Monterey Shale at depths
from 3,500-5,150 feet. The Dos Cuadras field is located offshore five and one-
half miles from Santa Barbara in the Santa Barbara Channel. The Company operates
three platforms with a 25% working interest (20.8% net revenue) and another
platform with a 67.5% working interest (56.3% net revenue).

                                       3
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

EAST:

     The Company also has properties located in East Texas (see next paragraph
regarding sale) and the onshore Gulf Coast region, which are operated from the
Company's headquarters in Houston.  Nuevo's Houston district operations
encompass an estimated net proved reserve base of 58.9 MMBOE as of December 31,
1998, and produced 4.0 MMBOE in 1998.  Houston district properties include the
Company's interests in the Oak Hill and Chapel Hill gas fields in Rusk and
Panola Counties of Texas; in the Giddings gas field in Grimes County, Texas; in
the Weeks Island oil field in Iberia Parish, Louisiana; and in the North Frisco
City oil field in Monroe County, Alabama.  The Oak Hill field is located in Rusk
County, Texas, and produces from the Cotton Valley reservoir and has long-lived
natural gas reserves.  The Company has an average 90% working interest (71% net
revenue) in these wells.  In 1996, the Company acquired an average 60% working
interest (46% net revenue) in 11 East Texas fields in the Chapel Hill area.
(See Note 3 to the Notes to Consolidated Financial Statements).  Additionally,
2,529 net mineral acres were acquired.  The Company owns an approximate 68%
working interest (54% net revenue) in the Weeks Island field.  The North Frisco
City field is Company-operated.  Nuevo owns approximately a 22% working interest
(16% net revenue).

     On January 6, 1999, the Company completed the sale of its East Texas
natural gas assets to an affiliate of Samson Resources Company for an adjusted
purchase price of $192.0 million (see Note 4 to the Notes to Consolidated
Financial Statements). A $5.2 million gain on settled hedge transactions was
realized in connection with closing of this sale in 1999. The effective date of
the sale is July 1, 1998. The Company reclassified these assets to assets held
for sale and discontinued depleting these assets during the third quarter of
1998. Estimated net proved reserves associated with these properties totaled
approximately 329.0 BCF of natural gas equivalent at January 1, 1999.

     The Company continues to create value through domestic oil and gas
development projects. The Company initiates workovers, recompletions,
development drilling, secondary and tertiary recovery operations and other
production enhancement techniques to maximize current production and the
ultimate recovery of reserves. The Company has identified in excess of 900
domestic exploitation projects on existing properties, with a West Texas
Intermediate ("WTI") crude price of $12.00 per barrel of oil ("BBL"). At a WTI
price of $18.50 per BBL, the Company has identified in excess of 1,400 domestic
exploitation projects on existing properties. Capital expenditures for domestic
exploitation projects totaled $104.6 million in 1998 and are budgeted at
approximately $32.0 million in 1999. This decrease in budgeted capital
expenditures from 1998 to 1999 is attributable to the current low oil price
environment. Examples of current or planned projects include the continuation of
horizontal drilling in the Bakersfield district and expansion of the waterflood
project at Huntington Beach.

     The Company also has an exploration program targeting high-potential
reserve opportunities in California. The Company seeks to reduce the risks
normally associated with exploration through the use of advanced technologies,
such as 3-D seismic surveys and computer aided exploration ("CAEX") techniques,
and by participating with experienced industry partners. The Company's
exploration program resulted in eight successful wells out of 14 drilled in
1998. The Company's most significant domestic discoveries in 1998 were: (i) four
successful wells at Four Isle Dome in Louisiana, which helped increase net
production from 0.6 MMCFPD and 35 BOPD at the beginning of 1998 to 7.9 MMCFPD
and 170 BOPD at the end of 1998; (ii) two successful wells at Weeks Island,
Louisiana, which each resulted in completions producing in excess of 700 BOPD;
and (iii) successful extension to the south and east at the Monument Junction
reservoir in the Cymric Field in California.

     Capital expenditures for domestic exploration activity totaled $26.7
million in 1998 and are budgeted at approximately $5.6 million in 1999.

International Operations
------------------------

     As of December 31, 1998, the Company's estimated international net proved
reserves totaled 25.8 MMBOE, or 10% of Nuevo's total proved reserve base.
During 1998, the Company's international production was 1.5 MMBOE, or 6% of
Nuevo's total production.

                                       4
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     The Company's international reserves and production consist of a 50%
working interest (37.5% average net revenue) in the Yombo and Masseko oil fields
located in the Marine I Permit offshore the Republic of Congo in West Africa
("Congo"). Estimated net proved reserves of the Yombo and Masseko oil fields as
of December 31, 1998 were 25.8 MMBOE, and production during 1998 totaled 1.5
MMBOE, all from the Yombo field. In 1998, revenues relating to production from
the Congo accounted for approximately 7% of the total oil and gas revenues for
the Company. The properties are located 27 miles offshore in approximately 370
feet of water. The Company also owns an interest in a converted super tanker
with storage capacity of over one million barrels of oil for use as a floating
production, storage and off loading vessel ("FPSO"). The Company's production is
converted on the FPSO to No. 6 fuel oil with less than 0.3% sulfur content.

     In December 1998, the Company temporarily abandoned the Chott Fejaj #3
wildcat well in Tunisia, North Africa.  The Company owns a 17.5% ownership
interest in the well.  Based on the Company's evaluation of the initial test
results on this well, the Company determined to expense the $1.8 million of
costs incurred as dry hole costs in 1998.

     In September 1998, the Company plugged and abandoned its first well in the
East Cape Three Points prospect offshore the Republic of Ghana in West Africa
("Ghana") due to the lack of commercial quantities of reserves.  Dry hole costs
and geological and geophysical costs for this well (net to the Company) were
$7.3 million and $1.6 million, respectively, in 1998.

     In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million.  Such acquisition added 3.4 MMBOE to the
Company's reserve base and increased the Company's net working interest in the
Congo from 43.75% to 50.0%.

     The Company's most significant international discovery in 1997 was the
Masseko M-4 well drilled on the Marine I Permit approximately six miles to the
northwest of the Yombo field. The Company drilled an exploration well to
evaluate the Lower Sendji and sub-salt sections underlying the Masseko
structure, as well as to further delineate the Upper Sendji and Tchala zones,
which were discovered but not developed by a previous operator. This well tested
at rates over 3,000 gross barrels per day from a newly discovered middle Sendji
section.

     During 1996, the Company drilled a successful exploration well, the B-14,
to the Lower Sendji formation in the Yombo field. This well is completed in half
of the 236 feet of net pay and has produced over 1,100 gross MBOE as of
December 31, 1998. Additionally, the Company initiated a waterflood project to
enhance production from existing Upper Sendji and Tchala zones in 1997.

     The Company's 1999 international exploration budget of approximately $8.0
million includes seismic evaluation and data acquisition.   International
development plans for 1999 include the continuation of the Company's drilling
program in the Congo and are budgeted at approximately $7.0 million.

     In March 1997, Nuevo Ghana, Inc., ("Nuevo Ghana"), a wholly-owned
subsidiary of the Company, signed a petroleum agreement with the Republic of
Ghana and the Ghana National Petroleum Corporation, ("GNPC"), for petroleum
rights covering approximately 1.7 million acres offshore Ghana in the East Cape
Three Points prospect area. The Company is the operator with a 75% working
interest, and a third party holds the remaining 25% working interest.

     In October 1997, Nuevo Ghana signed a second petroleum agreement with Ghana
and GNPC for petroleum rights covering an additional 2.7 million acres offshore
Ghana in the Accra-Keta prospect area.  The Company is the operator of this
prospect with a 100% working interest.  This new prospect area is sixty miles to
the east of the Company's 1.7 million acres awarded in March 1997.  The
exploration program for the Company's new acreage is similar to the initial
agreement and involves reprocessing existing seismic data, shooting additional
seismic and drilling an exploration well during the first phase of the
agreement.

     The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets.  In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive

                                       5
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the United States. The Company attempts to
conduct its business and financial affairs so as to protect against political
and economic risks applicable to operations in the various countries where it
operates, but there can be no assurance that the Company will be successful in
so protecting itself. A portion of the Company's investment in the Congo is
insured through political risk insurance provided by the Overseas Private
Investment Corporation ("OPIC"). See "Risk Factors".

Gas Plant and Other Facilities
------------------------------

     The Company has owned and operated gas plants and other facilities, most of
which have been ancillary to the primary business of producing oil and natural
gas.

     The Company owns three gas plants in California that are strategic assets
for the Company's oil and gas activities in California. The Stearns Gas Plant is
located in the Brea Olinda field and was processing 3.0 MMCFD at December 31,
1998. The Santa Clara Valley Gas Plant serves the Torrey field located east of
Ventura, California and was processing 9.2 MMCFD at December 31, 1998. The HS&P
Gas Plant became operational in September 1997 and is used to process gas
production from the Point Pedernales field. At December 31, 1998, the HS&P Gas
Plant was processing 2.6 MMCFD.

     In addition to the gas plants that process Company production, Nuevo has
owned certain non-core gas gathering, pipeline and storage assets. In December
1997, the Company announced its intention to dispose of these non-core assets
during 1998. Such assets include: the Company's 48.5% interest in the Richfield
Gas Storage facility, which was sold in February 1998 at its approximate
carrying value, an 80% interest in Bright Star Gathering, Inc., which was sold
in July 1998 at its approximately carrying value, and the Illini pipeline. The
Company recorded a non-cash, pre-tax charge to fourth quarter 1997 earnings of
$23.9 million, reflecting the estimated loss on the disposition of these assets.
A positive revision to this charge was made in the fourth quarter of 1998 in the
amount of $3.7 million to reflect the estimated current fair value of the Illini
pipeline. The Company entered into a sale agreement during 1998 to sell the
Illini pipeline to a third party. Such sale is currently pending and awaiting
regulatory approval. The Company's results of operations for the year ended
December 31, 1998, included the operating results from these assets through the
disposition date, as applicable; however, these assets were not depreciated
during 1998. The Company will retain its California gas plants, as these plants
are strategic assets for the Company's oil and gas activities in California.

     On May 2, 1997, the Company sold its 95% interest in the NuStar Joint
Venture, which owned an interest in the Benedum natural gas processing plant,
and an interest in certain related assets and natural gas gathering systems
located in West Texas. The Company recognized a $2.3 million gain on this sale,
which was effective January 1, 1997.

Real Estate
-----------

     In April 1996, along with its acquisition of certain California upstream
oil and gas properties from Union Oil Company of California ("Unocal") (see
"Acquisitions and Divestitures"), the Company acquired tracts of land in Orange
and Santa Barbara Counties in California, two office buildings, one in Ventura
County and one in Santa Barbara County, and nearly 16,000 acres of agricultural
property in the central valley of California. As of December 31, 1998, there was
$51.0 million allocated to land. The office buildings are included in other
facilities at December 31, 1998.

     Consistent with Nuevo's proactive asset management strategy, the Company
plans to sell certain of its surface real estate assets in Orange County in
1999. With land values rising in California, the Company expects to monetize a
significant portion of its California real estate portfolio to help fund its
1999 capital program.

     The surface fee in Orange county lies within the sphere of influence of the
city of Brea, which is in north Orange County and includes three fee parcels,
the Stearns Fee, the Stearns Columbia Fee and Naranjal "B" Fee.  These are
contiguous parcels with gross development potential of 764 acres. The Company
allocated $26.3 million

                                       6
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

in book value from the Unocal Properties purchase price to this surface fee.
Plans are being formulated in relation to the tract of land in Santa Barbara
County.

     One of the two office buildings acquired from Unocal currently houses Nuevo
and Torch employees in the district office in Santa Maria.

     The agricultural land, primarily in Kings County, Fresno County and Kern
County, has surface leases for grazing or farming use, which are compatible with
the production of oil.

Acquisitions and Divestitures of Oil and Gas Properties
-------------------------------------------------------

     Consistent with its contrarian acquisition and divestiture strategy, Nuevo
has, from time to time, been an active participant in the market for oil and gas
properties.  The Company attempts to purchase high growth assets which, for any
of a variety of reasons, are out of favor in the marketplace and hence available
for acquisition at attractive prices.  From time to time, the Company also seeks
to divest itself of lower growth assets at times when those assets are valued
highly by the marketplace.  Examples of this contrarian strategy are listed
below:

     On January 6, 1999, the Company completed the sale of its East Texas
natural gas assets to an affiliate of Samson Resources Company for an adjusted
purchase price of $192.0 million.  A $5.2 million gain on settled hedge
transactions was realized in connection with the closing of this sale in 1999.
The effective date of the sale is July 1, 1998.  The Company reclassified these
assets to assets held for sale and discontinued depleting these assets during
the third quarter of 1998.  Estimated net proved reserves associated with these
properties totaled approximately 329.0 BCF of natural equivalent at January 1,
1999.

     In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million.  Such acquisitions added 3.4 MMBOE to the
Company's reserve base and increased the Company's net working interest in the
Congo from 43.75% to 50.0%.

     In July 1996, the Company completed the acquisition of certain East Texas
oil and gas properties, which added 31.2 BCF to the Company's reserve base, for
a net purchase price of $9.3 million in cash. The package consisted of interests
in 11 fields. In December 1996, the holders of the preferential rights on these
properties exercised such rights for a cash payment of $8.0 million, acquiring
properties constituting approximately half of the estimated proved reserves
related to this acquisition.

     In June 1996, the Company sold 177 producing wells and the majority of its
acreage in the Giddings field and East Texas Austin Chalk holdings for $27.3
million, representing estimated net proved reserves of 4.2 MMBOE as of
December 31, 1995. The Company retained ownership of seven wells and surrounding
acreage in the Turkey Creek prospect area of the Austin Chalk trend located in
Grimes County, Texas.

     In April 1996, the Company acquired certain upstream oil and gas properties
located onshore and offshore California ("Unocal Properties") from Unocal and
certain California oil properties ("Point Pedernales Properties" and, together
with the Unocal Properties, the "California Properties") from Torch and certain
of its wholly-owned subsidiaries for a combined net purchase price of $525.9
million, plus a contingent payment based on future realized oil prices.  The
California Properties consisted of 52 fields with approximately 2,200 active
wells, and estimated net proved reserves as of December 31, 1998 of 172.6 MMBOE.
During 1998, the California Properties constituted 77% of the Company's total
oil and natural gas production on a barrel of oil equivalent basis.  Since
acquiring the California Properties, the Company has spent approximately $240.0
million to complete over 400 exploitation and development projects.

Industry Segment Information
----------------------------

     For industry segment data (including foreign operations), see Note 13 to
the Notes to Consolidated Financial Statements.

                                       7
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

Markets
-------

     The markets for hydrocarbons continue to be quite volatile.  The Company's
financial condition, operating results, future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas.  The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices.  Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company.  These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign oil imports and the
availability of alternate fuel sources.  Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, the Company's ability to
obtain additional capital, and its revenues, profitability and cash flows from
operations.  (See Note 16 to the Notes to Consolidated Financial Statements.)

     Properties characterized by the production of San Joaquin Valley heavy oil
(defined herein as those fields which produce primarily 15 (degrees) API quality
crude oil or heavier through thermal operations) constituted 28% of the
Company's total 1998 output.

     In addition, properties which produce primarily other grades of relatively
heavy oil (generally, 19 (degrees) API or heavier but produced through non-
thermal operations) constituted 2% of the Company's total 1998 output.

     The market for California heavy oil differs from the established market
indices for oil elsewhere in the U.S., due principally to the higher
transportation and refining costs associated with heavy oil.

     The Company's Yombo Field production in its Marine I Permit offshore the
Congo produces a relatively heavy crude oil (16-20 (degrees) API gravity) which
is processed into a low-sulfur No. 6 fuel oil product for sale to worldwide
markets. Production from this property constituted 6% of the Company's total
1998 output. The market for residual fuel oil differs from the markets for WTI
and other benchmark crudes due to its primary use as an industrial or utility
fuel versus the higher value transportation fuel component, which is produced
from refining most grades of crude oil.

     Sales to Tosco, formerly Unocal, accounted for 60%, 62% and 52% of 1998,
1997 and 1996 oil and gas revenues, respectively. Also in 1998, sales to Torch
Energy L.L.C. accounted for 10% of total 1998 oil and gas revenues. The loss of
any single significant customer or contract could have a material adverse short-
term effect on the Company; however, management of the Company does not believe
that the loss of any single significant customer or contract would materially
affect its business in the long-term.

     Under the terms of a $30.0 million volumetric production payment, the
Company was committed to deliver 10.7 BCF of natural gas through December 1998.
As of December 31, 1998, the Company had fulfilled its obligation under this
commitment. (See Note 5 of the Notes to Consolidated Financial Statements).
There are no other significant delivery commitments, and substantially all of
the Company's oil and gas production is sold at market responsive pricing
through a marketing affiliate of Torch. The Company from time to time may enter
into crude oil and natural gas price swaps or other similar transactions to
hedge its exposure to price fluctuations.

Regulation
----------

     Oil and Gas Regulation

     The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control.  These factors include state and
Federal regulation of oil and gas production and transportation, as well as
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the amount of oil
and gas available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive gas well may be "shut-in" because of an over-supply of
gas or lack of an available gas pipeline in the

                                       8
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

areas in which the Company may conduct operations. State and Federal regulations
generally are intended to prevent waste of oil and gas, protect rights to
produce oil and gas between owners in a common reservoir, control the amount of
oil and gas produced by assigning allowable rates of production and control
contamination of the environment. Pipelines and gas plants also are subject to
the jurisdiction of various Federal, state and local agencies.

     The Company's sales of natural gas are affected by the availability, terms
and costs of transportation. The rates, terms and conditions applicable to the
interstate transportation of gas by pipelines are regulated by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Acts, as well as
under Section 311 of the Natural Gas Policy Act. Since 1985, the FERC has
implemented regulations intended to increase competition within the gas industry
by making gas transportation more accessible to gas buyers and sellers on an
open-access, non-discriminatory basis.

     The Company's sales of oil are also affected by the availability, terms and
costs of transportation.  The rates, terms, and conditions applicable to the
interstate transportation of oil by pipelines are regulated by the FERC under
the Interstate Commerce Act.  In this connection, FERC has implemented a
simplified and generally applicable ratemaking methodology for interstate oil
pipelines to fulfill the requirements of Title VIII of the Energy Policy Act of
1992 comprised of an indexing system to establish ceilings on interstate oil
pipeline rates.  The FERC will also, under defined circumstances, permit
alternative ratemaking methodologies for interstate oil pipelines such as the
use of cost of service rates, settlement rates, and market-based rates.  Market-
based rates will be permitted to the extent the oil pipeline can demonstrate
that it lacks significant market power in the market in which it proposes to
charge market-based rates.

     Environmental Regulation

     General.  The Company's activities are subject to existing Federal, state
and local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing Federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company.

     Activities of the Company with respect to exploration, drilling and
production from wells, natural gas facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing natural gas and other products, are subject to
stringent environmental regulation by state and Federal authorities including
the Environmental Protection Agency ("EPA"), the Department of Transportation
and FERC. Such regulation can increase the cost of planning, designing,
installing and operating such facilities. In most instances, the regulatory
requirements relate to water and air pollution control measures.

     Waste Disposal.  The Company currently owns or leases, and has in the past
owned or leased, numerous properties that have been used for production of oil
and gas for many years.  Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company.  In addition, many of these properties have been
operated by third parties over whom the Company had no control as to such
entities' treatment of hydrocarbons or other wastes or the manner in which such
substances may have been disposed of or released.  State and Federal laws
applicable to oil and gas wastes and properties have become more strict.  Under
these new laws, the Company could be required to remove or remediate previously
disposed wastes (including wastes disposed of or released by prior owners or
operators) or property contamination (including groundwater contamination) or to
perform remedial plugging operations to prevent future contamination.

     The Company may generate wastes, including hazardous wastes that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazadous wastes. Furthermore, certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.

                                       9
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


     Superfund.  The Federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint
and several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a facility and persons that disposed of or arranged for
the disposal of the hazardous substances found at a facility. CERCLA also
authorizes the EPA and, in some cases, third parties to take actions in response
to threats to the public health or the environment and to seek to recover from
the responsible classes of persons the costs of such action. In the course of
its operations, the Company may have generated and may generate wastes that fall
within CERCLA's definition of "hazardous substances". The Company may also be an
owner of facilities on which "hazardous substances" have been released by
previous owners or operators. The Company may be responsible under CERCLA for
all or part of the costs to clean up facilities at which such wastes have been
released. Neither the Company nor, to its knowledge, its Predecessor
Partnerships has been named a potentially responsible person under CERCLA nor
does the Company know of any prior owners or operators of its properties that
are named as potentially responsible parties related to their ownership or
operation of such property.

     Air Emissions.  The operations of the Company are subject to local, state
and Federal regulations for the control of emissions of air pollution.
Administrative enforcement actions for failure to comply strictly with air
pollution regulations or permits are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, regulatory
agencies could require the Company to forego construction, modification or
operation of certain air emission sources, although the Company believes that in
the latter cases it would have enough permitted or permittable capacity to
continue its operations without a material adverse effect on any particular
producing field.

     Oil Pollution Act.  The Oil Pollution Act of 1990 ("OPA") and regulations
thereunder impose certain duties and liabilities on "responsible parties"
related to the prevention of oil spills and damages resulting from such spills
in United States waters.  A "responsible party" includes the owner or operator
of a facility or vessel, or the lessee or permittee of the area in which a
facility covered by OPA is located.  OPA assigns joint and several liability to
each responsible party for oil removal costs and a variety of public and private
damages.  Few defenses exist to the liability imposed by OPA.

     The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill.  Certain amendments to the OPA that were enacted in 1996 require owners
and operators of offshore facilities that have a worst case oil spill potential
of more than 1,000 barrels to demonstrate financial responsibility in amounts
ranging from $10.0 million in specified state waters to $35.0 million in federal
OCS waters, with higher amounts, up to $150.0 million in certain limited
circumstances, where the MMS believes such a level is justified by the risks
posed by the quantity or quality of oil that is handled by the facility.  On
March 25, 1997, the MMS promulgated a proposed rule implementing these OPA
financial responsibility requirements.  The Company believes that it currently
has established adequate proof of financial responsibility for its offshore
facilities.  However, the Company cannot predict whether the financial
responsibility requirements under the OPA amendments or the proposed rule will
result in the imposition of substantial additional annual costs to the Company
in the future or otherwise materially adversely affect the Company.  The impact
of the financial responsibility requirements is not expected to be any more
burdensome to the Company than it will be to its similarly or less capitalized
competitors.

     Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.

                                       10
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

Competition
-----------

     The Company operates in the highly competitive areas of oil and gas
exploration, development and production.  The availability of funds and
information relating to a property, the standards established by the Company for
the minimum projected return on investment and the availability of alternate
fuel sources are factors that affect the Company's ability to compete in the
marketplace.  The Company's competitors include major integrated oil companies
and a substantial number of independent energy companies, many of which possess
greater financial and other resources than the Company.

Personnel
---------

     At December 31, 1998, the Company employed 58 full time employees who
represent the executive officers and key operating, exploration, financial and
accounting management.  The Company outsources certain administrative and
operational functions to Torch, which maintains a large technical, operating,
accounting and administrative staff.  Pursuant to an agreement with Torch (the
"Torch Agreement"), Torch administered certain business activities of the
Company for a monthly fee based on a fixed percentage of operating cash flow and
total assets (as defined) during 1998.  (See Note 6 to the Notes to Consolidated
Financial Statements).  The combined personnel of Torch and the Company
consisted of 861 employees at December 31, 1998.

                                       11
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

ITEM 2.  PROPERTIES
-------------------

Reserves, Productive Wells, Acreage and Production
--------------------------------------------------

     The Company holds interests in oil and gas wells located in the United
States and West Africa. The Company's principal developed properties are located
in California, Texas, Louisiana, Alabama, and Congo, West Africa; undeveloped
acreage (see next page for detail) is located primarily in California, Texas,
Nevada, Mississippi, Congo and Ghana. Estimated proved oil and gas reserves at
December 31, 1998 decreased approximately 12% since December 31, 1997, primarily
as a result of lower oil prices. (See Note 16 to the Notes to Consolidated
Financial Statements). The Company has not filed any different oil or gas
reserve information with any foreign government or other Federal authority or
agency.

     The following table sets forth certain information, as of December 31,
1998, which relates to the Company's principal oil and gas properties:
<TABLE>
<CAPTION>
 
                                               Net Proved Reserves
                                                December 31, 1998                1998 Production           PV-10**
                                        ------------------------------    ---------------------------    ----------
                                          Oil*        Gas                  Oil*       Gas
                               Gross    (Mbbls)     (Mmcf)       MBOE     (Mbbls)    (Mmcf)     MBOE
                               Wells    -------     ------      ------    -------    ------     -----
                               -----
<S>                            <C>      <C>        <C>         <C>        <C>       <C>        <C>       <C>
U.S. PROPERTIES
California Fields
-----------------
  Cymric....................     498     49,902       5,768     50,863     3,905      1,604     4,172    $  64,938
  Midway-Sunset.............     492     42,085          --     42,085     2,900         --     2,900       23,603
  Brea Olinda...............     222     32,561      20,749     36,019       826        136       849       35,109
  Point Pedernales..........      10     10,016       5,618     10,953     2,385        990     2,550        1,129
  Belridge..................     434     11,920       1,026     12,091       608        198       641       17,570
  Huntington Beach..........      20      7,194         766      7,322       753         77       766       10,094
  Santa Clara...............      29      2,542       2,059      2,885       940        649     1,048       (8,135)
  Bardsdale.................       7      1,146       1,355      1,372       387        800       520        4,290
  South Mountain............      77      1,393       1,351      1,618       202        251       244          546
  Other.....................     456      3,314      24,395      7,380     3,534      9,000     5,034      (29,075)
                             -------    -------     -------    -------   -------    -------   -------    ---------
    Total California Fields.   2,245    162,073      63,087    172,588    16,440     13,705    18,724      120,069
                             -------    -------     -------    -------   -------    -------   -------    ---------
Other U.S. Fields
-----------------
  Oak Hill, Texas...........     349        418     303,468     50,996        33     11,451     1,941      125,271
  Carthage, Texas...........      52        139      13,861      2,449        10        854       152        6,073
  Giddings, Texas...........      12         13       6,334      1,069        13      3,162       540        7,302
  Other.....................     163      1,657      16,506      4,407       849      3,349     1,408       19,248
                             -------    -------     -------    -------   -------    -------   -------    ---------
    Total U.S. Properties...   2,821    164,300     403,256    231,509    17,345     32,521    22,765      277,963
                             -------    -------     -------    -------   -------    -------   -------    --------- 

FOREIGN PROPERTIES
  Yombo, Congo..............      31     18,193          --     18,193     1,461         --     1,461       31,163
  Masseko, Congo............      --      7,648          --      7,648        --         --        --       (9,193)
                             -------    -------     -------    -------   -------    -------   -------    ---------
    Total Foreign Properties      31     25,841          --     25,841     1,461         --     1,461       21,970
                             -------    -------     -------    -------   -------    -------   -------    --------- 

TOTAL PROPERTIES               2,852    190,141     403,256    257,350    18,806     32,521    24,226      299,933
                             =======    =======     =======    =======   =======    =======   =======    ========= 

Less:  East Texas Assets
    Held for Sale...........    (509)      (759)   (324,471)   (54,837)      (88)   (13,050)   (2,263)    (135,169)
                             -------    -------     -------    -------   -------    -------   -------    --------- 

PRO FORMA TOTAL, NET OF
    E. TEXAS ASSETS.........   2,343    189,382      78,785    202,513    18,718     19,471    21,963    $ 164,764
                             =======    =======     =======    =======   =======    =======   =======    ========= 
</TABLE>

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

*       includes natural gas liquids
**      pre-tax

                                       12
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     The summary of SEC reserves, which is presented on the previous page, is
computed based on realized prices at December 31, 1998, held constant over time
(see Note 16 to the Notes to Consolidated Financial Statements).  Management
believes that the following reserve information, which reflects escalated
commodity pricing, is more consistent with the belief that the current low oil
and gas prices will revert to long-term historical averages.  The following
table sets forth the escalated reserve information, as of December 31, 1998:
<TABLE>
<CAPTION>
 
                                               Net Proved Reserves (Escalated Case)
                                                        December 31, 1998                    PV-10**
                                             --------------------------------------          ------- 
                                               Oil*           Gas
                                             (Mbbls)         (Mmcf)           MBOE
                                             -------         ------          ------
<S>                                        <C>            <C>            <C>              <C>
U.S. PROPERTIES
California Fields
-----------------
  Cymric...............................         54,285          5,805           55,252        $178,438
  Midway-Sunset........................         43,765             --           43,765         117,839
  Brea Olinda..........................         33,229         21,257           36,772          86,149
  Point Pedernales.....................         13,009          7,543           14,266          22,372
  Belridge.............................         12,444          1,033           12,616          56,993
  Huntington Beach.....................         11,199          1,193           11,398          41,872
  Santa Clara..........................         18,445         30,976           23,608          41,316
  Bardsdale............................          1,206          1,417            1,442           8,072
  South Mountain.......................          4,294          4,363            5,021           4,148
  Other................................         35,433         44,640           42,873          71,561
                                               -------        -------          -------        --------
    Total California Fields.............       227,309        118,227          247,013         628,760
                                               -------        -------          -------        --------
Other U.S. Fields
-----------------
  East Texas............................           833        325,200           55,033         137,400
  Giddings, Texas.......................            14          6,334            1,070           7,336
  Other.................................         1,515          9,435            3,088          18,753
                                               -------        -------          -------        --------
    Total U.S. Properties...............       229,671        459,196          306,204         792,249
                                               -------        -------          -------        -------- 

FOREIGN PROPERTIES
 Yombo, Congo...........................        17,733             --           17,733          78,067
 Masseko, Congo.........................         7,515             --            7,515          11,966
                                               -------        -------          -------        --------
    Total Foreign Properties                    25,248             --           25,248          90,033
                                               -------        -------          -------        -------- 

TOTAL PROPERTIES                               254,919        459,196          331,452        $882,282
                                               =======        =======          =======        ========
 
Less:  East Texas Assets
    Held for Sale.......................          (833)      (325,200)         (55,033)       (137,400)
                                               -------        -------          -------        --------
 
PRO FORMA TOTAL, NET OF EAST
    TEXAS ASSETS........................       254,086        133,996          276,419        $744,882
                                               =======        =======          =======        ========
</TABLE>
---------------------
*      includes natural gas liquids
**     pre-tax

 
Acreage
-------

     The following table sets forth the acres of developed and undeveloped oil
and gas properties in which the Company held an interest as of December 31,
1998. Undeveloped acreage is considered to be those leased acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. A gross acre in the following table refers to
the number of acres in which a working interest is owned directly by the
Company. The number of net acres is the sum of the fractional ownership of
working interests owned directly by the Company in the gross acres expressed as
a whole number and percentages thereof. A "net acre" is deemed to exist when the
sum of fractional ownership of working interests in gross acres equals one.

                                       13
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

<TABLE>
<CAPTION>
                                                  Gross                 Net
                                               ----------            ----------
        <S>                                    <C>                    <C>
        Developed Acreage                         284,158               138,566
        Undeveloped Acreage                     4,835,338             4,161,276
                                               ----------            ----------
          Total                                 5,119,496             4,299,842
                                               ==========            ========== 
</TABLE> 

The following table sets forth the Company's undeveloped acreage as of
December 31, 1998:

<TABLE> 
<CAPTION> 
                                                  Gross                 Net
                                               ----------            ----------
        <S>                                    <C>                    <C>
        California                                320,173               139,702
        Texas                                      44,854                14,732
        Nevada                                      1,268                   158
        Mississippi                                13,900                 4,194
        Congo, West Africa:
          Marine 1 Permit                          38,000                19,000
        Ghana, West Africa:
          East Cape Three Points                1,700,000             1,275,000
          Accra-Keta                            2,700,000             2,700,000
        Other                                      17,143                 8,490
                                               ----------            ----------
          Total                                 4,835,338             4,161,276
                                               ==========            ========== 
</TABLE>

Productive Wells
----------------

     The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of December 31, 1998.  Productive wells are
producing wells and wells capable of production.

<TABLE> 
<CAPTION> 
                                                  Gross                 Net
                                               ----------            ----------
        <S>                                    <C>                    <C>

        Oil Wells                                  2,500                  2,122
        Gas Wells                                    352                    139
                                               ----------            ----------
          Total                                    2,852                  2,261
                                               ==========            ========== 
</TABLE>

Production
----------

     The Company's principal production volumes for the year ended December 31,
1998, were from the states of California, Texas, Alabama, Louisiana, and from
the Congo.

     Data relating to production volumes, average sales prices, average unit
production costs and oil and gas reserve information appears in Note 16 to the
Notes to Consolidated Financial Statements.

Drilling Activity and Present Activities
----------------------------------------

     During the three year period ended December 31, 1998, the Company's
principal drilling activities occurred in the continental United States and
offshore in state and Federal waters, and offshore the Congo in West Africa.

     The Company believes that its demonstrated ability to reduce operating
costs to levels well below those of the larger oil and gas companies from which
acquisitions have been made allows it to compete successfully in an industry
characterized by fluctuating commodity prices.

                                       14
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     Between the date of the California Properties acquisition, April 9, 1996,
and the end of 1998, the Company drilled 225 wells in the Cymric field in
central California, which contained 20% of the Company's total estimated net
proved equivalent reserves at December 31, 1998, and anticipates drilling
approximately 10 wells during 1999. In the Midway-Sunset field in central
California, which contained 16% of the total estimated net proved equivalent
reserves at December 31, 1998, the Company drilled 33 wells during 1998, and
plans to drill approximately 10 wells in 1999.

     In the Oak Hill field in Rusk County, Texas, the Company drilled 54 wells
since July 1996. The Company sold its interest in the Oak Hill field on
January 6, 1999. Net proved reserves from this field represented 20% of the
Company's total estimated net proved equivalent reserves at December 31, 1998.

     In 1996, the Company sold 177 producing wells and the majority of its
undeveloped acreage in the Giddings field and East Texas Austin Chalk formation
for $27.3 million.  The Company retained ownership of several wells and
surrounding acreage in the Turkey Creek prospect area of the Austin Chalk trend.
The Company drilled one well in 1998, five wells in 1997, and three wells in
1996 in this area.

     In 1997, the Company drilled an exploration well to evaluate the Lower
Sendji and subsalt sections underlying the Masseko structure located several
miles to the west of the Yombo field in the Congo, as well as to further
delineate the Upper Sendji and Tchala zones, which were discovered but not
developed by the previous operator. This well tested at rates over 3,000 gross
barrels per day from a newly discovered middle Sendji section. Platform design
and development plans are being formulated. Other potential exploration features
are being evaluated for possible future drilling. Additionally, the Company
initiated a waterflood project to enhance production from existing Upper Sendji
and Tchala zones. During 1996, the Company completed a six well development
drilling program in the Congo and drilled a successful exploration well, the
B-14, to the Lower Sendji formation in the Yombo field. This well is completed
in half of the 236 feet of net pay and has produced over 1,100 gross MBOE as of
December 31, 1998. Plans for 1999 include four shallow infill wells associated
with the waterflood implementation.

     The Company's exploration program resulted in eight successful wells out of
14 drilled in 1998. In addition, two wells were being tested at year-end. The
Company's most significant discoveries in 1998 were: (i) four successful wells
at Four Isle Dome in Louisiana, which helped increase net production from
0.6 MMCFPD and 35 BOPD at the beginning of 1998 to 7.9 MMCFPD and 170 BOPD at
the end of 1998; (ii) two successful wells at Weeks Island, Louisiana, which
each resulted in completions producing in excess of 700 BOPD; and (iii)
successful extension to the south and east at the Monument Junction reservoir in
the Cymric Field in California. In 1997, the Company's exploration program
resulted in nine successful wells out of 14 drilled. 1997 discoveries included:
the Masseko structure offshore Congo, the Monument Junction reservoir in Cymric
field, California and Tranquillon Ridge, offshore California. In 1996, the
Company's exploration program resulted in six successful wells out of 13
drilled. Discoveries included sections in the Yombo field, Cymric field and at
North Riley Ridge in Western Wyoming.

     The Company had six gross (2.65 net) wells in progress at December 31,
1998. The following table sets forth the results of drilling activity by the
Company, net to its interest, for the last three calendar years. Gross wells, as
it applies to wells in the following tables, refers to the number of wells in
which a working interest is owned directly by the Company. The number of net
wells is the sum of the fractional ownership of working interests owned directly
by the Company in gross wells expressed as whole numbers and percentages
thereof.

                                       15
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


<TABLE>
<CAPTION>
                                                               Exploratory Wells
                    ----------------------------------------------------------------------------------------------------
                                          Gross                                                 Net
                    ----------------------------------------------       -----------------------------------------------
                                           Dry                                                  Dry
                        Productive        Holes          Total               Productive        Holes         Total
                        ----------        -----          -----               ----------        -----         -----
<S>                    <C>             <C>            <C>                   <C>             <C>            <C>
        1996                  6              7             13                   3.40           2.09            5.49
        1997                  9              5             14                   6.63           2.33            8.96
        1998                  8              6             14                   4.09           3.58            7.67
 
                                                               Development Wells
                    ----------------------------------------------------------------------------------------------------
                                          Gross                                                 Net
                    ----------------------------------------------       -----------------------------------------------
                                           Dry                                                  Dry
                        Productive        Holes          Total               Productive        Holes         Total
                        ----------        -----          -----               ----------        -----         -----
        1996                149              1            150                 125.24           1.00          126.24
        1997                236              1            237                 217.52           1.00          218.52
        1998                155             --            155                 134.43             --          134.43
</TABLE>


Gas Plant, Pipelines and Other Facilities
-----------------------------------------

     As of December 31, 1998, the Company owned interests in the following gas
plant and pipeline facilities:

<TABLE>
<CAPTION>

                                                                                              1998
                                                                         Capacity          Throughput          Ownership
      Facility            State                 Operator                  MMCFD              MMCFD             Interest
      --------            -----                 --------                 --------          ----------          ---------
<S>                    <C>            <C>                                <C>                <C>                <C>
Illini Carrier         Illinois       Illini Carrier, L.P.                  50                6.8                100%
Stearns Gas Plant      California     Torch Operating Company                5                3.4                100%
Santa Clara Plant      California     Torch Operating Company               17               10.4                100%
HS&P Gas Plant         California     Torch Operating Company               13                4.9                 80%
</TABLE>

     In December 1997, the Company announced its intention to dispose of the
remainder of its non-core gas gathering, pipeline and storage assets during
1998.  Such assets include:  the Company's 48.5% interest in the Richfield Gas
Storage facility, which was sold in February 1998 at its approximate carrying
value; an 80% interest in Bright Star Gathering, Inc., which was sold in July
1998 at its approximate carrying value; and the Illini pipeline.  This resulted
in a non-cash, pre-tax charge to fourth quarter 1997 earnings of $23.9 million,
reflecting the estimated loss on the disposition of these assets.  A positive
revision to this charge was made in the fourth quarter of 1998 in the amount of
$3.7 million to reflect the current estimated fair value of the Illini pipeline.
The Company entered into a sale agreement during 1998 to sell the Illini
pipeline to a third party.  Such sale is currently pending and awaiting
regulatory approval.  The Company's results of operations included operating
results from these assets through the disposition date, as applicable; however,
these assets were not depreciated during 1998.  The Company will retain its
California gas plants, as these plants are strategic assets for the Company's
oil and gas activities in California.

     On May 2, 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company,
sold its 95% interest in the NuStar Joint Venture, which held the Company's
investment in the Benedum Plant System, for proceeds of $25.0 million. The
Company recognized a pre-tax gain of $2.3 million on this sale. The effective
date of this sale was January 1, 1997.

Risk Factors
------------

Historically Low Oil Prices

     The Company's financial condition, operating results, future growth and the
carrying value of its oil and gas properties are substantially dependent on
prevailing oil and gas prices.  The Company's ability to maintain or increase
its borrowing capacity and to obtain additional capital on attractive terms is
also substantially dependent

                                       16
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

upon oil and gas prices. During 1998, oil prices were very low compared with
prices received for oil historically. These low prices adversely affected the
Company's revenues and operating cash flows during 1998, and continued low oil
prices will adversely affect the Company in the future.

Volatility of Oil and Gas Prices

     Prices for oil and gas are subject to large fluctuations in response to
relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors beyond the control of the
Company.  These factors include weather conditions in the United States, the
condition of the United States economy, the actions of the Organization of
Petroleum Exporting Countries ("OPEC"), governmental regulation, political
stability in the Middle East and elsewhere, the foreign supply of oil and gas,
the price of foreign oil imports and the availability of alternate fuel sources.
Any substantial and extended decline in the price of oil or gas would have an
adverse effect on the Company's carrying value of its proved reserves, borrowing
capacity, the Company's ability to obtain additional capital, and its revenues,
profitability and cash flows from operations.

     Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value.  Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploitation
projects.

     A portion of the Company's production is California heavy oil. The market
for California heavy oil differs substantially from the established market
indices for oil and gas, due principally to the higher transportation and
refining costs associated with heavy oil. As a result, the price received for
heavy oil is generally lower than the price for medium and light oil, and the
production costs associated with heavy oil are relatively higher than for
lighter grades. The margin (sales price minus production costs) on heavy oil
sales is generally less than for lighter oil, and the effect of material price
decreases will more adversely affect the profitability of heavy oil production
compared with lighter grades of oil.

Reserve Replacement Risks

     The Company's future performance depends upon its ability to find, develop
and acquire additional oil and gas reserves that are economically recoverable.
Without successful exploration, exploitation or acquisition activities, the
Company's reserves and revenues will decline. No assurances can be given that
the Company will be able to find and develop or acquire additional reserves at
an acceptable cost.

     The successful acquisition and development of oil and gas properties
requires an assessment of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In addition, no assurances can be given that the Company's
exploitation and development activities will result in any increases in
reserves. The Company's operations may be curtailed, delayed or canceled as a
result of lack of adequate capital and other factors, such as title problems,
weather, compliance with governmental regulations or price controls, mechanical
difficulties or shortages or delays in the delivery of equipment. In addition,
the costs of exploitation and development may materially exceed initial
estimates.

Substantial Capital Requirements

     The Company makes, and will continue to make, substantial capital
expenditures for the exploitation, exploration, acquisition and production of
oil and gas reserves. Historically, the Company has financed these expenditures
primarily with cash generated by operations, proceeds from bank borrowings and
the proceeds of debt and equity issuances. The Company believes that it will
have sufficient cash provided by operating activities and borrowings under its
bank credit facility to fund planned capital expenditures. If revenues or the
Company's borrowing base decreases as a result of lower oil and gas prices,
operating difficulties or declines in reserves, the Company may have limited
ability to expend the capital necessary to undertake or complete future drilling
programs. There can be no assurance that additional debt or equity financing or
cash generated by operations will be available to meet these requirements.

                                       17
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


Uncertainty of Estimates of Reserves and Future Net Cash Flows

     Estimates of economically recoverable oil and gas reserves and of future
net cash flows are based upon a number of variable factors and assumptions, all
of which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, and development and
operating expenditures may not occur as estimated. Future results of operations
of the Company will depend upon its ability to develop, produce and sell its oil
and gas reserves. The reserve data included herein are estimates only and are
subject to many uncertainties. Actual quantities of oil and gas may differ
considerably from the amounts set forth herein. In addition, different reserve
engineers may make different estimates of reserve quantities and cash flows
based upon the same available data.

Operating Risks

     Nuevo's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and other environmental risks.
These risks could result in substantial losses to the Company due to injury and
loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage and suspension of operations. Moreover,
offshore operations are subject to a variety of operating risks peculiar to the
marine environment, such as hurricanes or other adverse weather conditions, to
more extensive governmental regulation, including regulations that may, in
certain circumstances, impose strict liability for pollution damage, and to
interruption or termination of operations by governmental authorities based on
environmental or other considerations. The Company's operations could result in
liability for personal injuries, property damage, oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages. The Company could be liable for environmental damages caused by
previous property owners. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could have a
material adverse effect on the Company's financial condition and results of
operations. The Company maintains insurance coverage for its operations,
including limited coverage for sudden environmental damages, but does not
believe that insurance coverage for environmental damages that occur over time
is available at a reasonable cost. Moreover, the Company does not believe that
insurance coverage for the full potential liability that could be caused by
sudden environmental damages is available at a reasonable cost. Accordingly, the
Company may be subject to liability or may lose substantial portions of its
properties in the event of certain environmental damages.

Foreign Investments

     The Company's foreign investments involve risks typically associated with
investments in emerging markets such as uncertain political, economic, legal and
tax environments and expropriation and nationalization of assets. The Company
attempts to conduct its business and financial affairs so as to protect against
political and economic risks applicable to operations in the various countries
where it operates, but there can be no assurance the Company will be successful
in protecting against such risks.

     The Company's international assets and operations are subject to various
political, economic and other uncertainties, including, among other things, the
risks of war, expropriation, nationalization, renegotiation or nullification of
existing contracts, taxation policies, foreign exchange restrictions, changing
political conditions, international monetary fluctuations, currency controls and
foreign governmental regulations that favor or require the awarding of drilling
contracts to local contractors or require foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction.  In addition, if a
dispute arises with foreign operations, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons, especially foreign oil ministries and national oil companies,
to the jurisdiction of the United States.

     The Company's private ownership of oil and gas reserves under oil and gas
leases in the United States differs distinctly from its ownership of foreign oil
and gas properties.  In the foreign countries in which the Company does
business, the state generally retains ownership of the minerals and consequently
retains control of (and in many cases, participates in) the exploration and
production of hydrocarbon reserves.  Accordingly, operations outside the United

                                       18
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


States, and estimates of reserves attributable to properties located outside the
United States, may be materially affected by host governments through royalty
payments, export taxes and regulations, surcharges, value added taxes,
production bonuses and other charges.

Hedging

     The Company periodically seeks to reduce its exposure to price volatility
by hedging its production through swaps, options and other commodity derivative
instruments. In a typical hedging transaction, the Company will have the right
to receive from the counterparty to the hedge the excess of the fixed price
specified in the hedge contract and a floating price based on a market index,
multiplied by the quantity hedged. If the floating price exceeds the fixed
price, the Company is required to pay the counterparty the difference. The
Company would be required to pay the counterparty the difference between such
prices regardless of whether the Company's production was sufficient to cover
the quantities specified in the hedge. In addition, the index used to calculate
the floating price in a hedge is frequently not the same as the prices actually
received for the production hedged. The difference (referred to as basis
differential) may be material, and may reduce the benefit or increase the
detriment caused by a particular hedge. There is not an established pricing
index for hedges of California heavy crude oil production, and the cash market
for heavy oil production in California tends to vary widely from index prices
typically used in oil hedges. Consequently, hedging California heavy crude oil
is particularly subject to the risks associated with volatile basis
differentials.

Competition; Markets for Production

     The Company operates in the highly competitive areas of oil and gas
exploration, exploitation, development and production.  The availability of
funds and information relating to a property, the standards established by the
Company for the minimum projected return on investment, the availability of
alternate fuel sources and the intermediate transportation of gas are factors
which affect the Company's ability to compete in the marketplace.  The Company's
competitors include major integrated oil companies and a substantial number of
independent energy companies, many of which possess greater financial and other
resources than the Company.

     The Company's heavy crude oil production in California requires special
treatment available only from a limited number of refineries.  Substantial
damage to such a refinery or closures or reduction in capacity due to financial
or other factors could adversely affect the market for the Company's heavy crude
oil production.

Environmental and Other Regulation

     The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection.  These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution which might
result from the Company's operations.  Moreover, the recent trend toward
stricter standards in environmental legislation and regulation is likely to
continue.  For instance, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production wastes
as "hazardous wastes" which would make the reclassified wastes subject to much
more stringent handling, disposal and cleanup requirements.  If such legislation
were to be enacted, it could have a significant impact on the operating costs of
the Company, as well as the oil and gas industry in general.  Initiatives to
further regulate the disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company.  The Company could incur substantial costs to comply with environmental
laws and regulations.

     The OPA imposes a variety of regulations on "responsible parties" related
to the prevention of oil spills. The implementation of new, or the modification
of existing, environmental laws or regulations, including regulations
promulgated pursuant to the OPA, could have a material adverse impact on the
Company.

                                       19
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


ITEM 3. LEGAL PROCEEDINGS
-------------------------

        The Company has been named as a defendant in the lawsuit Gloria Garcia
Lopez and Husband, Hector S. Lopez, Individually, and as successors to Galo Land
& Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending
in the 79th Judicial District Court of Brooks County, Texas (the "Lopez Case").
The plaintiffs allege: i) underpayment of royalties and claim damages, on a
gross basis against all working interest owners, of $27.7 million plus $26.2
million in interest for the period from 1985 to date; ii) that their production
was improperly commingled with gas produced from an adjoining lease, resulting
in damages, including interest, of $40.8 million, on a gross basis; (iii) $59.7
million (gross) for alleged failure to develop and $20.0 million (gross) for
interest in the alleged failure to develop; and iv) numerous other claims,
including claims for drainage, breach of the implied covenant to reasonably
develop the lease, conversion, fraud, emotional distress, lease termination and
exemplary damages, that may result in unspecified damages.  Nuevo's working
interest in these properties is 20%.  The Company, along with the other
defendants in this case, denies these allegations and is vigorously contesting
these claims.  Management does not believe that the outcome of this matter will
have a material adverse impact on the Company's operating results, financial
condition or liquidity.

        The Company has been named as defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

        There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.

                                       20
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------



                                    PART II
                                        
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------------------
        MATTERS
        -------

        The principal market on which the Company's Common Stock is traded is
the New York Stock Exchange (Symbol: NEV). There were approximately 1,342
stockholders of record and approximately 4,002 additional beneficial owners as
of March 15, 1999. The Company has not paid dividends on its Common Stock and
does not anticipate the payment of cash dividends in the immediate future as it
contemplates the use of cash flows for expansion of its operations. In addition,
certain restrictions contained in the Company's financing arrangements restrict
the payment of dividends (See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Resources and Liquidity and Note 8
to the Notes to Consolidated Financial Statements). The high and low recorded
prices of the Company's Common Stock during 1998 and 1997 are presented in the
following table:

<TABLE>
<CAPTION>
                                                                            Market Price               
                                                                    ------------------------------                               
                                                                      High                 Low      
                                                                    ---------            ---------                               
            Quarter Ended:                                                                                    
            <S>                                                     <C>                  <C>             
            March 31, 1998.......................................    $ 40.56              $ 30.19
            June 30, 1998........................................    $ 37.81              $ 30.25
            September 30, 1998...................................    $ 32.75              $ 15.50
            December 31, 1998....................................    $ 23.50              $  9.94
                                                                      
            March 31, 1997.......................................    $ 57.63              $ 38.38
            June 30, 1997........................................    $ 45.38              $ 34.38
            September 30, 1997...................................    $ 52.63              $ 39.94
            December 31, 1997....................................    $ 49.13              $ 38.00 
</TABLE>


Treasury Stock Repurchases
--------------------------

        In March 1997, the Board of Directors of the Company authorized the open
market repurchase of up to one million shares of outstanding Common Stock during
1997, at times and prices deemed attractive by management.  During April 1997,
the Company repurchased 500,000 shares of Common Stock in open market
transactions, at an average purchase price of $38.94 per share, plus 42,491
shares acquired from the cancellation of warrants issued during 1996.  In
December 1997, the Board of Directors authorized the open market repurchase of
an additional 500,000 shares of Common Stock during 1998, however, no such
repurchase occurred during 1998.

Put Options
-----------

        In May 1997, the Company sold put options on its Common Stock to a third
party.  The options gave the purchaser the right to sell to the Company 500,000
shares of its Common Stock at prices ranging from $40.26 to $41.04 per share
through December 31, 1997.  The contract gave the Company the choice of net
cash, net shares, or physical settlement.  Any repurchased shares would have
been treated as Treasury Stock.  The Company generated $1.6 million in option
premium from these transactions, which is reflected in additional paid-in
capital on the balance sheet.  As of December 31, 1997, 400,000 of these options
had expired with the Company's share prices above the strike price, and 100,000
of these options were settled on December 31, 1997, for a nominal amount of net
cash.

Shareholder Rights Plan
-----------------------

        In March 1997, the Company adopted a Shareholder Rights Plan to protect
the Company's shareholders from coercive or unfair takeover tactics. Under the
Shareholder Rights Plan, each outstanding share and each share of subsequently
issued Common Stock has attached to it one Right. Generally, in the event a
person or group

                                       21
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


("Acquiring Person") acquires or announces an intention to acquire beneficial
ownership of 15% or more of the outstanding shares of Common Stock without the
prior consent of the Company, or the Company is acquired in a merger or other
business combination, or 50% or more of its assets or earning power is sold,
each holder of a Right will have the right to receive, upon exercise of the
Right, that number of shares of common stock of the acquiring company, which at
the time of such transaction will have a market price of two times the exercise
price of the Right. The Company may redeem the Right for $.01 at any time before
a person or group becomes an Acquiring Person without prior approval. The Rights
will expire on March 21, 2007, subject to earlier redemption by the Board of
Directors of the Company.

Executive Compensation Plan
---------------------------

        During July 1997, the Board of Directors of the Company adopted a plan
to encourage senior executives to personally invest in the shares of the
Company, and to regularly review executives' ownership versus targeted ownership
objectives. These incentives include a deferred compensation plan (the "Plan")
that gives key executives the ability to defer all or a portion of their
salaries and bonuses and invest in Common Stock of the Company at a discount to
market prices or make other investments at the employee's discretion. Stock
acquired at a discount will be held in a benefit trust and restricted for a two-
year period, and the Plan does not permit investment in a diversified equity
portfolio until and unless targeted levels of Common Stock ownership in the
Company are achieved and maintained. Target levels of ownership are based on
multiples of base salary and are administered by the Compensation Committee of
the Board of Directors. The Plan applies to all executives at a level of Vice-
President and above.

                                       22
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

        The following selected financial data with respect to the Company should
be read in conjunction with the consolidated financial statements and
supplementary information included in Item 8 (amounts in thousands, except per
share data).

<TABLE>
<CAPTION>
                                                   As of and for the Years Ended December 31,
                                      ------------------------------------------------------------------
                                        1998       1997/(4)/       1996/(4)/     1995/(4)/      1994/(4)/
                                      --------     --------       --------       --------       --------
<S>                                  <C>          <C>            <C>            <C>            <C>
Oil and gas revenues..............    $240,010     $331,973       $279,859       $102,455       $ 79,585
Gas plant revenues................       2,665       14,826         34,802         27,183         28,798
Pipeline and other revenues.......       2,700        5,772          6,774          7,222         10,309
Gain on sale of assets, net.......       5,768        1,372          6,008             --          2,402
Interest and other income.........       1,560        3,335          1,614          1,106            245
                                      --------     --------       --------       --------       --------
  Total revenues..................     252,703      357,278        329,057        137,966        121,339
 
Total costs and expenses before
  extraordinary item (including
  income taxes and minority
  interest)/(3)/..................     346,975      367,954        294,779        133,834        125,765
Extraordinary loss on early
  extinguishment of debt..........          --        3,024             --             --             --
                                      --------     --------       --------       --------       --------
Net (loss) income/(1) (5)/........    $(94,272)    $(13,700)      $ 34,278       $  4,132       $ (4,426)
                                      ========     ========       ========       ========       ========
Net (loss) income attributable to
  Common stockholders.............    $(94,272)    $(13,700)      $ 33,339       $  2,660       $ (6,176)
(Loss) earnings per Common
  Share - Basic/(2)/..............    $  (4.76)    $  (0.69)      $   1.99       $   0.24       $  (0.57)
(Loss) earnings per Common 
  share - Diluted/(2)/............    $  (4.76)    $  (0.69)      $   1.84       $   0.23       $  (0.57)
Total Assets......................    $817,685     $804,286       $817,643       $262,359       $272,444
 
Long-term debt, net of current
  maturities......................    $419,150     $305,940       $287,038       $113,032       $118,219
</TABLE>

(1)  No Common Stock dividends have been declared since the formation of the
Company.  See Note 8 to the Notes to Consolidated Financial Statements
concerning restrictions on the payment of Common Stock dividends.

(2)  Retroactively restated to reflect the adoption of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share".  (See Note 2 to the
Notes to Consolidated Financial Statements).

(3)  Results for the years ended 1998 and 1997 include impairments of oil and
gas properties of $68.9 million and $30.0 million, respectively, and (revision
to) provision for impairment on assets held for sale of ($3.7) million and $23.9
million, respectively.

(4)  Retroactively restated to reflect the Company's January 1, 1998 conversion
from the full cost method to the successful efforts method of accounting for its
investments in oil and gas properties.  (See Note 2 to the Notes to Consolidated
Financial Statements).

(5)  The year ended December 31, 1996, includes activity of the California
Properties from the date of acquisition (April 9, 1996).

                                       23
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS
         -------------

Overview
--------

     Nuevo, headquartered in Houston, Texas, is primarily engaged in the
exploration for, and the acquisition, exploitation, development and production
of crude oil and natural gas.  The Company's strategy to differentiate itself
versus its numerous peer group competitors and to generate long term shareholder
value consists of: (i) a unique management philosophy that frames all important
decisions in terms of anticipated impact on per share (rather than absolute)
growth of reserves, production, cash flow and earnings; (ii) a contrarian
investment and financing orientation; (iii) the outsourcing of non-strategic
functions; (iv) the alignment of employee compensation structures with
shareholder objectives; and (v) a commitment to an exemplary governance
structure which reinforces the overarching view of Nuevo as merely a conduit for
shareholders to achieve superior long term capital gains.

     Nuevo is an independent energy company.  Since its inception in 1990, Nuevo
has grown and diversified its operations through a series of contrarian
acquisitions of oil and gas properties and the subsequent exploitation and
development of these properties.  The Company has complemented these efforts
with an active exploration program, which provides exposure to high-potential
prospects.  The Company's primary strengths are its track record of rapid
reserve growth on a per share basis, achieved at extremely low cost relative to
industry averages; its large inventory of exploitation and exploration projects
in its core areas of operation, which the Company believes will support future
growth in reserves and production per share; its demonstrated ability to
significantly reduce operating costs from levels experienced by prior operators;
its ability to identify and acquire, at attractive prices, producing properties
which have significant potential for further exploration, exploitation and
development; and a capital structure supportive of a growing investment program
and future acquisitions.

     The Company's results of operations have been significantly affected by
fluctuations in oil and gas prices. The Company's success in acquiring oil and
gas properties and its ability to maintain or increase production through its
exploitation activities have also significantly affected the Company's results.
The following table reflects the Company's oil and gas production and its
average oil and gas prices (inclusive of crude oil and natural gas price swaps),
by oil and gas segment and in total, for the periods presented:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                         ---------------------------------------------
        PRODUCTION:                                        1998               1997               1996
                                                         -------            -------            -------
        <S>                                               <C>                <C>                <C>
         Oil (MBBLS):
           East.....................................         838                878              1,375
           West.....................................      16,284             14,694             10,256
           Foreign..................................       1,461              1,555              1,420
                                                         -------            -------            -------
           Total....................................      18,583             17,127             13,051
                                                         =======            =======            =======
         Natural gas (MMCF):
           East.....................................      18,816             20,831             22,232
           West.....................................      13,705             14,794             12,543
                                                         -------            -------            -------
           Total....................................      32,521             35,625             34,775
                                                         =======            =======            =======
         Natural gas liquids (MBBLS):
           East.....................................          67                 76                 68
           West.....................................         156                206                225
                                                         -------            -------            -------
           Total....................................         223                282                293
                                                         =======            =======            =======
</TABLE>

                                       24
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                  ---------------------------------------------        
          AVERAGE SALES PRICE:                                      1998              1997               1996      
                                                                  --------          --------           --------       
          <S>                                                      <C>               <C>               <C>             
           Oil (per barrel):                                                                                      
                East.....................................          $ 12.63           $ 18.95            $ 20.39
                West.....................................          $  8.98           $ 14.73            $ 15.53
                Foreign..................................          $ 10.82           $ 14.66            $ 14.56
                Total....................................          $  9.25           $ 14.86            $ 15.84
           Natural gas (per MCF):                                                      
                East.....................................          $  1.80           $  2.08            $  2.13
                West.....................................          $  2.21           $  2.06            $  1.79
                Total....................................          $  2.00           $  2.06            $  2.08
                                                                                                                  
          AVERAGE UNIT PRODUCTION COST PER EQUIVALENT                                                             
           BARREL (6 MCF EQUAL 1 BARREL):                                                                         
                East.....................................          $  2.88           $  2.71            $  2.73
                West.....................................          $  5.94           $  5.53            $  5.41
                Foreign..................................          $  8.14           $  7.70            $  7.71
                Total....................................          $  5.56           $  5.14            $  4.86 
</TABLE>

     Effective January 1, 1998, the Company elected to convert from the full
cost method to the successful efforts method of accounting for its investments
in oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it will provide a fair presentation of
the Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value. Accordingly, all prior year
financial statements have been restated to conform to successful efforts
accounting. The effect, after tax, of the change in accounting method as of
December 31, 1997, was a reduction to retained earnings of $64.1 million,
primarily attributable to a decrease in net property and equipment and the
deferred tax liability of $99.2 million and $38.0 million, respectively. The
change in accounting method resulted in a decrease in net income of $32.5
million ($1.64 per share - basic and diluted) and $0.4 million ($0.02 per
share - basic and diluted) during 1997 and 1996, respectively. Had the Company
not converted to the successful efforts method, the results of operations for
the three months ended March 31, 1998, would have included a pre-tax full cost
ceiling write-down of approximately $250.0 million.

     Under the successful efforts method of accounting, oil and gas lease
acquisition costs and intangible drilling costs associated with exploration
efforts that result in the discovery of proved reserves and costs associated
with development drilling, whether or not successful, are capitalized when
incurred.  When a proved property is sold, ceases to produce or is abandoned, a
gain or loss is recognized.  When an entire interest in an unproved property is
sold for cash or cash equivalent, a gain or loss is recognized, taking into
consideration any recorded impairment.  When a partial interest in an unproved
property is sold, the amount received is treated as a reduction of the cost of
the interest retained.

     Unproved leasehold costs are capitalized, pending the results of
exploration efforts. Significant unproved leasehold costs are reviewed
periodically and a loss is recognized to the extent, if any, that the cost of
the property has been impaired. An impairment of unproved leasehold costs of
$8.1 million was recognized as of December 31, 1998. Exploration costs,
including geological and geophysical expenses, exploratory dry holes and delay
rentals, are charged to expense as incurred.

     Costs of productive wells, development dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves.  Capitalized drilling costs are depleted on a unit-
of-production basis over the life of the remaining proved developed reserves.
Estimated costs (net of salvage value) of dismantlement, abandonment and site
remediation are computed by the Company's independent reserve engineers and are
included when calculating depreciation and depletion using the unit-of-
production method.

                                       25
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


     The Company reviews proved oil and gas properties on a depletable unit
basis whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit is recognized. Fair value, on a
depletable unit basis, is estimated to be the present value of the undiscounted
expected future net revenues computed by application of estimated future oil and
gas prices, production and expenses, as determined by management, to estimated
future production of oil and gas reserves over the economic life of the
reserves. If the carrying value exceeds the undiscounted future net revenues, an
impairment is recognized equal to the difference between the carrying value and
the discounted estimated future net revenues of that depletable unit. The
Company considers probable reserves and escalated commodity pricing in its
estimate of future net revenues. Fair value impairments of oil and gas
properties of $60.8 million and $30.0 million were recognized as of December 31,
1998 and 1997, respectively; no such impairment was recognized during 1996.

     Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities are in
progress to bring these projects to their intended use.  The capitalization
rates are based on the Company's weighted average cost of funds used to finance
expenditures.

     Any reference to oil and gas reserve information in the Notes to
Consolidated Financial Statements is unaudited.

Financing Activities
--------------------

     The Company had $422.3 million in outstanding indebtedness at December 31,
1998, which is scheduled to mature as follows (amounts in thousands):

<TABLE>
                   <S>                                      <C>
                   1999............................         $   3,152
                   2000............................               750
                   2001............................                --
                   2002............................                --
                   2003............................           158,400
                   Thereafter......................           260,000
                                                            ---------

                                                            $ 422,302
                                                            =========
</TABLE>

     In June 1998, the Company issued $100.0 million 8 7/8% Senior Subordinated
Notes due June 1, 2008 (the "8 7/8% Notes").  Interest on the 8 7/8% Notes
accrues at the rate of 8 7/8% per annum and is payable semi-annually in arrears
on June 1 and December 1.  The 8 7/8% Notes are redeemable, in whole or in part,
at the option of the Company, on or after June 1, 2003, under certain
conditions.  The Company is not required to make mandatory redemption or sinking
fund payments with respect to the 8 7/8% Notes.  The indenture contains
covenants that, among other things, limit the Company's ability to incur
additional indebtedness, limits restricted payments, limit issuances and sales
of capital stock by restricted subsidiaries, limit dispositions of proceeds of
asset sales, limit dividends and other payment restrictions affecting restricted
subsidiaries, and restricts mergers, consolidations or sales of assets.  The 8
7/8% Notes are guaranteed by certain of Nuevo's subsidiaries.  The 8 7/8% Notes
are unsecured general obligations of the Company, and are subordinated in right
of payment to all existing and future senior indebtedness of the Company.  In
the event of a defined change in control, the Company will be required to make
an offer to repurchase all outstanding 8 7/8% Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption.

     Nuevo's Amended and Restated Credit Agreement, (the "Agreement"), dated as
of February 13, 1998, provides for unsecured revolving credit availability of up
to $400 million (subject to a periodic borrowing base determination) from a bank
group led by NationsBank of Texas, N.A. and Morgan Guaranty Trust Company of New
York, until its expiration on April 1, 2003.

     The borrowing base determination establishes the maximum borrowings that
may be outstanding under the credit facility, and is determined by a two-thirds
vote of the banks (three-fourths in the event of an increase in the borrowing
base), each of which bases its judgement on (i) the present value of the
Company's oil and gas reserves based on its own assumptions regarding future
prices, production, costs, risk factors and discount rates, and (ii) on
projected cash flow coverage ratios calculated under varying scenarios. If
amounts outstanding under the credit facility exceed the borrowing base, as
redetermined from time to time, the Company would be required to repay such
excess over a defined period of time.

                                       26
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     Effective January 6, 1999 the borrowing base was reduced from $380 million
to $200 million, reflecting the sale on that date of the Company's East Texas
natural gas reserves, and also reflecting a significant decline in projected oil
prices since the previous determination.

     Amounts outstanding under the credit facility bear interest at a rate equal
to the London Interbank Offered Rate ("LIBOR") plus an amount which increases as
borrowing base utilization increases. At December 31, 1998 the Company's
interest rate under the credit facility was LIBOR plus .375%, or 5.94%.
Outstandings under this facility at year end were $158.4 million, and at January
6, 1999 were reduced by $82.6 million from a portion of the proceeds of the East
Texas sale.

     The Credit Agreement has customary covenants including, but not limited to,
covenants with respect to to the following matters: (i) limitations on certain
restricted payments and investments; (ii) limitations on guarantees and
indebtedness; (iii) limitations on prepayments of subordinated and certain other
indebtedness; (iv) limitations on mergers and consolidations, on certain types
of acquisitions and on the issuance of certain securities by subsidiaries; (v)
limitations on liens; (vi) limitations on sales of properties; (vii) limitations
on transactions with affiliates; (viii) limitations on derivative contracts; and
(ix) limitations on debt in subsidiaries. The Company is also required to
maintain certain financial ratios and conditions, including without limitation
an EBITDA (earnings before interest, taxes, depreciation, depletion,
amortization and exploration expenses) to fixed charge coverage ratio, a net
worth requirement, and a funded debt to capitalization ratio. As a result of
reduced revenues due to falling oil prices, the Company has obtained amendments
for relief from the EBITDA fixed charge coverage test through March 31, 2000.
The Company is in compliance with this test and all other covenants of the
Agreement at December 31, 1998. The Company is currently in negotiation with its
banks regarding other terms of the Agreement, including pricing, security, the
frequency of borrowing base determinations and certain other covenants.
Management believes the outcome of such negotiations will result, over time, in
improved borrowing base availability and greater certainty of the commitment of
this facility during difficult periods in the oil and gas industry.

     On July 24, 1992, the Company closed the sale of $75.0 million aggregate
principal amount of 12 1/2% Senior Subordinated Notes (the "Notes") due June 15,
2002.  In June 1997, the Company redeemed the Notes at a total cost of $78.0
million, representing $75.0 million face value of the debt plus a 4% premium of
$3.0 million.  In addition to the premium, the Company wrote off approximately
$2.0 million of unamortized discount and deferred financing costs.  The
redemption resulted in an extraordinary loss on early extinguishment of debt of
$3.0 million, net of the related tax benefit of $2.0 million.  The Company used
proceeds from the Credit Facility to fund the redemption.

      On December 23, 1996, the Company and its wholly-owned subsidiary, Nuevo
Financing I, a statutory business trust formed under the laws of the state of
Delaware, (the "Trust"), closed the offering of 2,300,000 Term Convertible
Securities, Series A, ("TECONS") on behalf of the Trust.  The price to the
public of the TECONS was $50.00 per TECONS.  Distributions on the TECONS began
to accumulate from December 23, 1996, and are payable quarterly on March 15,
June 15, September 15, and December 15, at an annual rate of $2.875 per TECONS.
Each TECONS is convertible at any time prior to the close of business on
December 15, 2026, at the option of the holder, into shares of Common Stock at
the rate of .8421 shares of Common Stock for each TECONS, subject to adjustment.
The sole asset of the Trust as the obligor on the TECONS is $115.0 million
aggregate principal amount of 5.75% Convertible Subordinated Debentures of the
Company due December 15, 2026.

     Also on December 23, 1996, the Company and United Investors Management
Company ("United"), and The 1818 Fund, L.P. ("The 1818 Fund"), closed the
offering of 2,138,605 shares of Common Stock (the "Shares").  United sold
1,275,000 Shares and The 1818 Fund sold 863,605 Shares.  The price to the public
of the Shares was $47.50 per share.  All of the Shares sold by United were
outstanding and 112 of the Shares sold by The 1818 Fund were outstanding prior
to the offering.  The remaining 863,493 of the Shares sold by The 1818 Fund were
issued upon conversion of the remaining 11,220 shares of 7% Cumulative
Convertible Preferred Stock, ("7% Preferred Stock") of the Company.  As a result
of this conversion by The 1818 Fund of its shares of 7% Preferred Stock, there
are no longer any shares of the 7% Preferred Stock outstanding.  The Company did
not receive any proceeds from the sale of the Shares.  (See Note 8 to the Notes
to Consolidated Financial Statements).

     In April 1996, the Company financed the acquisition of the Unocal
Properties with the proceeds from the sale to the public of 5,109,200 shares of
Common Stock (the "Common Stock Offering") and a principal amount of $160.0
million, 9 1/2% Senior Subordinated Notes due 2006 of the Company, and by
borrowings under the Credit

                                       27
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


Facility. Such proceeds were also used to retire the borrowings under an
existing credit facility in the amount of $27.0 million. The purchase of the
Point Pedernales Properties was financed by the issuance to Torch of 1,275,000
shares of the Company's Common Stock, valued at the public offering price of
$28.00 per share in the Common Stock Offering. In connection with the
acquisition of the Unocal Properties, the Company also entered into a bridge
commitment with a bank group led by NationsBank of Texas, N.A. The facility was
not drawn down; however, $1.7 million in fees associated with the bridge
commitment were expensed in the second quarter of 1996, when the commitment
expired.

     In February 1995, in connection with the purchase of the stock of the Amoco
Congo Petroleum Company, the Company negotiated with the Overseas Private
Investment Corporation ("OPIC") and an agent bank for a non-recourse credit
facility in the amount of $25.0 million.  The initial drawdown on the facility
was $8.8 million to finance a portion of the purchase price.  The remaining
funds under the credit facility will be used to finance 75% of a development
drilling program in the Republic of Congo, West Africa ("Congo").  A portion of
the remaining outstanding commitment, $6.0 million, was drawn down in January
1996 to fund the first phase of the development drilling program in the Congo.
The interest rate associated with such credit facility is LIBOR plus 20 basis
points and a guaranty fee of 2.75% of the outstanding loan balance, all of which
is payable quarterly.  At December 31, 1998, the interest rate was 5.55%, plus
the 2.75% guaranty fee.  The loan agreement requires a sixteen-quarter repayment
period.

     In April 1994, the Company entered into a four-year commitment for a
$30.0 million volumetric production payment for the development of certain
infill drilling locations in the Oak Hill field. The proceeds from this
agreement financed the capital expenditures for well drilling, fracturing and
completing and for surface facility installations. Each advance under the
production payment obligated the Company to deliver a fixed volume of natural
gas, based on prevailing market conditions at the time of the advance. During
1994, the company received $18.4 million covering expenditures on nineteen
wells; no additional proceeds were ever received under this commitment. As of
December 31, 1998, the Company had fulfilled its obligation under this
commitment. (See Note 5 to the Notes to Consolidated Financial Statements).

     At present, there is no plan to pay dividends on Common Stock.  The Company
maintains a policy of reinvesting its discretionary cash flows for the expansion
of its business and operations.

Other Matters
-------------

Gas Balancing  Positions

     It is customary in the industry for various working interest partners to
sell more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions is not anticipated to adversely impact
the financial condition of the Company in the near term.

Year 2000

     Nuevo, like all other enterprises that utilize computer technology, faces a
threat of business disruption from the Year 2000 Issue.  The Year 2000 Issue
("Y2K") refers to the inability of computer and other information technology
systems to properly process date and time information, stemming from the
outdated programming practice of using two digits rather than four to represent
the year in a date.  The consequence of Y2K is that computer and embedded
processing systems are at risk of malfunctioning, particularly during the
transition from 1999 to 2000.

     The effects of Y2K are exacerbated by the interdependence of computer and
telecommunication systems throughout the world.  This interdependence also
exists among Nuevo and its vendors, customers and business partners, as well as
with regulators in the United States and host governments abroad.

     The risks associated with Y2K fall into three general areas: i) financial
and administrative systems, ii) embedded systems in field process control units,
and iii) third party exposures. Nuevo intends to address each of these three
areas through a readiness process that seeks to:

                                       28
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


        a)  increase the awareness of the issue among all employees;
        b)  identify areas of potential risk;
        c)  assess the relative impact of these risks and the Company's ability
            to manage them;
        d)  remediate high priority risks wherever possible; and
        e)  engage in contingency planning for identifiable risks that cannot be
            remediated.

     The Company's Board of Directors has assigned the oversight of Y2K to the
Audit Committee of the Board.  From the Audit Committee, all responsibility for
the readiness effort runs through the Chief Executive Officer ("CEO") of the
Company, and from the CEO through the Chief Financial Officer (for financial and
administrative systems) and the Vice President of Exploitation (for embedded
systems in field process control units).  As a matter of routine, management of
the Company updates the Audit Committee, and the entire Board, of its efforts to
increase Nuevo's readiness for Y2K.

     The Company and Torch have jointly developed a plan to address Nuevo's
risks associated with Y2K.  Torch provides the financial and administrative
systems for Nuevo and operates a substantial portion of its properties.  (As
used in the remainder of this Y2K discussion, references to the Company may
include the Torch employees assisting the Company in its Y2K readiness program).
As of March 1, 1999, the Company is in various stages of implementation of the
plan, as summarized below:

        Financial and Administrative Systems
        ------------------------------------

        1. Awareness. Nuevo has conducted numerous Y2K informational programs
           with its employees and the employees of Torch who provide input to or
           utilize the output of the financial and administrative systems of the
           Company. Employees at all levels of the organization have been asked
           to participate in the identification of potential Y2K risks which
           might otherwise go unnoticed by higher level employees and officers
           of Nuevo, and as a result, awareness of the issue is considered high.

        2. Risk Identification. Nuevo's most significant financial and
           administrative systems exposure is the Y2K status of the accounting
           and land administration software package that Torch uses to collect
           and manage data for internal management decision making and for
           external financial reporting purposes. Other concerns include network
           hardware and software, desktop computing hardware and software,
           telecommunications and office space readiness.

        3. Risk Assessment. The failure to identify and correct a material Y2K
           problem could result in inaccurate or untimely financial information
           for management decision-making or financial reporting purposes. The
           severity of any such problems will impact the time period during
           which the quality of management information comes under question. At
           this time, management is confident that any Y2K disruptions
           associated with its or Torch's financial and administrative systems
           will not have a material effect on the Company.

        4. Remediation. Since April 1998, Torch has been working on an upgrade
           to its accounting software, which is expected to achieve full Y2K
           compliance in the first half of 1999. In addition, Torch has
           inventoried all network and desktop software applications used by
           Nuevo and believes them to be generally Y2K compliant. The costs of
           all such risk assessments and remediation are borne by Torch under
           the terms of Nuevo's outsourcing agreements.

        5. Contingency Planning. Notwithstanding the previously described
           efforts, should there be significant unanticipated disruptions in
           Nuevo's financial and administrative systems, a number of accounting
           processes that are currently automated will need to be performed
           manually. Nuevo is currently considering its options with respect to
           contingency arrangements for temporary staffing to accommodate such
           situations.

                                       29
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


        Embedded Systems
        ----------------

        1. Awareness. The Company's Y2K program has involved all levels of
           management of field assets from production foremen and higher.
           Employees at all levels of the organization have been asked to
           participate in the identification of potential Y2K risks, which might
           otherwise go unnoticed by higher level employees and officers of
           Nuevo, and as a result, awareness of the issue is considered high.

        2. Risk Identification. Nuevo has completed a comprehensive inventory of
           embedded computer components within the process control systems of
           its operated oil and natural gas fields and processing plants. Nuevo
           identified approximately 1,900 embedded components in these
           computerized systems. Nuevo researched the manufacturer and/or
           installer of each component to determine the anticipated compliance
           or non-compliance of the component. To date, the vast majority of
           embedded components so researched have been deemed either date
           insensitive or Y2K compliant. The Y2K compliance status is unknown
           for approximately 24% of the embedded components identified, and
           research is continuing on these components. However, the complexity
           of embedded systems is such that a small minority of non-compliant
           components, even a single non-compliant component, can corrupt an
           entire system.

        3. Risk Assessment. The failure to identify and correct a material Y2K
           problem could result in outcomes ranging from errors in data
           reporting, to curtailments or shutdowns in production, to
           environmental or safety incidents. Now that the component-level
           evaluation is substantially complete, a broader evaluation at the
           system-level has commenced. Nuevo anticipates that the system-level
           evaluation will be completed by the end of the second quarter of
           1999. To assist in this effort, Nuevo and Torch Operating Company
           have retained consultants who are knowledgeable and experienced in
           the assessment of Y2K issues impacting field operations. The effort
           to completely assess the situation with embedded systems is dynamic
           and will likely not be fully completed by December 31, 1999. Costs
           incurred through December 31, 1998, were not material to Nuevo's
           results of operations, and the cost of the assessment is not expected
           to be material to Nuevo's future financial results. However, at this
           time, management is unable to express any degree of confidence that
           there will not be material production disruptions associated with Y2K
           non-compliance. Depending on the magnitude of any such disruptions
           and the time required to correct them, such failures could materially
           and adversely impact the Company's results of operations, liquidity
           and financial condition.

        4. Remediation. The Company has prioritized the remediation of embedded
           components and systems that are either known to be Y2K non-compliant
           or that have higher risk of Y2K failures. Nuevo intends to give first
           priority to the remediation of any situation with potential impacts
           to human health and safety or the environment, and will further
           prioritize remediation targets by the anticipated financial impact of
           any such situations on the Company. Nuevo intends to test, upgrade
           and re-test those embedded components and systems in field process
           control units deemed to pose the greatest risk. It is important to
           note that in some circumstances, the procedures that are used to test
           embedded components for Y2K compliance themselves pose a risk of
           damaging the component or corrupting the system, thereby accelerating
           the consequences of Y2K failures. Accordingly, in some situations, it
           may be deemed the most prudent decision not to test certain embedded
           components and systems. The amount of capital that Nuevo budgeted for
           these anticipated costs to remediate or replace embedded components
           and systems that pose the greatest risk of Y2K non-compliance, is
           approximately $1.6 million and is not considered to be material to
           the liquidity or financial condition of the Company. However, it is
           expected that some additional risks may be identified during 1999, so
           there can be no assurances that actual capital spending on Y2K
           remediation will not significantly exceed any amounts originally
           budgeted.

                                       30
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


        5. Contingency Planning. Should material production disruptions occur as
           a result of Y2K failures in field operations, Nuevo's operating cash
           flow will be impacted. This contingency is being factored into
           deliberations on capital budgeting, liquidity and capital adequacy.
           It is management's intention to maintain adequate financial
           flexibility to sustain the Company during any such period of cash
           flow disruption.

        Third Party Exposures
        ---------------------

        1. Awareness. Nuevo has conducted numerous Y2K informational programs
           with its employees and the employees of Torch who have significant
           interaction with outside vendors, customers, and business partners of
           the Company. All such employees have been asked to participate in the
           identification of potential third party Y2K risks, which might
           otherwise go unnoticed by higher level employees and officers of
           Nuevo, and as a result, awareness of the issue is considered high.

        2. Risk Identification. Nuevo's most significant third party Y2K
           exposure is to the refinery customers who purchase its oil
           production, on the customer side, and from electricity and other
           utility companies supplying field operations, on the supplier side.
           Other significant concerns include the readiness of third party crude
           oil and natural gas pipeline facilities involved in the
           transportation of Nuevo's products, the integrity of global
           telecommunication systems, the readiness of commercial banks to
           execute electronic fund transfers, and of the ability of the
           financial community to maintain an orderly market in Nuevo's
           securities.

        3. Risk Assessment. Refineries are extremely complex operations
           containing hundreds or thousands of computerized processes. The
           failure on the part of a Nuevo refining customer to identify and
           correct a material Y2K problem could result in material disruptions
           in the sale of Nuevo's production to that refinery. In many cases,
           affected Nuevo production may not be easily shifted to other markets,
           and the result can range from reduced realizations on crude oil
           produced, curtailed production or even shut-in production. Failures
           of pipelines that connect Nuevo's production to markets may have
           similar effects. Although the Company has made inquiries to key third
           parties on the subject of Y2K readiness and will continue to do so,
           it has no ability to require responses to such inquiries or to
           independently verify their accuracy. Accordingly, management is
           unable to express any degree of confidence that there will not be
           material production disruptions associated with third party Y2K non-
           compliance. Depending on the magnitude of any such disruptions and
           the time required to correct them, such failures could materially and
           adversely impact the Company's results of operations, liquidity and
           financial condition.

        4. Remediation. Where Nuevo perceives significant risk of Y2K non-
           compliance that may have a material impact on the Company, and where
           the relationship between the Company and a vendor, customer or
           business partner permits, Nuevo may pursue joint testing during 1999.
           Joint testing would occur following upgrades and other remediation to
           hardware, software and communication links, as applicable, with the
           intent of determining that the remediated system being tested will
           perform as expected on December 31, 1999.

        5. Contingency Planning. Should material production disruptions occur as
           a result of Y2K failures of third parties, Nuevo's operating cash
           flow will be impacted. This contingency is being factored into
           deliberations on capital budgeting, liquidity and capital adequacy.
           It is management's intention to maintain adequate financial
           flexibility to sustain the Company during any such period of cash
           flow disruption.

Results of Operations
---------------------

     Revenues

     The Company has experienced significant oil and gas revenue volatility in
recent years.  Extremely low oil prices are primarily responsible for the
decreased revenues in 1998, while the Company's acquisitions of producing

                                       31
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


properties and development drilling programs are primarily responsible for the
increased revenues during 1997 and 1996.  During this three year period, the
volatility of oil and gas prices directly impacted revenues.   To reduce its
exposure to changes in oil and gas prices, the Company periodically utilizes
derivative financial instruments.  As a result of such hedging transactions, oil
and gas revenues were increased by $0.6 million in 1998, and were reduced by
$6.0 million and $2.5 million in 1997 and 1996, respectively.

     Oil and gas revenues for 1998 of $240.0 million were 28% lower than 1997
oil and gas revenues of $332.0 million, primarily due to a 38% decrease in
average realized oil prices from $14.86 per barrel in 1997 to $9.25 per barrel
in 1998.  Also contributing to this decline in oil and gas revenues were
decreases in natural gas production and realized gas prices.  The Company's gas
production decreased 9% from 35.6 billion cubic feet ("BCF") in 1997 to 32.5 BCF
in 1998.  Average realized gas prices decreased 3% from $2.06 per thousand cubic
feet ("MCF") in 1997 to $2.00 per MCF in 1998.  The decline in oil and gas
revenues was partially offset by a 9% increase in the Company's oil production
from 17,127 MBBLS in 1997 to 18,583 MBBLS in 1998.

     East:  1998 oil and gas revenues for the Company's eastern oil and gas
operations decreased 24% from $61.5 million in 1997 to $46.9 million in 1998.
This decrease is primarily due to a 10% decrease in gas production from 20.8 BCF
in 1997 to 18.8 BCF in 1998, as well as a 13% decrease in the average realized
price of gas from $2.08 per MCF in 1997 to $1.80 per MCF in 1998.

     West:  1998 oil and gas revenues for the Company's western oil and gas
operations decreased 28% from $247.7 million in 1997 to $177.3 million in 1998.
This decrease is primarily due to a 39% decrease in the average realized price
of oil from $14.73 per BBL in 1997 to $8.98 per BBL in 1998, which was partially
offset by an 11% increase in oil production from 14,694 MBBLS in 1997 to 16,284
MBBLS in 1998.

     Foreign:  1998 oil and gas revenues for the Company's foreign oil and gas
operations decreased 31% from $22.8 million in 1997 to $15.8 million in 1998.
This decrease is primarily due to a 26% decrease in the average realized price
of oil from $14.66 per BBL in 1997 to $10.82 per BBL in 1998, as well as a
decrease in oil production of 6% from 1,555 MBBLS in 1997 to 1,461 MBBLS in
1998.

     Oil and gas revenues for 1997 of $332.0 million were 19% higher than 1996
oil and gas revenues of $279.9 million, primarily due to 30% increase in oil
production (including natural gas liquids) from 13,344 MBBLS in 1996 to 17,409
MBBLS in 1997.  This increase in oil volumes is attributable to the fact that
1997 included an entire year of operating results for the California Properties,
compared to only nine months in 1996 (the California Properties were acquired in
April 1996).  The California Properties accounted for 75% of total oil and gas
revenues in 1997.  The increase in production was partially offset by the
disruption of Point Pedernales production due to an oil spill in September 1997
and a decrease in the average realized prices of oil and gas in 1997.  The
Company's average realized price for oil in 1997 was $14.86 per barrel, a 6%
decrease from $15.84 in 1996.  The Company's average realized price for gas in
1997 was $2.06, a 1% decrease from $2.08 in 1996.

     East:  1997 oil and gas revenues for the Company's eastern oil and gas
operations decreased 18% from $74.9 million in 1996 to $61.5 million in 1997.
This decrease is due to: (i) a 6% decrease in gas production from 22.2 BCF in
1996 to 20.8 BCF in 1997; (ii) a 36% decrease in oil production from 1,375 MBBLS
in 1996 to 878 MMBBLS in 1997; (iii) a 7% decrease in the average realized price
of oil from $20.39 per BBL in 1996 to $18.95 per BBL in 1997; and (iv) a slight
decrease in the average realized price of gas from $2.13 per MCF in 1996 to
$2.08 per MCF in 1997.

     West:  1997 oil and gas revenues for the Company's western oil and gas
operations increased 34% from $184.3 million in 1996 to $247.7 million in 1997.
This increase is primarily due to the fact that 1997 included an entire year of
operating results for the California Properties, compared to only nine months in
1996.

     Foreign:  1997 oil and gas revenues for the Company's foreign oil and gas
operations increased 10% from $20.7 million in 1996 to $22.8 million in 1997.
This increase is primarily due to a 10% increase in oil production from 1,420
MBBLS in 1996 to 1,555 MBBLS in 1997.

                                       32
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     Gas plant revenues in 1998 of $2.7 million were 82% lower than 1997
revenues of $14.8 million.  This decrease is due to the sale of the Company's
interest in the Benedum Plant System in May 1997.  Gas plant revenues in 1997 of
$14.8 million were 57% lower than 1996 revenues of $34.8 million due to the sale
of the Company's investment in the Benedum Plant System in May 1997.  The
Company recognized a $2.3 million pre-tax gain on the sale.

     Pipeline and other revenues in 1998 of $2.7 million were 53% lower than
1997 revenues of $5.8 million.  This decrease is primarily due to the sale of
the Company's interests in the Richfield Gas Storage facility in February 1998
and Bright Star Gathering, Inc. in July 1998.  Pipeline and other revenues in
1997 of $5.8 million were 15% lower than 1996 revenues of $6.8 million, as a
result of lower throughput during 1997 compared to 1996.

     Gain on sale of assets for 1998 was $5.8 million.  This gain on sale of
assets includes a $4.1 million gain on the sale of the Company's interest in the
Sansinena field in California in the third quarter of 1998 and a $1.7 million
gain on the sale of the Company's interest in the Coke field in Chapel Hill,
Texas in the first quarter of 1998.  The net gain on sale of assets for 1997 was
$1.4 million, which is comprised of:  (i) a $1.4 million gain on the sale of
the Company's interest in Second Bayou, Weeks Island, Louisiana; (ii) a $2.3
million gain on the Company's interest in the Benedum Plant System; (iii) a $1.6
million loss on the sale of the Company's interest in the South Timbalier field;
and (iv) a $0.7 million loss on the sale of other non-core properties.  The net
gain on sale of assets for 1996 was $6.0 million, which is comprised of a $9.2
million gain on the sale of the Company's interest in the Giddings field and
East Texas Austin Chalk holdings in June 1996, which was offset by a $3.2
million loss on the sale of other non-core properties.

     Expenses

     Lease operating expenses for 1998 totaled $134.7 million, as compared to
$120.0 million and $93.1 million for 1997 and 1996, respectively.  The annual
increases of 12% in 1998 and 29% in 1997 are generally reflective of higher
production and costs associated with the California Properties, which
constituted 77%, 73% and 66% of total production in 1998, 1997 and 1996,
respectively.  In  1998, the Company experienced an increase in workovers of
$11.2 million as compared to the same period in 1997, as well as poor weather
conditions in the first quarter of 1998 in California that caused landslides and
power outages, which resulted in $2.3 million of incremental, unusual costs.  In
1997, lease operating expenses were incurred for an entire year versus only nine
months in 1996, since the California Properties were acquired in April 1996.

     East:  1998 lease operating expenses for the Company's eastern oil and
gas operations decreased slightly from $11.9 million in 1997 to $11.6 million in
1998. 1997 lease operating expenses for the Company's eastern oil and gas
operations decreased 16% from $14.1 million in 1996 to $11.9 million in 1997,
primarily due to a 14% decrease in oil and gas production.

     West:  1998 lease operating expenses for the Company's western oil and
gas operations increased 16% from $96.1 million in 1997 to $111.2 million in
1998.  This increase is due to an increase in workovers as compared to the same
period in 1997, as well as poor weather conditions in the first quarter of 1998
in California that caused landslides and power outages, which resulted in $2.3
million of incremental, unusual costs.  Lease operating expenses for the west
increased 41% from $68.1 million in 1996 to $96.1 million in 1997, since the
Company owned the California Properties for an entire year in 1997 versus only
nine months in 1996 (acquired in April 1996).

     Foreign:  1998 lease operating expenses for the Company's foreign oil and
gas operations decreased slightly from $12.0 million in 1997 to $11.9 million in
1998. 1997 lease operating expenses for the Company's foreign oil and gas
operations increased 10% from $10.9 million in 1996 to $12.0 million in 1997 due
to a 10% increase in production.

     Gas plant operating expenses of $3.2 million in 1998 decreased 76% from
$13.4 million in 1997, which decreased 54% from $29.3 million in 1996.  These
decreases are due to the sale of the Company's investment in the Benedum Plant
System in May 1997.

                                       33
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


     Pipeline and other operating expenses for 1998 totaled $2.0 million, as
compared to $5.2 million and $6.1 million in 1997 and 1996, respectively.  The
61% decrease in 1998 is primarily due to the sale of the Company's interests in
the Richfield Gas Storage facility in February 1998 and Bright Star Gathering,
Inc. in July 1998.  The 14% decrease in 1997 is due to lower throughput in 1997
as compared to 1996.

     Exploration costs, including geological and geophysical (G&G) costs, dry
hole costs and delay rentals, were $16.6 million, $11.1 million and $4.6 million
for the years ended December 31, 1998, 1997 and 1996, respectively.  Exploration
costs for the year ended 1998 included:  $13.0 million of dry hole costs ($7.3
million of which relates to exploration activity in Ghana, West Africa), $2.1
million of G&G costs ($1.5 million of which relates to activity in Ghana), $0.9
million of delay rentals and $0.6 million of other exploration costs.
Exploration costs for the year ended 1997 included:  $9.3 million of dry hole
costs, $0.7 million of G&G costs, $1.0 million of delay rentals and $0.1 million
of other exploration costs.  Exploration costs for the year ended 1996 included:
$3.1 million of dry hole costs, $1.2 million of G&G costs, $0.2 million of delay
rentals and $0.1 million of other exploration costs.

     Depreciation, depletion and amortization of $85.0 million in 1998
decreased 17% from $102.2 million in 1997, which increased 35% from $75.7
million in 1996.  The decrease in 1998 is primarily due to the year-end 1997
impairment of $30.0 million related to the excess of capitalized costs over
future net revenues, as well as the reclassification of the East Texas natural
gas properties to assets held for sale as of July 1, 1998, at which point the
properties were no longer depleted.  The increase in 1997 is attributable to
increased production volumes in 1997, due to the acquisition of the California
Properties in April 1996.

     The Company recorded provisions for impairment of oil and gas properties
in 1998 and 1997 in the amounts of $68.9 million and $30.0 million,
respectively.  These impairments were recorded as a result of declines in the
price of oil, which caused capitalized costs to be in excess of future net
revenues.  No such impairment was recognized during 1996.

     In December 1997, the Company recorded a $23.9 million provision for
impairment on assets held for sale, in connection with its plans to dispose of
its non-core gas gathering, pipeline and gas storage assets during 1998,
including all such assets except its California gas plants.  (See Note 4 to the
Notes to Consolidated Financial Statements.)  A positive revision to this charge
was made in the fourth quarter of 1998 in the amount of $3.7 million to reflect
the estimated current fair market value of the Illini pipeline.

     General and administrative expenses totaled $18.6 million, $19.8 million,
and $14.9 million in 1998, 1997 and 1996, respectively.  The 6% decrease in 1998
is primarily due to a reduction in employee bonuses in 1998 and a $1.7 million
severance expense incurred in the third quarter of 1997 associated with the
resignation of the Company's President and Chief Executive Officer. These
decreases were offset in part by non-recurring costs incurred in 1998 associated
with outside engineering costs and third-party consulting studies associated
with the re-negotiation of the Company's outsourcing agreements.  The 33%
increase in 1997 compared to 1996 is primarily due to additional general and
administrative costs associated with a full year of operations from the
California Properties and the $1.7 million severance payment referred to above.

     Outsourcing fees were $9.5 million, $12.0 million, and $10.2 million in
1998, 1997 and 1996, respectively.  The 21% decrease in 1998 is primarily due to
decreased operating cash flows (see Note 6 to the Notes to Consolidated
Financial Statements) as  a result of low realized oil prices.  The 17% increase
in 1997 is primarily due to the fact that there was  a full year of operations
from the California Properties in 1997 as compared to 1996.

     Interest expense of $32.5 million for 1998 increased 19% from $27.4 million
in 1997, primarily as a result of additional borrowings under the Company's
Credit Facility and the issuance in June 1998 of $100.0 million of 8 7/8% Notes.
Interest expense for 1997 decreased 24% from $36.0 million in 1996, primarily as
a result of the Company redeeming its 12  1/2% Notes, as well as decreased debt
under the Credit Facility due to the repayment of a portion of the debt
outstanding under this facility with the proceeds from the issuance of the
TECONS in late 1996.

                                       34
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------

     In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged a
Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.

     Dividends on the TECONS increased from $0.2 million in 1996 to $6.6 million
in 1998 and 1997. The TECONS pay dividends at a rate of 5.75% and were issued in
December 1996. (See Note 9 to the Notes to Consolidated Financial Statements.)

     Income tax benefit of $32.6 million was recognized in 1998, compared to a
benefit of $8.7 million in 1997 and expense of $24.0 million in 1996.  The
Company's effective income tax rate was (25.7)%, (38.8)% and 41.3% in 1998, 1997
and 1996, respectively.  At December 31, 1998, the Company determined that it
was more likely than not that a portion of the deferred tax assets will not be
realized and the valuation allowance was increased by $16.9 million to a total
valuation allowance of $17.6 million.

     Extraordinary Item

     In June 1997, the Company recorded an extraordinary loss on the early
extinguishment of its 12  1/2% Notes in the amount of $3.0 million, net of the
related tax benefit of $2.0 million.  No extraordinary items were recorded in
1998 or 1996.

     Net (Loss) Income

     A net loss of $94.3 million was generated in 1998, as compared to a net
loss of $13.7 million in 1997 and net income of $34.3 million in 1996. Net
income after deducting dividends paid on the 7% Preferred Stock was $33.3
million in 1996. There was no 7% Preferred Stock outstanding during 1998 or
1997; as such, no preferred dividends were paid in 1998 or 1997.

Capital Resources and Liquidity
-------------------------------

     Since its inception, the Company has grown and diversified its operations
through a series of opportunistic acquisitions of oil and gas properties and the
subsequent exploitation of these properties.  The Company has complemented these
efforts with an active exploration program, which provides exposure to prospects
that have the potential to add substantially to the growth of the Company.  The
funding of these activities has historically been provided by operating cash
flows, bank financing, private and public placements of debt and equity
securities, property divestitures and joint ventures with industry participants.
Net cash provided by operating activities was $35.8 million, $165.5 million, and
$126.9 million in 1998, 1997 and 1996, respectively.  The Company invested
$157.4 million, $195.1 million and $516.0 million in oil and gas properties in
1998, 1997 and 1996, respectively.  Additionally, the Company spent $2.8
million, $1.7 million and $21.1 million on gas plant and other facilities in
1998, 1997 and 1996, respectively.  Included in the oil and gas capital
expenditures for 1998 is approximately $81.5 million for development drilling
activity in California.  In the Company's 1999 capital budget, approximately
$40.0 million is allocated to exploitation and development projects and
approximately $17.0 million is directed to exploration. Exploitation spending is
anticipated to consist of $28.0 million in California, $5.0 million in the Gulf
Coast region, and $7.0 million internationally. Exploration spending is planned
to be allocated $7.0 million in California, $2.0 million in the Gulf Coast
region, and $8.0 million internationally.  The continued low oil and gas price
impact on the Company's cash flows from operations may require management to
revise its capital expenditure plans.

     The Company believes its working capital, cash flow from operations and
available financing sources are sufficient to meet its obligations as they
become due and to finance its exploration and development programs.  Effective
May 5, 1998, the Borrowing Base on the Company's Credit Facility was increased
from $330.0 million to $380.0 million.  The Company had an unused commitment
under the Credit Facility of $221.6 million at December 31, 1998.  The Borrowing
Base was redetermined in connection with the Company's sale of its East Texas
natural gas assets.  As a result of this sale and the low oil price environment,
the Borrowing Base was reduced to $200.0

                                       35
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


million effective January 6, 1999. The Company applied $82.6 million of the
proceeds from the sale of the East Texas assets to the outstanding borrowings
under its Credit Facility (see Note 4 to the Notes to Consolidated Financial
Statements). Subsequent to this paydown, the Company had unused commitment under
the Credit Facility of $124.2 million as of January 6,1999. Current maturities
of long-term debt for the next five years total $162.3 million.

Outlook
-------

     The Company's revenues, cash flows, results of operations and liquidity are
dependent on oil and gas prices, as is its ability to acquire financing for its
operations.  Approximately 78% of the Company' production for 1998 was oil.  Oil
prices during 1998 and the first part of 1999 have been very low compared to
historical prices.  As a result, the Company's revenues, earnings and cash flows
were materially reduced compared to 1997, even though production levels
increased during 1998.  In response to low oil prices, the Company reduced its
1998 capital expenditure budget and budgeted for 1999 accordingly, postponing
projects which are not expected to generate an acceptable rate of return at
current low oil prices. The Company may increase its capital budget for 1999 if
prices improve.  Although the Company believes that its cash flows from
operations and borrowing capacity will be sufficient to meet the Company's needs
for the foreseeable future, continued low oil prices will continue to adversely
affect the Company.

     The Company anticipates investing approximately $57.0 million during 1999
for exploration and exploitation.  The Company plans to sell certain of its
surface real estate assets in Orange County, California, during 1999 to help
fund the 1999 capital program.  In addition, the Company believes its working
capital, cash provided by operating activities, property divestitures, project
financing resources and the Credit Facility are sufficient to meet these capital
commitments.

     Estimates of future net cash flows from proved reserves of oil, gas,
condensate and natural gas liquids were made in accordance with SFAS No. 69,
"Disclosures about Oil and Gas Producing Activities."  (See Note 16 to the Notes
to Consolidated Financial Statements).  The estimates are based on realized
prices at year-end of $8.03 per barrel of oil and $1.79 per MCF of gas.
Significant changes can occur in these estimates based on prices currently in
effect.  The results of these disclosures should not be construed to represent
the fair market value of the Company's oil and gas properties.  A market value
determination would include many additional factors including: (i) anticipated
future increases or decreases in oil and gas prices and production and
development costs; (ii) an allowance for return on investment; (iii) the value
of additional reserves, not considered proved at the present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.

     The Company periodically uses derivative financial instruments to manage
oil and gas price risk. For 1999, the Company entered into swap agreements on
4,500 BOPD of its Congo production, hedging the basis differential between No. 6
fuel oil and West Texas Intermediate ("WTI") at an average differential of
$2.28. The Company also purchased a call option on 2,000 BOPD of its Congo
production at a strike price of $16.00 per barrel, to hedge the Company's
potential liability under a price sharing agreement with a third party. These
agreements expose the Company to counterparty credit risk to the extent the
counterparty is unable to meet its settlement commitments to the Company.

     Inflation has not had a material impact on the Company and is not expected
to have a material impact on the Company in the future.

                                       36
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


Recent Accounting Pronouncements
--------------------------------

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".  This
statement establishes standards of accounting for and disclosures of derivative
instruments and hedging activities.  This statement requires all derivative
instruments to be carried on the balance sheet at fair value and is effective
for the Company beginning January 1, 2000; however, early adoption is permitted.
The Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement early.

Comprehensive Income
--------------------

     The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. Comprehensive income includes net income and all
changes in an enterprise's other comprehensive income including, among other
things, foreign currency translation adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. The implementation
of this statement had no impact on the Company, as there are no differences
between comprehensive (loss) income and net (loss) income for the periods
presented.

Contingencies
-------------

     The Company has been named as a defendant in the Lopez case. The plaintiffs
allege, among other things, underpayment of royalties and that their production
was improperly commingled with gas produced from an adjoining lease. See "Legal
Proceedings" and Note 14 to the Notes to Consolidated Financial Statements. The
Company, along with the other defendants in this case, denies these allegations
and is vigorously contesting these claims. Management does not believe that the
outcome of this matter will have a material adverse impact on the Company's
operating results, financial condition or liquidity.

     The Company has been named as a defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.

     In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged
a Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.

     In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field with
shore-based processing facilities.  The volume of the spill was estimated to be
163 barrels of oil.  Torch, which operates the platform and pipeline for the
Company, responded immediately by shutting down the pipeline and notified the
National Response Center and all appropriate Federal, state, and local
authorities as well as petroleum industry environmental response consortia.  The
costs of the clean- up and the cost to repair the pipeline either have been or
are expected to be covered by insurance held by the Company, less the Company's
deductibles of $120,000.  Repairs were completed by the end of 1997, and
production recommenced in December 1997.  Additionally, the Company has exposure
to certain costs that may not be recoverable by insurance, including fines,
penalties, and damages.  Such costs are not quantifiable at this time, but are
not expected to be material to the Company's operating results, financial
condition or liquidity.

     The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets.  In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of the United States.  The
Company attempts to conduct its business and financial affairs so as to protect
against political and economic risks applicable to operations in the various
countries where it operates, but there can be no assurance that

                                       37
<PAGE>
PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


the Company will be successful in so protecting itself. A portion of the
Company's investment in the Congo is insured through political risk insurance
provided by OPIC.

     The Company and its partners in the Congo are undergoing a tax examination
related to their ownership interests in the Yombo field offshore Republic of
Congo, for the years 1994 through 1997.  The Congolese taxing authorities have
issued a preliminary assessment of approximately $24.0 million in taxes and
penalties for all years, in aggregate for all parties who have ownership in this
field.  Nuevo's working interest in this field is 43.75% during the years under
examination.  The Company, along with the other partners, is in discussions with
the Congolese taxing authorities refuting this assessment as without merit to
the items being disallowed.  Management does not believe that the outcome of
this matter will have a material adverse effect upon the Company.

     In connection with their respective acquisitions of two subsidiaries (each
a "Congo subsidiary"), owning interests in the Yombo field offshore West Africa,
the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co. ("CMS")
agreed with the seller of the subsidiaries not to claim certain tax losses
("dual consolidated losses") incurred by such subsidiaries prior to the
acquisitions.  Pursuant to the agreement, the Company and CMS may be liable to
the seller for the recapture of dual consolidated losses utilized by the seller
in years prior to the acquisitions if certain triggering events occur, including
(i) a disposition by either the Company or CMS of its respective Congo
subsidiary, (ii) either Congo subsidiary's sale of its interest in the Yombo
field, (iii) the acquisition of the Company or CMS by another consolidated group
or (iv) the failure of the Company or CMS's Congo subsidiary to continue as a
member of its respective consolidated group.  A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified in
the consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed.  The Company and CMS have agreed among
themselves that the party responsible for the triggering event shall indemnify
the other for any liability to the seller as a result of such triggering event.
The Company's potential direct liability could be as much as $50.0 million if a
triggering event with respect to the Company occurs, and the Company believes
that CMS's liability (for which the Company would be  jointly liable with an
indemnification right against CMS) could be as much as $67.0 million.  The
Company does not expect a triggering event to occur with respect to it or CMS
and does not believe the agreement will have a material adverse effect upon the
Company.

     During 1997, a new government was established in the Congo. Although the
political situation in the Congo has not to date had a material adverse effect
on the Company's operations in the Congo, no assurances can be made that
continued political unrest in West Africa will not have a material adverse
effect on the Company and its operation in the Congo in the future.

     In 1996, the previous Congo government requested that the convention
governing the Marine I Exploitation Permit be converted to a Production Sharing
Agreement ("PSA"). Preliminary discussions were held with the government in
early 1997. Nuevo is under no obligation to convert to a PSA, and its existing
convention is valid and protected by law. The Company's position is that any
conversion to a PSA would have no detrimental impact to Nuevo, otherwise, Nuevo
will not agree to any such conversion. In late 1997, a new government was
established in the Congo. The new government has recently begun discussions with
Nuevo and its partner concerning the conversion to a PSA.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

     The Company is exposed to market risk, including adverse changes in
commodity prices and interest rates.

     Commodity Price Risk - The Company produces and sells crude oil, natural
gas and natural gas liquids. As a result, the Company's operating results can be
significantly affected by fluctuations in commodity prices caused by changing
market forces. The Company periodically seeks to reduce its exposure to price
volatility by hedging its production through swaps, options and other commodity
derivative instruments. The Company uses hedge accounting for these instruments,
and settlements of gains or losses on these contracts are reported as a
component of oil and gas revenues and operating cash flows in the period
realized. These agreements expose the Company to counterparty credit risk to the
extent that the counterparty is unable to meet its settlement commitments to the
Company. At December 31, 1998, the fair value of derivative instruments
outstanding was a loss of $2.4 million. A 10% decrease in the underlying
commodity price would increase this loss by $.2 million.

                                       38
<PAGE>
 
                             NUEVO ENERGY COMPANY
                             --------------------


     Interest Rate Risk - The Company may enter into financial instruments such
as interest rate swaps to manage the impact of changes in interest rates. At
December 31, 1998, the Company had no open interest rate swaps or similar
agreements. For 1999, the Company has entered into an agreement which hedges the
price at which Nuevo may repurchase a portion of its fixed rate debt and
effectively converts such debt to a floating rate exposure for a period of one
year. This agreement is not held for trading purposes. As the swap provider is a
major financial institution, the Company does not anticipate non-performance by
the provider.

     The Company's exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
The following table presents principal amounts (stated in thousands) and the
related average interest rates by year of maturity for the Company's debt
obligations at December 31, 1998:

<TABLE>
<CAPTION> 

                                                                                                                     Fair
                                                                                                                     ----
                                1999        2000       2001      2002         2003    Thereafter       Total         Value
                                ----        ----       ----      ----         ----    ----------       -----         -----
Long-term debt, including
  current maturities:
<S>                           <C>           <C>        <C>       <C>       <C>         <C>           <C>           <C>
    Variable rate              $ 3,152      $ 750        --        --      $ 158,400           --     $ 162,302     $ 162,302
    Average interest rate          5.7%       5.7%       --        --            6.2%          --           6.2%
 
    Fixed rate                      --         --        --        --             --    $ 260,000     $ 260,000     $ 250,788
    Average interest rate           --         --        --        --             --          9.3%          9.3%
</TABLE>

                                       39
<PAGE>
 
                             NUEVO ENERGY COMPANY

Item 8.  Financial Statements and Supplementary Data



                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


                                                                        Page
                                                                       Number
                                                                       ------
                                                                      
Independent Auditors' Report............................................   41
                                                                      
Financial Statements:                                                 
                                                                      
Consolidated Balance Sheets as of December 31, 1998                   
   and 1997 (Restated)..................................................   42
                                                                      
Consolidated Statements of Operations for the Years Ended             
   December 31, 1998, 1997 (Restated) and 1996 (Restated)...............   43
                                                                      
Consolidated Statements of Changes in Stockholders'                   
   Equity for the Years Ended December 31, 1998,                      
   1997 (Restated) and 1996 (Restated)..................................   44
                                                                      
Consolidated Statements of Cash Flows for the Years Ended             
   December 31, 1998, 1997 (Restated) and 1996 (Restated)...............   45
                                                                      
Notes to Consolidated Financial Statements..............................   46

                                       40
<PAGE>
 
                             NUEVO ENERGY COMPANY

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Nuevo Energy Company:

  We have audited the accompanying consolidated balance sheets of Nuevo Energy
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nuevo Energy
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

  As discussed in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for oil and gas
properties from the full cost method to the successful efforts method in 1998.



                                          /s/ KPMG LLP

Houston, Texas
March 25, 1999

                                       41
<PAGE>

                             NUEVO ENERGY COMPANY
 
                          CONSOLIDATED BALANCE SHEETS

                   (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                       December 31,
                                                                                             ---------------------------------
                                                                                               1998                    1997*
                                                                                              ------                  ------
<S>                                                                                       <C>                      <C>
                                    ASSETS 
CURRENT ASSETS:
  Cash and cash equivalents......................................................            $    7,403               $    9,208
  Accounts receivable............................................................                25,096                   38,196
  Product inventory..............................................................                 5,998                    1,627
  Assets held for sale...........................................................               120,055                    6,950
  Prepaid expenses and other.....................................................                 2,700                    2,879
                                                                                             ----------               ----------
     Total current assets........................................................               161,252                   58,860
                                                                                             ----------               ----------
PROPERTY AND EQUIPMENT, at cost:
  Land...........................................................................                51,038                   51,411
  Oil and gas properties (successful efforts method).............................               959,348                  984,273
  Gas plant facilities...........................................................                17,112                   15,500
  Other facilities...............................................................                 6,696                    7,831
                                                                                             ----------               ----------
                                                                                              1,034,194                1,059,015
  Accumulated depreciation, depletion and amortization...........................              (417,622)                (324,904)
                                                                                             ----------               ----------
                                                                                                616,572                  734,111
                                                                                             ----------                ---------
DEFERRED TAX ASSETS, net.........................................................                27,534                       --
OTHER ASSETS.....................................................................                12,327                   11,315
                                                                                             ----------               ----------
                                                                                             $  817,685               $  804,286
                                                                                             ==========               ==========
                        LIABILITIES AND STOCKHOLDERS' EQUITY 
CURRENT LIABILITIES:
  Accounts payable...............................................................            $   24,393               $   17,062
  Accrued interest...............................................................                 4,161                    4,285
  Accrued drilling costs.........................................................                 8,380                   12,781
  Accrued lease operating costs..................................................                 4,694                    8,891
  Other accrued liabilities......................................................                 4,843                    2,868
  Current maturities of long-term debt...........................................                 3,152                    3,716
                                                                                             ----------               ----------
     Total current liabilities...................................................                49,623                   49,603
                                                                                             ----------               ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES........................................               419,150                  305,940
DEFERRED TAX LIABILITIES.........................................................                    --                    4,986
OTHER LONG-TERM LIABILITIES......................................................                 2,034                    4,018
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
 NUEVO FINANCING I...............................................................               115,000                  115,000
CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock, $1.00 par value, 10,000,000 shares authorized; 7% Cumulative
   Convertible Preferred Stock, none issued and outstanding at December 31, 1998
   and 1997......................................................................                    --                       --
  Common stock, $0.01 par value, 50,000,000 shares authorized, 20,308,462 and
   20,237,537 shares issued at December 31, 1998 and 1997, respectively..........                   203                      202
  Additional paid-in capital.....................................................               355,600                  354,296
  Treasury stock, at cost, 473,876 and 497,372 shares, at December 31, 1998 and
   1997, respectively............................................................               (19,335)                 (19,929)
  Stock held by benefit trust, 47,759 and 45,119 shares, at December 31, 1998
   and 1997, respectively........................................................                (1,732)                  (1,244)
  Accumulated deficit............................................................              (102,858)                  (8,586)
                                                                                             ----------               ----------
      Total stockholders' equity.................................................               231,878                  324,739
                                                                                             ----------               ----------
                                                                                             $  817,685               $  804,286
                                                                                             ==========               ==========
</TABLE>
-----------
* Restated
                See Notes to Consolidated Financial Statements.

                                       42
<PAGE>

                             NUEVO ENERGY COMPANY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                               ---------------------------------------------------
                                                                                 1998                1997*                1996*
                                                                               ---------            ---------            ---------
<S>                                                                            <C>                  <C>                  <C>
REVENUES:
  Oil and gas revenues..............................................           $ 240,010             $331,973             $279,859
  Gas plant revenues................................................               2,665               14,826               34,802
  Pipeline and other revenues.......................................               2,700                5,772                6,774
  Gain on sale of assets, net.......................................               5,768                1,372                6,008
  Interest and other income.........................................               1,560                3,335                1,614
                                                                                --------             --------             -------- 
                                                                                 252,703              357,278              329,057

COSTS AND EXPENSES:
  Lease operating expenses..........................................             134,704              120,042               93,062
  Gas plant operating expenses......................................               3,202               13,356               29,311
  Pipeline and other operating costs................................               2,028                5,243                6,105
  Exploration costs.................................................              16,562               11,082                4,571
  (Revision of) provision for impairment on assets held for sale....              (3,740)              23,942                   --
  Provision for impairment of oil and gas properties................              68,904               30,000                   --
  General and administrative expenses...............................              18,633               19,822               14,880
  Outsourcing fees..................................................               9,461               11,984               10,249
  Depreciation, depletion and amortization..........................              85,036              102,158               75,664
  Interest expense..................................................              32,471               27,357               36,009
  Dividends on Guaranteed Preferred Beneficial Interests in
   Company's Convertible Debentures (TECONS)........................               6,613                6,613                  165
  Other expense.....................................................               5,726                3,019                1,069
                                                                                --------             --------             --------
                                                                                 379,600              374,618              271,085
                                                                                --------             --------             -------- 
(Loss) income before income taxes, minority interest and
 extraordinary item.................................................            (126,897)             (17,340)              57,972
Income tax (benefit) expense........................................             (32,625)              (6,656)              23,965
Minority interest in loss of subsidiary.............................                  --                   (8)                (271)
                                                                                --------             --------             -------- 
(Loss) income before extraordinary item.............................             (94,272)             (10,676)              34,278
Extraordinary loss on early extinguishment of debt, net of income
 tax benefit of $2,037..............................................                  --                3,024                   --
                                                                                --------             --------             --------
Net (loss) income...................................................             (94,272)             (13,700)              34,278
Dividends on preferred stock........................................                  --                   --                  939
                                                                                --------             --------             --------
Net (loss) income available to common stockholders..................            $(94,272)            $(13,700)            $ 33,339
                                                                                ========             ========             ========
(Loss) earnings per Common share -- Basic:
 (Loss) income before extraordinary item (net of dividends on
  preferred stock)..................................................              $(4.76)            $  (0.54)               $1.99
 Extraordinary loss on early extinguishment of debt, net of income
  tax benefit.......................................................                  --                (0.15)                  --
                                                                                --------             --------             -------- 
  Net (loss) income.................................................              $(4.76)            $  (0.69)               $1.99
                                                                                ========             ========             ========
Weighted average Common shares outstanding..........................              19,795               19,796               16,755
                                                                                ========             ========             ======== 
(Loss) earnings per Common share -- Diluted:
 (Loss) income before extraordinary item............................              $(4.76)            $  (0.54)               $1.84
 Extraordinary loss on early extinguishment of debt, net of income
  tax benefit.......................................................                  --                (0.15)                  --
                                                                                --------             --------             -------- 
  Net (loss) income.................................................              $(4.76)            $  (0.69)               $1.84
                                                                                ========             ========             ========
Weighted average Common and dilutive potential Common shares
 outstanding........................................................              19,795               19,796               18,596
                                                                                ========             ========             ======== 
</TABLE>
------------ 
* Restated
                See Notes to Consolidated Financial Statements.

                                       43
<PAGE>

                             NUEVO ENERGY COMPANY
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                      Common Stock      Preferred Stock    Additional                Stock held     Retained         Total
                     ---------------   ----------------     Paid-In      Treasury    by Benefit     Earnings     Stockholders'
                     Shares   Amount   Shares    Amount     Capital       Stock         Trust       (Deficit)        Equity
                     ------   ------   ------    ------    ----------    --------    ----------     ---------    -------------
<S>                  <C>      <C>      <C>       <C>       <C>          <C>          <C>           <C>           <C>
January 1, 1996*..   11,717     $117       15      $ 15      $151,442   $      --    $       --     $ (28,225)        $123,349
Issuance of           6,384       64       --        --       172,147          --            --            --          172,211
 Common Stock.....
Exercise of stock
 options and            587        6       --        --        14,718          --            --            --           14,724
 related tax
 benefit..........
Issuance of
 non-employee            --       --       --        --           244          --            --            --              244
 stock options....
Issuance of              --       --       --        --         1,575          --            --            --            1,575
 warrants.........
Conversion of         1,164       12      (15)      (15)           --          --            --            --               (3)
 Preferred Stock..
Preferred Stock          --       --       --        --            --          --            --          (939)            (939)
 dividends........
Net income*.......       --       --       --        --            --          --            --        34,278           34,278
                     ------     ----     ----      ----      --------   ---------    ----------     ---------         --------
December 31, 1996*   19,852      199       --        --       340,126          --            --         5,114          345,439
                     ======     ====     ====      ====      ========   =========    ==========     =========         ========
Exercise of stock
 options and            386        3       --        --        11,332          --            --            --           11,335
 related tax
 benefit..........
Stock put options.       --       --       --        --         1,630          --            --            --            1,630
Employee stock           --       --       --        --         1,208          --            --            --            1,208
 awards...........
Purchase of              --       --       --        --            --     (21,173)           --            --          (21,173)
 Treasury Shares..
Stock held by            --       --       --        --            --       1,244        (1,244)           --               --
 benefit trust....
Net loss*.........       --       --       --        --            --          --            --       (13,700)         (13,700)
                     ------     ----     ----      ----      --------   ---------    ----------     ---------         --------
December 31, 1997*   20,238      202       --        --       354,296     (19,929)       (1,244)       (8,586)         324,739
                     ======     ====     ====      ====      ========   =========    ==========     =========         ========
Exercise of stock
 options and             70        1       --        --         1,304          --            --            --            1,305
 related tax
 benefit..........
Stock held by            --       --       --        --            --         488          (488)           --               --
 benefit trust....
Sale of Treasury         --       --       --        --            --         106            --            --              106
 Shares...........
Net loss..........       --       --       --        --            --          --            --       (94,272)         (94,272)
                     ------     ----     ----      ----      --------   ---------    ----------     ---------         --------
December 31, 1998.   20,308     $203       --    $  --       $355,600    $(19,335)      $(1,732)    $(102,858)        $231,878
                     ======     ====     ====      ====      ========   =========    ==========     =========         ======== 
</TABLE>
------------
* Restated

                See Notes to Consolidated Financial Statements.

                                       44
<PAGE>

                             NUEVO ENERGY COMPANY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                          -------------------------------------------------------
                                                                              1998                 1997*                 1996*
                                                                            ---------            ---------             --------- 
<S>                                                                       <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income..............................................           $ (94,272)           $ (13,700)            $  34,278
 Adjustments to reconcile net (loss) income to net cash provided
  by operating activities:
     Depreciation, depletion and amortization....................              85,036              102,158                75,664
     Dry hole costs..............................................              12,962                9,311                 3,145
     Amortization of debt financing costs........................               1,643                1,513                 1,370
     Amortization of deferred revenue............................              (1,625)              (3,203)               (4,104)
     (Revision of) provision for impairment on assets held for                 (3,740)              23,942                    --
      sale.......................................................
     Provision for impairment of oil and gas properties..........              68,904               30,000                    --
     Gain on sale of assets, net.................................              (5,768)              (1,372)               (6,008)
     Loss on early extinguishment of debt........................                  --                5,061                    --
     Employee stock awards.......................................                  --                1,208                    --
     Deferred taxes..............................................             (32,520)              (9,249)               22,465
     Depreciation of deferred compensation liability.............              (1,138)                  --                    --
     Minority interest...........................................                  --                   (8)                 (271)
                                                                            ---------            ---------             --------- 
                                                                               29,482              145,661               126,539
  Changes in assets and liabilities, net of acquisition effects:
     Accounts receivable.........................................              13,051                  578               (21,086)
     Gas imbalances..............................................                 333                   20                  (198)
     Accounts payable............................................               6,634                1,663                14,574
     Accrued liabilities.........................................              (5,813)              13,719                11,316
     Other.......................................................              (7,854)               3,821                (4,224)
                                                                            ---------            ---------             ---------
    NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES..............              35,833              165,462               126,921
                                                                            ---------            ---------             ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to land..............................................                  --                   --               (51,638)
  Additions to oil and gas properties............................            (157,352)            (195,108)             (515,985)
  Proceeds from sale of gas plant................................                  --               24,992                    --
  Proceeds from sales of properties..............................              11,830                2,385                42,700
  Additions to gas plant and other facilities....................              (2,813)              (1,747)              (21,079)
                                                                            ---------            ---------             ---------
    NET CASH FLOWS USED IN INVESTING ACTIVITIES..................            (148,335)            (169,478)             (546,002)
                                                                            ---------            ---------             ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings.......................................             240,900              234,000               408,000
  Debt issuance costs............................................              (3,360)                  --               (10,920)
  Net proceeds from issuance of common stock.....................                  --                   --               138,327
  Payments of long-term debt.....................................            (128,254)            (217,503)             (232,359)
  Preferred stock dividends......................................                  --                   --                  (939)
  Proceeds from exercise of stock options........................               1,305                6,074                10,003
  Proceeds from issuance of Company-Obligated Mandatorily
   Redeemable Convertible Preferred Securities of Nuevo 
   Financing I...................................................                  --                   --               115,000
  Premium on early extinguishment of debt........................                  --               (3,440)                   --
  Proceeds from sale of stock put options........................                  --                1,630                    --
  Proceeds from sale of treasury stock...........................                 106                   --                    --
  Purchase of treasury shares....................................                  --              (21,173)                   --
  Cash distribution to minority interest owner...................                  --                   --                  (160)
                                                                            ---------            ---------             ---------
   NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES.....             110,697                 (412)              426,952
                                                                            ---------            ---------             ---------
Net (decrease) increase in cash and cash equivalents.............              (1,805)              (4,428)                7,871
Cash and cash equivalents at beginning of year...................               9,208               13,636                 5,765
                                                                            ---------            ---------             ---------
Cash and cash equivalents at end of year.........................           $   7,403            $   9,208             $  13,636
                                                                            =========            =========             =========
</TABLE>
-------------
* Restated

                See Notes to Consolidated Financial Statements.

                                       45
<PAGE>
 
                             NUEVO ENERGY COMPANY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION

   Nuevo Energy Company ("Nuevo") was formed as a Delaware corporation on March
2, 1990, to acquire the businesses of certain public and private partnerships
(collectively "Predecessor Partnerships").  On July 9, 1990, the plan of
consolidation ("Plan of Consolidation") was approved by limited partners owning
a majority of units of limited partner interests in the partnerships whereby the
net assets of the Predecessor Partnerships, which were subject to such Plan of
Consolidation, were exchanged for Common Stock of Nuevo ("Common Stock").  All
references to the "Company" include Nuevo and its majority and wholly-owned
subsidiaries, unless otherwise indicated or the context indicates otherwise.

   The Company is primarily engaged in the exploration for, and the acquisition,
exploitation, development and production of crude oil and natural gas.  The
Company's principal oil and gas properties are located domestically onshore and
offshore California, in East Texas and the onshore Gulf Coast region; and
internationally offshore West Africa.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Principles of Consolidation

   The consolidated financial statements include the accounts of Nuevo and its
majority and wholly-owned subsidiaries.  The Company's 48.5% general partner
interest in Richfield Gas Storage Partnership was pro rata consolidated through
February 1998, at which time the Company's interest was sold.  The consolidated
financial statements also include Bright Star Gathering, Inc., which was 80%
owned by the Company until it was sold in July 1998.  NuStar Joint Venture and
its 66.7% investment in the Benedum Plant System, of which the Company owned a
95% interest, was pro rata consolidated through May 2, 1997, at which time the
Company's interest was sold.  Minority interests have been deducted from results
of operations and stockholders' equity in the appropriate periods.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.

 Change in Accounting Method

   Effective January 1, 1998, the Company elected to convert from the full cost
method to the successful efforts method of accounting for its investments in oil
and gas properties.  The Company believes that the successful efforts method of
accounting is preferable, as it will provide a fair presentation of the
Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value.  Accordingly, all prior year
financial statements have been restated to conform with successful efforts
accounting.  The effect, after tax, of the change in accounting method as of
December 31, 1997, was a reduction to retained earnings of $64.1 million,
primarily attributable to a decrease in net property and equipment and the
deferred tax liability of $99.2 million and $38.0 million, respectively.  The
change in accounting method resulted in a decrease in net income of $32.5
million ($1.64 per share - basic and diluted) and $0.4 million ($0.02 per share
- basic and diluted) during 1997 and 1996, respectively.  Had the Company not
converted to the successful efforts method, the results of operations for the
three months ended March 31, 1998, would have included a pre-tax full cost
ceiling write-down of approximately $250.0 million.

 Oil and Gas Properties

   The Company utilizes the successful efforts method of accounting for its
investments in oil and gas properties.  Under successful efforts, oil and gas
lease acquisition costs and intangible drilling costs associated with
exploration efforts that result in the discovery of proved reserves and costs
associated with development drilling, whether or not successful, are capitalized
when incurred.  When a proved property is sold, ceases to produce or is
abandoned, a gain or loss is recognized.  When an entire interest in an unproved
property is sold for cash or cash equivalent, gain or loss is recognized, taking
into consideration any recorded impairment.  When a partial interest in an
unproved property is sold, the amount received is treated as a reduction of the
cost of the interest retained.

                                       46
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Unproved leasehold costs are capitalized pending the results of exploration
efforts.  Significant unproved leasehold costs are reviewed periodically and a
loss is recognized to the extent, if any, that the cost of the property has been
impaired.  An impairment of unproved leasehold costs of $8.1 million was
recognized as of December 31, 1998.  Exploration costs, including geological and
geophysical expenses, exploratory dry holes and delay rentals, are charged to
expense as incurred.

   Costs of productive wells, development dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves.  Capitalized drilling costs are depleted on a unit-
of-production basis over the life of the remaining proved developed reserves.
Estimated costs (net of salvage value) of dismantlement, abandonment and site
remediation are computed by the Company's independent reserve engineers and are
included when calculating depreciation and depletion using the unit-of-
production method.

   The Company reviews proved oil and gas properties on a depletable unit basis
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable.  For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit is recognized.  Fair value, on a
depletable unit basis, is estimated to be the present value of the undiscounted
expected future net revenues computed by application of estimated future oil and
gas prices, production and  expenses, as determined by management, to estimated
future production of oil and gas reserves over the economic life of the
reserves.  If the carrying value exceeds the undiscounted future net revenues,
an impairment is recognized equal to the difference between the carrying value
and the discounted estimated future net revenues of that depletable unit.  The
Company considers probable reserves and escalated commodity pricing in its
estimate of future net revenues.  Fair value impairments of $60.8 million and
$30.0 million were recognized as of December 31, 1998 and 1997, respectively; no
such impairment was recognized during 1996.

   Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities are in
progress to bring these projects to their intended use.  The capitalization
rates are based on the Company's weighted average cost of funds used to finance
expenditures.

   Any reference to oil and gas reserve information in the Notes to Consolidated
Financial Statements is unaudited.

  Environmental Liabilities

   Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate.  Expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed.  Liabilities are recorded when environmental
assessments and/or clean-ups are probable, and the costs can be reasonably
estimated.  Generally, the timing of these accruals coincides with the Company's
commitment to a formal plan of action.

  Gas Plant and Other Facilities

   Gas plant and other facilities include the costs to acquire certain gas plant
and other facilities and to secure rights-of-way.  Capitalized costs associated
with gas plant and other facilities are amortized primarily over the estimated
useful lives of the various components of the facilities utilizing the straight-
line method.  The estimated useful lives of such assets range from three to
thirty years.  The Company reviews these assets for impairment whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable.

  Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities".  This statement establishes
standards of accounting for and disclosures of derivative instruments and
hedging activities.  This statement requires all derivative instruments to be
carried on the balance sheet at fair value and is effective 

                                       47
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for the Company beginning January 1, 2000, however, early adoption is permitted.
The Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement early.

  Comprehensive Income

   The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective
January 1, 1998.  Comprehensive income includes net income and all changes in an
enterprise's other comprehensive income including, among other things, foreign
currency translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities.  The implementation of this statement
had no impact on the Company, as there are no differences between comprehensive
(loss) income and net (loss) income for the periods presented.

  Gas Balancing Positions

   The Company uses the entitlement method for recording sales of natural gas.
Under the entitlement method, revenue is recorded based on the Company's net
revenue interest in production.  Deliveries of natural gas in excess of the
Company's net revenue interests are recorded as liabilities and under-deliveries
are recorded as assets.  Production imbalances are recorded at the lower of the
sales price in effect at the time of production or the current market value.
Substantially all such amounts are anticipated to be settled with production in
future periods.

  Derivative Financial Instruments

   The Company utilizes derivative financial instruments to reduce its exposure
to changes in the market prices of natural gas and crude oil.  Commodity
derivatives utilized as hedges include futures, swap and option contracts, which
are used to hedge natural gas and oil prices.  Commodity price and basis swaps
are sometimes used to hedge the basis differential between the derivative
financial instrument index price and the commodity field price.  In order to
qualify as a hedge, price movements in the underlying commodity derivative must
be highly correlated with the hedged commodity.  Settlement of gains and losses
on price swap contracts are realized monthly, generally based upon the
difference between the contract price and the average closing New York
Mercantile Exchange ("NYMEX") price and are reported as a component of oil and
gas revenues and operating cash flows in the period realized.

   Gains and losses on option and futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of oil and gas commodities
are deferred on the balance sheet and recognized in income when the related
hedged transaction occurs.  Premiums paid on option contracts are deferred in
other assets and amortized into oil and gas revenues over the terms of the
respective option contracts.  Gains or losses attributable to the termination of
a derivative financial instrument are deferred on the balance sheet and
recognized in revenue when the hedged crude oil and natural gas is sold.  There
were no such deferred gains or losses at December 31, 1998 or 1997.  Gains or
losses on derivative financial instruments that do not qualify as a hedge are
recognized in income currently.

   As a result of such hedging transactions, oil and gas revenues were increased
by $0.6 million in 1998, and were reduced by $6.0 million and $2.5 million in
1997 and 1996, respectively.

  Earnings per Share ("EPS")

   Basic EPS is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue Common Stock were exercised or converted into Common
Stock or resulted in the issuance of Common Stock that then shared in the
earnings of the entity.  For the years ended December 31, 1998 and 1997, the
Company did not have any potentially dilutive securities, as net losses were
incurred during these periods.  For the year ended December 31, 1996, the
Company's potentially dilutive securities included dilutive stock options.
Potential dilution may also occur in future periods due to the Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I
("TECONS").

                                       48
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Stock-Based Compensation

   The Company applies the intrinsic value method for accounting for stock and
stock-based compensation described by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees".  Had the Company applied the
fair value method described by SFAS No. 123, "Accounting for Stock-Based
Compensation", it would have incurred compensation expense for stock-based
compensation in 1998, 1997 and 1996.  (See Note 8 for the SFAS No. 123 pro forma
effects on income and earnings per share.)

  Income Taxes

   Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes.  Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities.  The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.

  Statements of Cash Flows

   For cash flow presentation purposes, the Company considers all highly liquid
money market instruments with an original maturity of three months or less to be
cash equivalents.  Interest paid in cash, net of amounts capitalized, for 1998,
1997 and 1996 was $31.6 million, $28.2 million and $30.6 million, respectively.
Net amounts paid (refunded) in cash for income taxes for 1998, 1997 and 1996
were $1,332,000, ($45,000) and $1,500,000, respectively.

  Product Inventory

   Inventory relating to quantities of processed fuel oil and natural gas
liquids in storage as of the balance sheet date is carried at current market
pricing.  The Company recognizes revenue for fuel oil sales when the sale is
completed and risk of loss transfers to a third party purchaser.  Fuel oil in
inventory is stated at year end market prices less transportation costs; the
Company recognizes changes in the market value of inventory from one period to
the next as oil revenues.

  Use of Estimates

   In order to prepare these financial statements in conformity with generally
accepted accounting principles, management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities, as well as reserve
information, which affects the depletion calculation.  Actual results could
differ from those estimates.

  Reclassifications

   Certain reclassifications of prior period amounts have been made to conform
to the current presentation.

3.  ACQUISITIONS

   In April 1998, the Company acquired a third party's interest in the Yombo
field in the Republic of Congo, West Africa ("Congo") for $7.8 million.  Such
acquisition added 3.4 million barrels of oil equivalent to the Company's reserve
base and increased the Company's net working interest in the Congo from 43.75%
to 50.0%.

   In July 1996, the Company completed the acquisition of certain East Texas oil
and gas properties for a net purchase price of $9.3 million in cash.  The
acquisition of these properties was effective as of December 1, 1995, and the
purchase price was reduced by the net cash flows from production between such
date and closing.  In December 1996, the holders of the preferential rights on
these properties exercised such rights for a cash payment of $8.0 million,
acquiring properties constituting approximately half of the estimated proved
reserves related to this acquisition.

                                       49
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In April 1996, the Company consummated the acquisition of (i) certain
upstream oil and gas properties located onshore and offshore California ("Unocal
Properties") of Union Oil Company of California ("Unocal") for an adjusted
purchase price of $490.2 million in cash plus a contingent payment based on
future realized oil prices, and (ii) certain California oil properties ("Point
Pedernales Properties", and together with the Unocal Properties, the "California
Properties") from Torch Energy Advisors Incorporated ("Torch") and certain of
its wholly-owned subsidiaries for a net adjusted purchase price of $35.7 million
in Common Stock of the Company. The acquisition of the California Properties was
effective as of October 1, 1995, and the purchase price was reduced by the net
cash flows from production between such date and closing. The acquisition was
recorded using the purchase method, effective April 1, 1996 for accounting
purposes.

4.  DIVESTITURES

   On January 6, 1999, the Company completed the sale of its East Texas natural
gas assets to an affiliate of Samson Resources Company for an adjusted purchase
price of $192.0 million.  Of the proceeds, $100.0 million was set aside to fund
an escrow account to provide "like-kind exchange" tax treatment in the event the
Company acquires domestic producing oil and gas properties in the first half of
1999. The remainder of the proceeds were used to repay outstanding senior bank
debt. A $5.2 million gain on settled hedge transactions was realized in
connection with the closing of this sale in 1999. The effective date of the sale
is July 1, 1998. The Company reclassified these assets to assets held for sale
and discontinued depleting these assets during the third quarter of 1998.
Estimated net proved reserves associated with these properties totaled
approximately 329.0 billion cubic feet of natural gas equivalent at January 1,
1999. The following condensed balance sheet reflects the pro forma effects of
the sale of the East Texas assets:

<TABLE> 
<CAPTION> 
                                                              Pro Forma         Pro Forma
                                           December 31,      Adjustments      December 31,
                                               1998        (Sale of E. TX)        1998
                                           ------------    ---------------    ------------
                                                             (Unaudited)       (Unaudited)
<S>                                         <C>             <C>                <C> 
CONDENSED BALANCE SHEET                                                     
                                                                            
ASSETS:                                                                     
 Current assets                                   $161,252         $(10,055)         $151,197
 Net property and equipment                        616,572               --           616,572
 Deferred tax assets, net                           27,534          (15,222)           12,312
 Other assets                                       12,327               --            12,327
                                                  --------         --------          --------
                                                  $817,685         $(25,277)         $792,408
                                                  ========         ========          ========
LIABILITIES AND STOCKHOLDERS' EQUITY:                                       
 Current liabilities                              $ 49,623         $ (9,530)         $ 40,093
 Long-term debt                                    419,150          (82,633)          336,517
 Deferred tax liabilities                               --               --                --
 Deferred revenue                                       --               --                --
 Other long-term liabilities                         2,034               --             2,034
 TECONS                                            115,000               --           115,000
 Stockholders' equity                              231,878           66,886           298,764
                                                  --------         --------          --------
                                                  $817,685         $(25,277)         $792,408
                                                  ========         ========          ========
</TABLE>

   During the third quarter of 1998, the Company sold its interest in the
Sansinena field in California, and recorded a gain on the sale of $4.1 million.
During the first quarter of 1998, the Company sold its interest in the Coke
field in Chapel Hill, Texas, and recorded a $1.7 million gain on this sale.

   In December 1997, the Company announced its intention to dispose of the
remainder of its non-core gas gathering, pipeline and storage assets during
1998.  Such assets include: the Company's 48.5% interest in the Richfield Gas
Storage facility, which was sold in February 1998 at its approximate carrying
value; an 80% interest in Bright Star Gathering, Inc., which was sold in July
1998 at its approximate carrying value; and the Illini 

                                       50
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

pipeline. The Company recorded a non-cash, pre-tax charge to fourth quarter 1997
earnings of $23.9 million, reflecting the estimated loss on the disposition of
these assets. A positive revision to this charge was made in the fourth quarter
of 1998 in the amount of $3.7 million to reflect the estimated current fair
value of the Illini pipeline. The Company entered into a sale agreement during
1998 to sell the Illini pipeline to a third party. Such sale is currently
pending and awaiting regulatory approval. The Company's results of operations
for the year ended December 31, 1998, included the operating results from these
assets through the disposition date, as applicable; however, these assets were
not depreciated during 1998. The Company will retain its California gas plants,
as these plants are strategic assets for the Company's oil and gas activities in
California.

   In May 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company, sold
its 95% interest in the NuStar Joint Venture, which held the Company's
investment in the Benedum Plant System, for proceeds of $25.0 million.  The
effective date of the sale was January 1, 1997.  Proceeds from the sale were
used to reduce outstanding debt under the Company's revolving credit facility,
as well as project debt related to the Benedum Gas Plant in the amount of $5.9
million.  The Company recorded a pre-tax gain of $2.3 million relating to the
sale.

   During the first quarter of 1997, the Company sold its interest in the Second
Bayou field in Cameron Parish, Louisiana and recorded a gain of $1.4 million.
During the third quarter of 1997, the Company recognized a loss of $1.6 million
on the sale of South Timbalier Block 8.  In addition, the Company disposed of
several non-core properties at a combined net loss of $679,000.

   In June 1996, the Company sold 177 producing wells and the majority of its
acreage in the Giddings field and East Texas Austin Chalk holdings for $27.3
million recognizing a gain of $9.2 million.  The Company retained ownership of
seven wells and surrounding acreage in the Turkey Creek prospect area of the
Austin Chalk trend.  The Company also sold several non-core properties at a
combined loss of $3.2 million.

5.  PRODUCTION PAYMENTS

   In April 1994, the Company entered into a four-year commitment for a $30.0
million volumetric production payment for the development of certain infill
drilling locations in the Oak Hill field in East Texas.  The proceeds from this
agreement financed the capital expenditures for well drilling, fracturing and
completing and for surface facility installations.  Each advance under the
production payment obligates the Company to deliver a fixed volume of natural
gas, based upon prevailing market conditions at the time of the advance.  During
1994, the Company received $18.4  million, committing the Company to deliver
10.7 BCF of natural gas through December 1998.  As of December 31, 1998, the
Company had fulfilled its obligation under this commitment.  The cash advances
were reflected as deferred revenues on the Company's December 31, 1997
consolidated balance sheet and were amortized into revenue as the natural gas
volumes were delivered.  No such advances were received in 1998, 1997 or 1996.

6.  OUTSOURCING SERVICES

   Torch, the Company's outside service provider, is primarily in the business
of providing management and advisory services relating to oil and gas assets for
institutional and public investors and maintains a large technical, operating,
accounting and administrative staff.

   In early 1999, Nuevo signed new outsourcing agreements with Torch and its
subsidiaries, effective January 1, 1999, to provide the following services:  (i)
oil and gas administration (accounting, information technology and land
administration); (ii) human resources; (iii) corporate administration (legal,
graphics, support, and corporate insurance); (iv) crude oil marketing; (v)
natural gas marketing; (vi) land leasing, and (vii) field operations.  Each of
the new agreements is stand alone, with different terms ranging from one to five
years.  In addition, the Company executed a Master Services Agreement with
Torch, which contains all the overall terms and conditions governing each
individual service agreement.  Several functions, such as mergers and
acquisitions and internal audit, will be brought in-house.  The Company is still
in the process of finalizing the field operations agreement with Torch, but
anticipates signing this agreement in late March 1999.

                                       51
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Prior to January 1, 1999, the Company's outsourcing services were governed by
an agreement with Torch (the "Torch Agreement") whereby Torch administered
certain business activities of the Company for a monthly fee. The Torch
Agreement required Torch to administer the business activities of the Company
for a monthly fee equal to the sum of one-twelfth of 2% on the first $250
million of assets and one-twelfth of 1% on assets in excess of $250 million,
excluding certain gas plant facilities and cash, plus 2% of monthly operating
cash flows (as defined) during the period in which the services were rendered.
In addition, the Torch Agreement contained a provision whereby 20% of the
overhead fees on Torch operated properties were credited against the monthly fee
paid to Torch, as well as a provision whereby the monthly fee was credited for
one-twelfth of $900,000. For the years ended December 31, 1998, 1997 and 1996,
outsourcing fees paid to Torch amounted to $9.5 million, $12.0 million and $10.2
million, respectively.

   A subsidiary of Torch markets oil, natural gas and natural gas liquids from
certain oil and gas properties and gas plants in which the Company owns an
interest.  In 1998, 1997 and 1996, such marketing fees were $2.0 million, $2.9
million and $2.8 million, respectively.

   Torch operates certain oil and gas interests owned by the Company.  The
Company is charged, on the same basis as other third parties, for all customary
expenses and cost reimbursements associated with these activities.  Operator's
fees charged for these activities for the years ended December 31, 1998, 1997
and 1996, was $25.5 million, $24.8 million and $8.8 million, respectively.

   In consideration of the services rendered by Torch in connection with the
origination of the 1996 acquisition of the Unocal Properties, the Company agreed
to pay Torch $10.0 million in twelve equal monthly installments after the
closing of the acquisition.

7.  RELATED PARTY TRANSACTIONS

   A broker's fee of 30,000 warrants was granted to a company, of which a
director of the Company is a partner, for services associated with the
acquisition of the Unocal Properties.  These warrants were exercised in the
first quarter of 1997.

   Included in general and administrative expenses for 1997 was a $1.7 million
severance payment to the Company's former President and Chief Executive Officer.

8.  STOCKHOLDERS' EQUITY

  Common and Preferred Stock

   The Certificate of Incorporation of the Company authorizes the issuance of up
to 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock,
the terms, preferences, rights and restrictions of which are established by the
Board of Directors of the Company.  All shares of Common Stock have equal voting
rights of one vote per share on all matters to be voted upon by stockholders.
Cumulative voting for the election of directors is not permitted.  Certain
restrictions contained in the Company's loan agreements limit the amount of
dividends that may be declared.  Under the terms of the most restrictive
indenture of the 8 7/8% Senior Subordinated Notes and the 9 1/2% Senior
Subordinated Notes described in Note 10, the Company and its restricted
subsidiaries had no funds available for the payment of dividends at December 31,
1998.  However, the Company had unrestricted liquidity available through its
unrestricted subsidiaries at December 31, 1998.

   On December 23, 1996, the Company and United Investors Management Company
("United") and The 1818 Fund, L.P. ("The 1818 Fund") closed the offering of
2,138,605 shares of Common Stock (the "Shares").  United sold 1,275,000 Shares
and The 1818 Fund sold 863,605 shares.  The price to the public of the Shares
was $47.50 per share.  All of the Shares sold by United were outstanding and 112
of the Shares sold by The 1818 Fund were outstanding prior to the offering.  The
remaining 863,493 of the Shares sold by The 1818 Fund were issued upon
conversion of the remaining 11,220 shares of 7% Preferred Stock of the Company.
The Company did not receive any proceeds from the issuance of these shares.  As
a result of this conversion by The 1818 Fund of its shares of 7% Preferred
Stock, there are no longer any shares of the 7% Preferred Stock outstanding.

                                       52
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   During April 1996, the Company partially financed the acquisition of the
Unocal Properties with the proceeds from the sale to the public of 5,109,200
shares of Common Stock (the "Common Stock Offering").  The purchase of the Point
Pedernales Properties was financed by the issuance to Torch of 1,275,000 shares
of the Company's Common Stock valued at the public offering price of $28.00 per
share in the Common Sock Offering.

  EPS Computation

   SFAS No. 128, "Earnings per Share", requires a reconciliation of the
numerator (income) and denominator (shares) of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.  In 1998 and 1997,
weighted average potential dilutive common shares of 331,000 and 670,000 are not
included in the calculation of diluted loss per share due to their anti-dilutive
effect.  The Company's reconciliation is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                 For the Year Ended December 31,
                                                  --------------------------------------------------------------
                                                         1998                  1997*                1996*
                                                  -------------------   -------------------   ------------------
                                                     Loss      Shares     Income     Shares    Income     Shares
                                                  ----------   ------   ----------   ------   ---------   ------
<S>                                               <C>          <C>      <C>          <C>      <C>         <C>
(Loss) income before extraordinary item........    $(94,272)             $(10,676)             $34,278
Less:  Dividends on Preferred Stock............          --                    --                 (939)
                                                   --------              --------              -------
(Loss) earnings before extraordinary item per      
 Common share -- Basic.........................     (94,272)   19,795     (10,676)   19,796     33,339    16,755
Effect of dilutive securities:
Convertible Preferred Stock....................          --        --          --        --        939        --
Stock options..................................          --        --          --        --         --     1,841
                                                   --------    ------    --------    ------    -------    ------
(Loss) earnings before extraordinary item per
 Common share -- Diluted.......................    $(94,272)   19,795    $(10,676)   19,796    $34,278    18,596
                                                   ========    ======    ========    ======    =======    ======
</TABLE>
-----------------
* Restated

  Treasury Stock Repurchases

   In March 1997, the Board of Directors of the Company authorized the open
market repurchase of up to one million shares of outstanding Common Stock during
1997, at times and prices deemed attractive by management.  During April 1997,
the Company repurchased 500,000 shares of Common Stock in open market
transactions, at an average purchase price of $38.94 per share, plus 42,491
shares acquired from the cancellation of warrants issued during 1996.  In
December 1997, the Board of Directors authorized the open market repurchase of
an additional 500,000 shares of Common Stock during 1998, however, no such
repurchase occurred during 1998.

  Put Options

   In May 1997, the Company sold put options on its Common Stock to a third
party.  The options gave the purchaser the right to sell to the Company 500,000
shares of its Common Stock at prices ranging from $40.26 to $41.04 per share
through December 31, 1997.  The contract gave the Company the choice of net
cash, net shares, or physical settlement.  Any repurchased shares would have
been treated as Treasury Stock.  The Company generated $1.6 million in option
premium from these transactions, which is reflected in additional paid-in
capital on the balance sheet.  As of December 31, 1997, 400,000 of these options
had expired with the Company's share prices above the strike price, and 100,000
of these options were settled on December 31, 1997, for a nominal amount of net
cash.

                                       53
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Shareholder Rights Plan

   In March 1997, the Company adopted a Shareholder Rights Plan to protect the
Company's shareholders from coercive or unfair takeover tactics.  Under the
Shareholder Rights Plan, each outstanding share and each share of subsequently
issued Common Stock has attached to it one Right.  Generally, in the event a
person or group ("Acquiring Person") acquires or announces an intention to
acquire beneficial ownership of 15% or more of the outstanding shares of Common
Stock without the prior consent of the Company, or the Company is acquired in a
merger or other business combination, or 50% or more of its assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise of the Right, that number of shares of common stock of the acquiring
company, which at the time of such transaction will have a market price of two
times the exercise price of the Right.  The Company may redeem the Right for
$.01 at any time before a person or group becomes an Acquiring Person without
prior approval.  The Rights will expire on March 21, 2007, subject to earlier
redemption by the Board of Directors of the Company.

  Executive Compensation Plan

   During July 1997, the Board of Directors of the Company adopted a plan to
encourage senior executives to personally invest in the shares of the Company,
and to regularly review executives' ownership versus targeted ownership
objectives.  These incentives include a deferred compensation plan (the "Plan")
that gives key executives the ability to defer all or a portion of their
salaries and bonuses and invest in Common Stock of the Company at a discount to
market prices or make other investments at the employee's discretion.  Stock
acquired at a discount will be held in a benefit trust and restricted for a two-
year period.  The stock held in the benefit trust is accounted for as a
liability of the Company and is marked-to-market, with any necessary adjustment
to general and administrative expense.  The Company recorded a benefit related
to deferred compensation of $0.6 million in 1998 and an expense of $0.8 million
in 1997.  The Plan does not permit investment in a diversified equity portfolio
until and unless targeted levels of Common Stock ownership in the Company are
achieved and maintained.  Target levels of ownership are based on multiples of
base salary and are administered by the Compensation Committee of the Board of
Directors. The Plan applies to all executives at a level of Vice-President and
above.

  Stock Incentive Plan

   In 1990, the Company established its 1990 Stock Option Plan ("Stock Option
Plan"), with respect to its Common Stock, and in 1993, the Board of Directors
adopted the Nuevo Energy Company 1993 Stock Incentive Plan ("Stock Incentive
Plan").  The purpose of the Stock Option Plan and the Stock Incentive Plan is to
provide directors and key employees of the Company and its subsidiaries
performance incentives and to provide a means of encouraging stock ownership in
the Company by such persons.

   The maximum number of shares subject to options under the Stock Incentive
Plan is 2,500,000 shares.  Options are granted under the Stock Incentive Plan on
the basis of the optionee's contribution to the Company.  No option may exceed a
term of more than ten years.  Options granted under the Stock Incentive Plan may
be either incentive stock options or options that do not qualify as incentive
stock options.  The Company's compensation committee is authorized to designate
the recipients of options, the dates of grants, the number of shares subject to
options, the option price, the terms of payment upon exercise of the options,
and the time during which the options may be exercised.  Options granted are
exercisable, in full, six months following the date of the grant.

                                       54
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   A summary of activity in the stock option plans during the three years ended
1998 is set forth below:

<TABLE>
<CAPTION>
                                                                                             Weighted-
                                                                                              Average
                                                                    Options               Exercise Price
                                                               -----------------         -----------------
<S>                                                            <C>                       <C>
Outstanding at January 1, 1996..............................        1,835,837                 $17.97
  Granted...................................................          518,100                 $38.10
  Exercised.................................................         (587,799)                $17.03
                                                                    ---------
Outstanding at December 31, 1996............................        1,766,138                 $24.24
  Granted...................................................          652,875                 $41.89
  Exercised.................................................         (328,550)                $18.59
  Canceled..................................................           (1,000)                $47.88
                                                                    ---------
Outstanding at December 31, 1997............................        2,089,463                 $30.61
  Granted...................................................        1,124,800 *               $16.27
  Exercised.................................................          (70,925)                $18.35
  Canceled..................................................         (466,975)*               $36.19
                                                                    ---------
Outstanding at December 31, 1998............................        2,676,363                 $23.94
                                                                    =========
----------------
</TABLE>

   *Reflects the cancellation and re-issuance of 401,850 non-executive employee
stock options on December 14, 1998.

   The Company had 1,756,263 options and 1,493,088 options exercisable at
December 31, 1998 and 1997, respectively.  Detail of stock options outstanding
and options exercisable at December 31, 1998 follows:

<TABLE>
<CAPTION>
                                                        Outstanding                               Exercisable
                                      ------------------------------------------------     ---------------------------
                                                         Weighted-         Weighted-                       Weighted-
                                                          Average           Average                         Average
                                                         Remaining         Exercise                        Exercise
     Range of Exercise Prices            Number         Life (Years)         Price          Number           Price
     ------------------------         -------------     ------------         -----          ------       -------------
<S>                                   <C>             <C>                <C>             <C>             <C>
$11.00 to $12.38...................         738,934          9.54           $11.18           43,334          $11.64
$16.13 to $22.13...................       1,046,429          4.84           $19.52          821,929          $19.21
$29.00 to $39.93...................         322,000          6.46           $32.73          322,000          $32.73
$41.50 to $47.88...................         569,000          7.83           $43.70          569,000          $43.70
                                          ---------                                       ---------
  Total............................       2,676,363                                       1,756,263
                                          =========                                       =========
</TABLE>

   The weighted-average fair value of options granted during 1998, 1997 and
1996, was $7.55, $12.89 and $11.52, respectively.  The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: expected stock price
volatility of 50.9% in 1998, 35.2% in 1997 and 33.6% in 1996; risk free interest
of 5% in 1998, 5.75% in 1997, and 6% in 1996, and average expected option lives
of 3 years.  Had compensation expense for stock-based compensation been
determined based on the fair value at the date of grant, the Company's net
income, earnings available to Common Stockholders and earnings per share would
have been reduced to the pro forma amounts indicated below (amounts in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                -------------------------------------------
                                                                                   1998             1997*            1996*
                                                                                ---------         --------          -------
<S>                                                         <C>             <C>              <C>              <C>
Net (loss) income........................................   As reported         $ (94,272)        $(13,700)         $34,278
                                                            Pro forma           $(103,434)        $(16,315)         $32,028
Net (loss) income available to Common Stockholders.......   As reported         $ (94,272)        $(13,700)         $33,339
                                                            Pro forma           $(103,434)        $(16,315)         $31,089
(Loss) earnings per Common share -- Basic................   As reported         $   (4.76)        $  (0.69)         $  1.99
                                                            Pro forma           $   (5.23)        $  (0.82)         $  1.86
(Loss) earnings per Common share -- Diluted..............   As reported         $   (4.76)        $  (0.69)         $  1.84
                                                            Pro forma           $   (5.23)        $  (0.82)         $  1.72
</TABLE>
--------------
* Restated

                                       55
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
   OF NUEVO FINANCING I

   On December 23, 1996, the Company and Nuevo Financing I, a statutory business
trust formed under the laws of the state of Delaware, (the "Trust"), closed the
offering of 2,300,000 Term Convertible Securities, Series A, ("TECONS") on
behalf of the Trust.  The price to the public of the TECONS was $50.00 per
TECONS.  Distributions on the TECONS began to accumulate from December 23, 1996,
and are payable quarterly on March 15, June 15, September 15, and December 15,
at an annual rate of $2.875 per TECONS.  Each TECONS is convertible at any time
prior to the close of business on December 15, 2026, at the option of the holder
into shares of Common Stock at the rate of .8421 shares of Common Stock for each
TECONS, subject to adjustment.  The sole asset of the Trust as the obligor on
the TECONS is $115.0 million aggregate principal amount of 5.75% Convertible
Subordinated Debentures of the Company due December 15, 2026.

10.    LONG-TERM DEBT

   Long-term debt is comprised of the following at December 31, 1998 and 1997
(amounts in thousands):

<TABLE>
<CAPTION>
                                                                                        1998                1997
                                                                                      --------            --------
<S>                                                                                   <C>                 <C>
8 7/8% Senior Subordinated Notes (a).......................................           $100,000            $     --
9 1/2% Senior Subordinated Notes (b).......................................            160,000             160,000
OPIC credit facility (at 5.55% and 6.04% at December 31, 1998 and 1997,
 respectively, plus a guaranty fee of 2.75%) (c)...........................              3,902               7,605
 
Bank credit facility (at 5.94% and 6.125% at December 31, 1998 and 1997,
 respectively) (d).........................................................            158,400             142,000
 
Other......................................................................                 --                  51
                                                                                      --------            --------
   Total debt..............................................................            422,302             309,656
Less current maturities....................................................             (3,152)             (3,716)
                                                                                      --------            --------
Long-term debt.............................................................           $419,150            $305,940
                                                                                      ========            ========
</TABLE>
_______
(a)  In June 1998, the Company issued $100.0 million , 8 7/8% Senior
     Subordinated Notes due June 1, 2008 (the "8 7/8% Notes").  Interest on the
     8 7/8% Notes accrues at the rate of 8 7/8%  per annum and is payable semi-
     annually in arrears on June 1 and December 1.  The 8 7/8% Notes are
     redeemable, in whole or in part, at the option of the Company, on or after
     June 1, 2003, under certain conditions.  The Company is not required to
     make mandatory redemption or sinking fund payments with respect to the 
     8 7/8% Notes.  The indenture contains covenants that, among other things,
     limit the Company's ability to incur additional indebtedness, limits
     restricted payments, limit issuances and sales of capital stock by
     restricted subsidiaries, limit dispositions of proceeds of asset sales,
     limit dividends and other payment restrictions affecting restricted
     subsidiaries, and restricts mergers, consolidations or sales of assets.
     The 8 7/8% Notes are guaranteed by certain of Nuevo's subsidiaries.  The 
     8 7/8% Notes are unsecured general obligations of the Company, and are
     subordinated in right of payment to all existing and future senior
     indebtedness of the Company.  In the event of a defined change in control,
     the Company will be required to make an offer to repurchase all outstanding
     8 7/8% Notes at 101% of the principal amount thereof, plus accrued and
     unpaid interest to the date of redemption.

(b)  In April 1996, the Company financed a portion of the purchase price of the
     Unocal Properties with proceeds from the sale to the public of a principal
     amount of $160.0 million, 9 1/2% Senior Subordinated Notes due April 15,
     2006 (the "9  1/2% Notes").  Interest on the 9 1/2% Notes accrues at the
     rate of 9 1/2%  per annum and is payable semi-annually in arrears on April
     15 and October 15.  The 9 1/2% Notes are redeemable, in whole or in part,
     at the option of the Company, on or after April 15, 2001, under certain
     conditions.  The Company is not  required to make mandatory redemption or
     sinking fund payments with respect to the 9 1/2% Notes.  The indenture
     contains covenants that, among other things, limit the Company's ability to
     incur additional indebtedness, limits restricted payments, limit issuances
     and sales of capital stock by restricted subsidiaries, limit dispositions
     of proceeds of asset sales, limit dividends and other payment restrictions
     affecting restricted subsidiaries, and restricts mergers, consolidations or
     sales of assets.  The 9 1/2% Notes were guaranteed by

                                       56
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     certain of Nuevo's subsidiaries until February 1998, at which time such
     subsidiaries were released as guarantors. The 9 1/2% Notes are unsecured
     general obligations of the Company, and are subordinated in right of
     payment to all existing and future senior indebtedness of the Company. In
     the event of a defined change in control, the Company will be required to
     make an offer to repurchase all outstanding 9 1/2% Notes at 101% of the
     principal amount thereof, plus accrued and unpaid interest to the date of
     redemption.

(c)  In February 1995, in connection with the purchase of the stock of Amoco
     Congo Production Company, the Company negotiated with the Overseas Private
     Investment Corporation ("OPIC") and an agent bank for a non-recourse credit
     facility in the amount of $25.0 million.  The security for such facility is
     the assets and stock of the Nuevo Congo Company ("NCC").  The initial
     drawdown on the facility was $8.8 million to finance a portion of the
     purchase price.  The remaining funds under the credit facility will be used
     to finance 75% of the development drilling program in the Congo.  A portion
     of the remaining outstanding commitment, $6.0 million, was drawn down in
     January 1996 to fund the first phase of the development drilling program in
     the Congo.  The interest rate associated with such credit facility is the
     London Interbank Offered Rate ("LIBOR") plus 20 basis points and a guaranty
     fee of 2.75% of the outstanding loan balance, payable quarterly.  At
     December 31, 1998, the interest rate was 5.55%, plus the guarantee fee of
     2.75%.  The loan agreement requires a sixteen-quarter repayment period.

 
(d)  Nuevo's Amended and Restated Credit Agreement, (the "Agreement"), dated as
     of February 13, 1998, provides for unsecured revolving credit availability
     of up to $400 million (subject to a periodic borrowing base determination)
     from a bank group led by NationsBank of Texas, N.A. and Morgan Guaranty
     Trust Company of New York, until its expiration on April 1, 2003.

     The borrowing base determination establishes the maximum borrowings that
     may be outstanding under the credit facility, and is determined by a two-
     thirds vote of the banks (three-fourths in the event of an increase in the
     borrowing base), each of which bases its judgement on (i) the present value
     of the Company's oil and gas reserves based on its own assumptions
     regarding future prices, production, costs, risk factors and discount
     rates, and (ii) on projected cash flow coverage ratios calculated under
     varying scenarios. If amounts outstanding under the credit facility exceed
     the borrowing base, as redetermined from time to time, the Company would be
     required to repay such excess over a defined period of time.

     Effective January 6, 1999 the borrowing base was reduced from $380 million
     to $200 million, reflecting the sale on that date of the Company's East
     Texas natural gas reserves, and also reflecting a significant decline in
     projected oil prices since the previous determination.

     Amounts outstanding under the credit facility bear interest at a rate equal
     to the London Interbank Offered Rate ("LIBOR") plus an amount which
     increases as borrowing base utilization increases. At December 31, 1998 the
     Company's interest rate under the credit facility was LIBOR plus .375%, or
     5.94%. Outstandings under this facility at year end were $158.4 million,
     and at January 6, 1999 were reduced by $82.6 million from a portion of the
     proceeds of the East Texas sale.

     The Credit Agreement has customary covenants including, but not limited to,
     covenants with respect to to the following matters: (i) limitations on
     certain restricted payments and investments; (ii) limitations on guarantees
     and indebtedness; (iii) limitations on prepayments of subordinated and
     certain other indebtedness; (iv) limitations on mergers and consolidations,
     on certain types of acquisitions and on the issuance of certain securities
     by subsidiaries; (v) limitations on liens; (vi) limitations on sales of
     properties; (vii) limitations on transactions with affiliates; (viii)
     limitations on derivative contracts; and (ix) limitations on debt in
     subsidiaries. The Company is also required to maintain certain financial
     ratios and conditions, including without limitation an EBITDA (earnings
     before interest, taxes, depreciation, depletion, amortization and
     exploration expenses) to fixed charge coverage ratio, a net worth
     requirement, and a funded debt to capitalization ratio. As a result of
     reduced revenues due to falling oil prices, the Company has obtained
     amendments for relief from the EBITDA fixed charge coverage test through
     March 31, 2000. The Company is in compliance with this test and all other
     covenants of the Agreement at December 31, 1998. The Company is currently
     in negotiation with its banks regarding other terms of the Agreement,
     including pricing, security, the frequency of borrowing base determinations
     and certain other covenants. Management believes the outcome of such
     negotiations will result, over time, in improved borrowing base
     availability and greater certainty of the commitment of this facility
     during difficult periods in the oil and gas industry.

     In June 1997, the Company redeemed its 12 1/2% Senior Subordinated Notes at
     a total cost of $78.0 million, representing $75.0 million face value of the
     debt plus a 4% premium of $3.0 million. In addition to the

                                       57
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     premium, the Company wrote off approximately $2.0 million of unamortized
     discount and deferred financing costs. The redemption resulted in an
     extraordinary loss on early extinguishment of debt in the amount of $3.0
     million, net of the related tax benefit of $2.0 million. The Company used
     proceeds from its bank facility to fund the redemption.

     The amount of scheduled debt maturities during the next five years and
     thereafter is as follows (amounts in thousands):

               1999...........................................  $  3,152
               2000...........................................       750
               2001...........................................        --
               2002...........................................        --
               2003...........................................   158,400
               Thereafter.....................................   260,000
                                                                --------
                 Total debt...................................  $422,302
                                                                ========

     Based upon the quoted market price, the fair value of the 8 7/8% Notes was
     estimated to be $90.6 million at December 31, 1998, and the fair value of
     the 9 1/2 % Notes was estimated to be $160.2 million and $170.3 million at
     December 31, 1998 and 1997, respectively. For the OPIC credit facility and
     other debt, for which no quoted prices are available, management believes
     the carrying value of the debt materially represents the fair value of the
     debt at December 31, 1998 and 1997.

                                       58
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11.  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

  NCC is a U.S. corporation with foreign branch operations in the Congo. The
functional currency of NCC is the U.S. Dollar and its income is taxed in the
United States.  The Company's Congo investment involves risks typically
associated with investments in emerging markets such as an uncertain political,
economic, legal and tax environment, and expropriation and nationalization of
assets.  The Company's investment is insured through political risk insurance
provided by OPIC.

  The OPIC credit facility, discussed in Note 10, requires the Company to
provide consolidating financial statements that separately show NCC.  Also shown
separately is Nuevo Congo LTD. ("NCL") which is the company that holds Nuevo's
additional interest in the Yombo field in the Congo (see Note 3) that was
acquired in 1998.  These condensed consolidating financial statements are
presented below:

                     CONDENSED CONSOLIDATING BALANCE SHEET

                            AS OF DECEMBER 31, 1998

                             (AMOUNTS IN THOUSANDS)
                                        
<TABLE>
<CAPTION>
                                                           Nuevo               NCC               NCL            Consolidated
                                                          --------           -------           -------          ------------
<S>                                                       <C>                <C>               <C>                <C>
Total current assets............................          $145,906           $12,870           $ 2,476            $161,252
Net property and equipment......................           568,509            39,112             8,951             616,572
Deferred tax assets, net........................            27,059               475                --              27,534
Total other assets..............................            12,308                19                --              12,327
                                                          --------           -------           -------            --------
  Total assets..................................          $753,782           $52,476           $11,427            $817,685
                                                          ========           =======           =======            ========
Total current liabilities.......................          $ 18,006           $31,163           $   454            $ 49,623
Long-term debt..................................           418,400               750                --             419,150
Other long-term liabilities.....................             2,034                --                --               2,034
Mandatorily Redeemable Convertible Preferred
 Securities of Nuevo Financing I................           115,000                --                --             115,000
 
Total stockholders' equity......................           200,342            20,563            10,973             231,878
                                                          --------           -------           -------            --------
  Total liabilities and stockholders' equity....          $753,782           $52,476           $11,427            $817,685
                                                          ========           =======           =======            ========
</TABLE>

                     CONDENSED CONSOLIDATING BALANCE SHEET

                            AS OF DECEMBER 31, 1997

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          Nuevo*               NCC*           Consolidated*
                                                                         --------            -------          -------------
<S>                                                                      <C>                 <C>                <C>
Total current assets...........................................          $ 51,318            $ 7,542            $ 58,860
Net property and equipment.....................................           701,000             33,111             734,111
Total other assets.............................................            11,220                 95              11,315
                                                                         --------            -------            --------
  Total assets.................................................          $763,538            $40,748            $804,286
                                                                         ========            =======            ========
Total current liabilities......................................          $ 44,177            $ 5,426            $ 49,603
Long-term debt.................................................           302,038              3,902             305,940
Deferred tax liabilities.......................................             4,771                215               4,986
Other long-term liabilities....................................            (5,642)             9,660               4,018
Mandatorily Redeemable Convertible Preferred Securities of
 Nuevo Financing I.............................................           115,000                 --             115,000
Total stockholders' equity.....................................           303,194             21,545             324,739
                                                                         --------            -------            --------
  Total liabilities and stockholders' equity...................          $763,538            $40,748            $804,286
                                                                         ========            =======            ========
</TABLE>
---------------
* Restated

                                       59
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           Nuevo                NCC                NCL            Consolidated
                                                         ---------            -------             ------          ------------
<S>                                                      <C>                  <C>                 <C>              <C>
Revenues........................................         $ 236,758            $14,607             $1,338           $ 252,703
Expenses........................................           362,103             16,279              1,218             379,600
                                                         ---------            -------             ------           ---------
(Loss) income before income taxes...............          (125,345)            (1,672)               120            (126,897)
Income tax benefit..............................           (31,935)              (690)                --             (32,625)
                                                         ---------            -------             ------           ---------
Net (loss) income...............................         $ (93,410)           $  (982)            $  120           $ (94,272)
                                                         =========            =======             ======           =========
</TABLE>


                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

                        FOR YEAR ENDED DECEMBER 31, 1997

                             (AMOUNTS IN THOUSANDS)
                                        
<TABLE>
<CAPTION>
                                                                          Nuevo*               NCC*           Consolidated*
                                                                         --------            -------          -------------
<S>                                                                      <C>                 <C>                <C>
Revenues.......................................................          $334,446            $22,832            $357,278
Expenses.......................................................           358,079             16,531             374,610
                                                                         --------            -------            --------
(Loss) income before income taxes and extraordinary item.......           (23,633)             6,301             (17,332)
Income tax (benefit) expense...................................            (6,883)               227              (6,656)
                                                                         --------            -------            --------
(Loss) income before extraordinary item........................           (16,750)             6,074             (10,676)
Extraordinary loss on early extinguishment of debt, net of tax     
 benefit.......................................................             3,024                 --               3,024
                                                                         --------            -------            --------
Net (loss) income..............................................          $(19,774)           $ 6,074            $(13,700)
                                                                         ========            =======            ========
</TABLE>

                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

                      FOR THE YEAR ENDED DECEMBER 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          Nuevo*              NCC*           Consolidated*
                                                                         --------           -------          -------------
<S>                                                                      <C>                <C>                 <C>
Revenues.......................................................          $308,380           $20,677             $329,057
Expenses.......................................................           256,568            14,246              270,814
                                                                         --------           -------             --------
Income before income taxes.....................................            51,812             6,431               58,243
Income tax expense (benefit)...................................            23,969                (4)              23,965
                                                                         --------           -------             --------
Net income.....................................................            27,843             6,435               34,278
Dividends on Preferred Stock...................................               939                --                  939
                                                                         --------           -------             --------
Net earnings available to Common Stockholders..................          $ 26,904           $ 6,435             $ 33,339
                                                                         ========           =======             ========
</TABLE>
---------------
* Restated

                                       60
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                      FOR THE YEAR ENDED DECEMBER 31, 1998
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             Nuevo               NCC                NCL           Consolidated
                                                           ---------           --------           -------         ------------
<S>                                                        <C>                 <C>                <C>               <C>
Cash flows from operating activities:
  Net (loss) income................................        $ (93,410)          $   (982)          $   120           $ (94,272)
  Non-cash adjustments.............................          119,473              4,281                --             123,754
  Change in assets and liabilities.................           (8,015)            14,923              (557)              6,351
                                                           ---------           --------           -------           ---------
     Net cash provided by (used in) operating
      activities...................................           18,048             18,222              (437)             35,833
                                                           ---------           --------           -------           ---------
Cash flows from investing activities:
  Additions to oil and gas properties..............         (137,430)           (10,971)           (8,951)           (157,352)
  Proceeds from sale of properties.................           11,830                 --                --              11,830
  Additions to other properties and other..........           (2,813)                --                --              (2,813)
                                                           ---------           --------           -------           ---------
       Net cash used in investing activities.......         (128,413)           (10,971)           (8,951)           (148,335)
                                                           ---------           --------           -------           ---------
Cash flows from financing activities:
  Proceeds from borrowings.........................          240,900                 --                --             240,900
  Payments of long-term debt.......................         (124,551)            (3,703)               --            (128,254)
  Contribution to (from) Nuevo.....................          (10,852)                --            10,852                  --
  Other............................................           (1,949)                --                --              (1,949)
                                                           ---------           --------           -------           ---------
     Net cash provided by (used in) financing
      activities...................................          103,548             (3,703)           10,852             110,697
                                                           ---------           --------           -------           --------- 
Net increase (decrease) in cash & cash equivalents.           (6,817)             3,548             1,464              (1,805)
Cash and cash equivalents at beginning of year.....            7,417              1,791                --               9,208
                                                           ---------           --------           -------           ---------
Cash and cash equivalents at end of year...........        $     600           $  5,339           $ 1,464           $   7,403
                                                           =========           ========           =======           =========
</TABLE>

                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                      FOR THE YEAR ENDED DECEMBER 31, 1997
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            Nuevo*              NCC*            Consolidated*
                                                                          ---------           --------          -------------
<S>                                                                       <C>                 <C>                <C>
Cash flows from operating activities:
  Net (loss) income...............................................        $ (19,774)          $  6,074           $ (13,700)
  Non-cash adjustments............................................          155,749              3,612             159,361
  Change in assets and liabilities................................           12,846              6,955              19,801
                                                                          ---------           --------           ---------
     Net cash provided by operating activities....................          148,821             16,641             165,462
                                                                          ---------           --------           ---------
Cash flows from investing activities:
  Additions to oil and gas properties.............................         (182,261)           (12,847)           (195,108)
  Proceeds from sale of properties................................           27,377                 --              27,377
  Additions to other properties and other.........................           (1,747)                --              (1,747)
                                                                          ---------           --------           ---------
       Net cash used in investing activities......................         (156,631)           (12,847)           (169,478)
                                                                          ---------           --------           ---------
Cash flows from financing activities:
  Proceeds from borrowings........................................          234,000                 --             234,000
  Payments of long-term debt......................................         (213,800)            (3,703)           (217,503)
  Other...........................................................          (16,909)                --             (16,909)
                                                                          ---------           --------           ---------
     Net cash provided by (used in) financing activities..........            3,291             (3,703)               (412)
                                                                          ---------           --------           ---------
Net (decrease) increase in cash and cash equivalents..............           (4,519)                91              (4,428)
Cash and cash equivalents at beginning of year....................           11,936              1,700              13,636
                                                                          ---------           --------           ---------
Cash and cash equivalents at end of year..........................        $   7,417           $  1,791           $   9,208
                                                                          =========           ========           =========
</TABLE>
-----------------
* Restated

                                       61
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                      FOR THE YEAR ENDED DECEMBER 31, 1996

                            (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             Nuevo*              NCC*           Consolidated*
                                                                           ---------           --------         -------------
<S>                                                                        <C>                 <C>                <C>
Cash flows from operating activities:
  Net income......................................................         $  27,843           $  6,435           $  34,278
  Non-cash adjustments............................................            89,792              2,469              92,261
  Change in assets and liabilities................................            (6,483)             6,865                 382
                                                                           ---------           --------           ---------
     Net cash provided by operating activities....................           111,152             15,769             126,921
                                                                           ---------           --------           ---------
Cash flows from investing activities:
  Additions to oil and gas properties.............................          (496,516)           (19,469)           (515,985)
  Proceeds from sale of properties................................            42,700                 --              42,700
  Additions to other properties and other.........................           (72,717)                --             (72,717)
                                                                           ---------           --------           ---------
       Net cash used in investing activities......................          (526,533)           (19,469)           (546,002)
                                                                           ---------           --------           ---------
Cash flows from financing activities:
  Proceeds from borrowings........................................           402,000              6,000             408,000
  Proceeds from issuance of Company-Obligated Mandatorily
   Redeemable Convertible Preferred Securities of Nuevo 
   Financing I....................................................           115,000                 --             115,000
  Payments of long-term debt......................................          (229,406)            (2,953)           (232,359)
  Other...........................................................           136,311                 --             136,311
                                                                           ---------           --------           ---------
     Net cash provided by financing activities....................           423,905              3,047             426,952
                                                                           ---------           --------           ---------
Net increase (decrease) in cash and cash equivalents..............             8,524               (653)              7,871
Cash and cash equivalents at beginning of year....................             3,412              2,353               5,765
                                                                           ---------           --------           ---------
Cash and cash equivalents at end of year..........................         $  11,936           $  1,700           $  13,636
                                                                           =========           ========           =========
</TABLE>

12.  INCOME TAXES

  Income tax (benefit) expense is summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                 ---------------------------------------------------------
                                                                     1998                  1997*                 1996*
                                                                 ------------         --------------        --------------
<S>                                                               <C>                    <C>                   <C>
Current
 Federal................................................          $   (105)              $   135               $ 1,200
  State.................................................                --                   421                   300
                                                                  --------               -------               -------
                                                                      (105)                  556                 1,500
                                                                  --------               -------               -------
Deferred                                                      
  Federal...............................................           (24,172)               (7,449)               17,465
  State.................................................            (8,348)               (1,800)                5,000
                                                                  --------               -------               -------
                                                                   (32,520)               (9,249)               22,465
                                                                  --------               -------               -------
   Total income tax (benefit) expense...................          $(32,625)              $(8,693)              $23,965
                                                                  ========               =======               =======
</TABLE>

  A deferred tax benefit related to the exercise of employee stock options of
approximately $5.3 million and $4.7 million was allocated directly to additional
paid-in capital in 1997 and 1996, respectively.  A current tax benefit of $2.0
million was allocated to the extraordinary loss in 1997.

-----------------
*Restated

                                       62
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Total income tax (benefit) expense differs from the amount computed by
applying the Federal income tax rate to (loss) income before income taxes,
minority interest and extraordinary item.  The reasons for these differences are
as follows:

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                          ------------------------------------------------------
                                                                              1998                1997*                1996*
                                                                          ------------        -------------         ------------
<S>                                                                       <C>                 <C>                   <C>
Statutory Federal income tax rate................................            (35.0)%              (35.0)%               35.0%
(Decrease) increase in tax rate resulting from:
  State income taxes, net of Federal benefit.....................             (4.3)                (4.0)                 5.9
  Non-realization of tax benefits related to provision for
   impairment on assets held for sale............................               --                  3.6                   --
  Increase in valuation allowance................................             13.4                   --                   --
  Nondeductible travel and entertainment and other...............              0.2                 (3.4)                  .4%
                                                                             -----                -----                 ----
                                                                             (25.7)%              (38.8)%               41.3%
                                                                             =====                =====                 ====
</TABLE>

  The tax effects of temporary differences that result in significant portions
of the deferred income tax assets and liabilities and a description of the
financial statement items creating these differences are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                                                                        As of December 31,
                                                                                   ----------------------------
                                                                                     1998                1997*
                                                                                   --------            --------
<S>                                                                                <C>                 <C>
Net operating loss carryforwards......................................             $ 45,610            $ 10,267
Alternative minimum tax credit carryforwards..........................                1,054               1,337
State income taxes....................................................                1,520                  --
Capital loss carryforwards............................................                2,365                 700
                                                                                   --------            --------
  Total deferred income tax assets....................................               50,549              12,304
  Less: valuation allowance...........................................              (17,646)               (700)
                                                                                   --------            --------
  Net deferred income tax assets......................................               32,903              11,604
                                                                                   --------            --------
Property and equipment................................................               (5,369)            (12,694)
State income taxes....................................................                   --              (3,896)
                                                                                   --------            --------
  Total deferred income tax liabilities...............................               (5,369)            (16,590)
                                                                                   --------            --------
Net deferred income tax asset (liability).............................             $ 27,534            $ (4,986)
                                                                                   ========            ========
</TABLE>
---------------
* Restated

  At December 31, 1998, the Company had a net operating loss carryforward for
regular tax of approximately $130.3 million, which will expire in future years
beginning in 2006 through 2012.  The alternative minimum tax credit carryforward
of $1.1 million does not expire and may be applied to reduce regular income tax
to an amount not less than the alternative minimum tax payable in any one year.
At December 31, 1998, the Company determined that it was more likely than not
that a portion of the deferred tax assets will not be realized and the valuation
allowance was increased by $16.9 million to a total valuation allowance of $17.6
million.

                                       63
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13. INDUSTRY SEGMENT INFORMATION

  As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which was issued by the FASB
in June 1997.  This statement establishes standards for reporting information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
reports.

  The Company's operations are concentrated primarily in two segments:
exploration and production of oil and natural gas, and gas plant and other
facilities.

<TABLE>
<CAPTION>
                                                                                          As of and For the Year Ended
                                                                                                  December 31,
                                                                               --------------------------------------------------
                                                                                 1998                1997*                1996*
                                                                               --------            --------             ---------
                                                                                            (Amounts in thousands)
<S>                                                                            <C>                 <C>                  <C>
Sales to unaffiliated customers:                                                           
  Oil and gas -- East...............................................           $  46,885            $ 61,456             $ 74,930
  Oil and gas -- West...............................................             177,315             247,723              184,261
  Oil and gas -- Foreign............................................              15,810              22,794               20,668
  Gas plant, pipeline and other facilities..........................               5,365              20,598               41,576
                                                                               ---------            --------             --------
  Total sales.......................................................             245,375             352,571              321,435
  Other revenues....................................................               7,328               4,707                7,622
                                                                               ---------            --------             --------
  Total revenues....................................................           $ 252,703            $357,278             $329,057
                                                                               =========            ========             ========
Operating (loss) profit before income taxes:                                               
  Oil and gas -- East...............................................           $  22,608            $ 24,745             $ 37,659
  Oil and gas -- West...............................................             (67,677)             40,369               72,049
  Oil and gas -- Foreign............................................             (12,849)              6,172                7,247
  Gas plant, pipeline and other facilities (2)......................               3,063             (22,478)               2,619
                                                                               ---------            --------             --------
                                                                                 (54,855)             48,808              119,574
  Unallocated corporate expenses....................................              32,958              32,170               25,157
  Interest expense..................................................              32,471              27,357               36,009
  Dividends on TECONS...............................................               6,613               6,613                  165
                                                                               ---------            --------             --------
  Operating (loss) profit before income taxes.......................           $(126,897)           $(17,332)            $ 58,243
                                                                               =========            ========             ========
Identifiable assets:
  Oil and gas -- Domestic (1).......................................           $ 748,695            $671,603             $682,995
  Oil and gas -- Foreign............................................              40,700              40,139               33,147
  Gas plant and other facilities....................................              14,893              17,387               66,329
                                                                               ---------            --------             --------
                                                                                 804,288             729,129              782,471
 Corporate assets and investments...................................              13,397              75,157               35,172
                                                                               ---------            --------             --------
  Total.............................................................           $ 817,685            $804,286             $817,643
                                                                               =========            ========             ========
Capital expenditures:
  Oil and gas -- East...............................................           $  36,597            $ 32,857             $ 37,480
  Oil and gas -- West (1)...........................................              96,179             148,927              525,259
  Oil and gas -- Foreign............................................              30,498              14,111               19,607
  Gas plant and other facilities....................................               2,813               1,747                2,717
                                                                               ---------            --------             --------
                                                                               $ 166,087            $197,642             $585,063
                                                                               =========            ========             ========
Depreciation, depletion and amortization:
  Oil and gas -- East...............................................           $  10,391            $ 14,252             $ 24,842
  Oil and gas -- West...............................................              68,164              81,011               43,964
  Oil and gas -- Foreign............................................               4,971               3,385                2,473
  Gas plant and other facilities....................................                 812               2,830                3,812
                                                                               ---------            --------             --------
                                                                               $  84,338            $101,478             $ 75,091
                                                                               =========            ========             ========
</TABLE>
----------------
*  Restated
 

                                       64
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(1)  Identifiable assets and capital expenditures for 1996 include $15.0 million
     in costs associated with gas plant facilities in California, which
     processes immaterial amounts of third party gas, and whose revenues from
     the sale of these liquids are included in oil and gas revenues.

(2)  Gas plant and other facilities operations for 1998 include a positive
     revision to a prior period charge of $3.7 million and for 1997 include a
     charge for $23.9 million to record an impairment on assets held for sale
     and a $2.3 million gain on sale.  See Note 4.

   In 1998, 1997 and 1996, the Company had one customer that accounted for 60%,
62%, and 52% of oil and gas revenues, respectively.  Also in 1998, the Company
had another customer who accounted 10% of oil and gas revenues.

14. CONTINGENCIES

  The Company has been named as a defendant in the lawsuit Gloria Garcia Lopez
and Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending
in the 79th Judicial District Court of Brooks County, Texas.  The plaintiffs
allege: (i) underpayment of royalties and claim damages, on a gross basis
against all working interest owners, of $27.7 million plus $26.2 million in
interest for the period from 1985 to date; (ii) that their production was
improperly commingled with gas produced from an adjoining lease, resulting in
damages, including interests of $40.8 million, on a gross basis; (iii) $59.7
million (gross) for alleged failure to develop and $20.0 million (gross) for
interest in the alleged failure to develop; and (iv) numerous other claims that
may result in unspecified damages.  Nuevo's working interest in these properties
is 20%.  The Company, along with the other defendants in this case, denies these
allegations and is vigorously contesting these claims.  Management does not
believe that the outcome of this matter will have a material adverse impact on
the Company's operating results, financial condition or liquidity.

  The Company has been named as a defendant in certain other lawsuits incidental
to its business.  Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition.  However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation.  The Company is defending itself
vigorously in all such matters.

  In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged a
Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.

  In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field with
shore-based processing facilities.  The volume of the spill was estimated to be
163 barrels of oil.  Torch, which operates the platform and pipeline for the
Company, responded immediately by shutting down the pipeline and notified the
National Response Center and all appropriate Federal, state, and local
authorities, as well as petroleum industry environmental response consortia.
The costs of the clean up and the repair either have been or are expected to be
covered by insurance held by the Company, less the Company's deductibles of
$120,000 net to the Company. Repairs were completed by the end of 1997, and
production recommenced in December 1997.  Additionally, the Company has exposure
to certain costs that may not be recoverable by insurance, including fines,
penalties, and damages.  Such costs are not quantifiable at this time, but are
not expected to be material to the Company's operating results, financial
condition or liquidity.

  The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets.  In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of the United States.  The
Company attempts to conduct its business and financial affairs so as to protect
against political and economic risks applicable to operations in the various
countries where it operates, but there can be no

                                       65
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

assurance that the Company will be successful in so protecting itself. A portion
of the Company's investment in the Congo is insured through political risk
insurance provided by OPIC.

  The Company and its partners in the Congo are undergoing a tax examination
related to their ownership interests in the Yombo field offshore Republic of
Congo, for the years 1994 through 1997.  The Congolese taxing authorities have
issued a preliminary assessment of approximately $24.0 million in taxes and
penalties for all years, in aggregate for all parties who have ownership in this
field.  Nuevo's working interest in this field is 43.75% during the years under
examination.  The Company, along with the other partners, is in discussions with
the Congolese taxing authorities refuting this assessment as without merit to
the items being disallowed.  Management does not believe that the outcome of
this matter will have a material adverse effect upon the Company.

  In connection with their respective acquisitions of two subsidiaries (each a
"Congo subsidiary") owning interests in the Yombo field offshore West Africa,
the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co.  ("CMS")
agreed with the seller of the subsidiaries not to claim certain tax losses
("dual consolidated losses") incurred by such subsidiaries prior to the
acquisitions.  Pursuant to the agreement, the Company and CMS may be liable to
the seller for the recapture of dual consolidated losses utilized by the seller
in years prior to the acquisitions if certain triggering events occur, including
(i) a disposition by either the Company or CMS of its respective Congo
subsidiary, (ii) either Congo subsidiary's sale of its interest in the Yombo
field, (iii) the acquisition of the Company or CMS by another consolidated group
or (iv) the failure of the Company or CMS's Congo subsidiary to continue as a
member of its respective consolidated group.  A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified in
the consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed.  The Company and CMS have agreed among
themselves that the party responsible for the triggering event shall indemnify
the other for any liability to the seller as a result of such triggering event.
The Company's potential direct liability could be as much as $50.0 million if a
triggering event with respect to the Company occurs, and the Company believes
that CMS's liability (for which the Company would be jointly liable with an
indemnification right against CMS) could be as much as $67.0 million.  The
Company does not expect a triggering event to occur with respect to it or CMS
and does not believe the agreement will have a material adverse effect upon the
Company.

  During 1997, a new government was established in the Congo.  Although the
political situation in the Congo has not to date had a material adverse effect
on the Company's operations in the Congo, no assurances can be made that
continued political unrest in West Africa will not have a material adverse
effect on the Company and its operations in the Congo in the future.

15.  FINANCIAL INSTRUMENTS

  The Company periodically uses derivative financial instruments to manage oil
and natural gas price risk. For 1999, the Company entered into swap agreements
on 4,500 barrels of oil per day ("BOPD") of its Congo production, hedging the
basis differential between No. 6 fuel oil and West Texas Intermediate ("WTI") at
an average differential of $2.28.  The Company also purchased a call option on
2,000 BOPD of its Congo production at a strike price of $16.00 per barrel of oil
("BBL"), to hedge the Company's potential liability under a price sharing
agreement with a third party. These agreements expose the Company to
counterparty credit risk to the extent that the counterparty is unable to meet
its settlement commitments to the Company.

  For 1999, the Company has entered into an agreement under which a portion of
the its fixed rate debt will be converted to floating rate debt.  This agreement
is not held for trading purposes.  As the swap provider is a major financial
institution, the Company does not anticipate non-performance by the provider.

Determination of Fair Values of Financial Instruments

  Fair value for cash, short-term investments, receivables and payables
approximates carrying value.  The following table details the carrying values
and approximate fair values of the Company's other investments, derivative
financial instruments and long-term debt at December 31, 1998 and 1997.

                                       66
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                                 December 31, 1998                  December 31, 1997
                                                             ----------------------------       ---------------------------
                                                             Carrying        Approximate        Carrying       Approximate
                                                              Value          Fair Value          Value          Fair Value
                                                             --------        ------------       --------       ------------
<S>                                                          <C>             <C>                <C>            <C>
Other investments......................................       $     80         $     80          $    434         $    553
Derivative Instruments:                                    
  Option premium.......................................            292              241                --               --
  Commodity price swaps................................             --           (2,636)               --              506
Long-term debt (see Note 10)...........................        419,150          409,938           305,940          316,228
TECONS.................................................        115,000           71,875           115,000          112,700
</TABLE>

                                       67
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16.  SUPPLEMENTAL INFORMATION - (UNAUDITED)

  Oil and Gas Producing Activities:

  Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules.  Reserve quantities and future production as of
December 31, 1998 are based primarily on reserve reports prepared by the
independent petroleum engineering firm of Ryder Scott Company.  Reserve
quantities and future production for previous years are based primarily upon
reserve reports prepared by Ryder Scott Company and the independent petroleum
firm of Poco Oil Company.  These estimates are inherently imprecise and subject
to substantial revision.

  Estimates of future net cash flows from proved reserves of gas, oil,
condensate and natural gas liquids ("NGL") were made in accordance with SFAS No.
69, "Disclosures about Oil and Gas Producing Activities".  The estimates are
based on realized prices at year-end, of $8.03 per BBL and $1.79 per thousand
cubic feet of gas ("MCF").  Estimated future cash  inflows are reduced by
estimated future development and production costs based on year-end cost levels,
assuming continuation of existing economic conditions, and by estimated future
income tax expense.  Tax expense is calculated by applying the existing
statutory tax rates, including any known future changes, to the pre-tax net cash
flows, less depreciation of the tax basis of the properties and depletion
allowances applicable to the gas, oil, condensate and NGL production.  Because
the disclosure requirements are standardized, significant changes can occur in
these estimates based upon oil and gas prices currently in effect.  The results
of these disclosures should not be construed to represent the fair market value
of the Company's oil and gas properties.  A market value determination would
include many additional factors including: (i) anticipated future increases or
decreases in oil and gas prices and production and development costs; (ii) an
allowance for return on investment; (iii) the value of additional reserves, not
considered proved at the present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.

  The following tables include the Company's East Texas natural gas assets,
which were sold on January 6, 1999 (see Note 4).  Such assets accounted for 54.9
MBOE, or 21%, of the Company's December 31, 1998 net proved reserve estimates.

Costs incurred (amounts in thousands)-

  The following table sets forth the costs incurred in property acquisition and
development activities:

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                             ---------------------------------------------------
                                                                                1998                1997*                1996*
                                                                             ---------           ----------           ----------
<S>                                                                          <C>                 <C>                  <C>
DOMESTIC
Property acquisition:
 Proved properties(2)...............................................          $    200            $ 10,206             $452,603
 Unproved properties................................................             1,320                  --               40,000
Exploration.........................................................            26,706              18,474                7,289
Development(1)......................................................           104,550             153,104               62,847
                                                                              --------            --------             --------
                                                                              $132,776            $181,784             $562,739
                                                                              ========            ========             ========
FOREIGN
Property acquisition:
 Proved properties..................................................          $  7,809            $     --             $     --
 Unproved properties................................................             1,404                  --                   --
Exploration.........................................................             9,204              10,887                8,844
Development.........................................................            12,081               3,224               10,763
                                                                              --------            --------             --------
                                                                              $ 30,498            $ 14,111             $ 19,607
                                                                              ========            ========             ========
</TABLE> 

                                       68
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Costs incurred (amounts in thousands) Cont'd. -  

<TABLE> 
<CAPTION> 
                                                                                            Year Ended December 31,
                                                                                ------------------------------------------------- 
                                                                                  1998                1997*                1996*
                                                                                --------            --------             --------
<S>                                                                             <C>                 <C>                  <C>
TOTAL
Property acquisition:
 Proved properties..................................................            $  8,009            $ 10,206             $452,603
 Unproved properties................................................               2,724                  --               40,000
Exploration.........................................................              35,910              29,361               16,133
Development.........................................................             116,631             156,328               73,610
                                                                                --------            --------             --------
                                                                                $163,274            $195,895             $582,346
                                                                                ========            ========             ========
</TABLE>
(1)  Includes capitalized interest directly related to development activities of
     $0.6 million in 1998 and $2.4 million in 1997.
(2)  The acquisition of domestic proved properties for 1996 includes $15.0
     million in costs associated with gas plant facilities in California.
---------------
*  Restated

Capitalized costs (amounts in thousands)-

The following table sets forth the capitalized costs relating to oil and gas
activities and the associated accumulated depreciation, depletion and
amortization:

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                               ---------------------------------------------------
                                                                                 1998                 1997*                1996*
                                                                               ---------            ---------            ---------
<S>                                                                            <C>                  <C>                  <C>
DOMESTIC
Proved properties...................................................           $ 877,230            $ 903,096            $ 739,260
Unproved properties.................................................              20,984               41,661               44,661
                                                                               ---------            ---------            ---------
 Total capitalized costs............................................             898,214              944,757              783,921
 Accumulated depreciation, depletion and amortization...............            (401,139)            (315,038)            (198,024)
                                                                               ---------            ---------            ---------
  Net capitalized costs.............................................           $ 497,075            $ 629,719            $ 585,897
                                                                               =========            =========            =========
FOREIGN
Proved properties...................................................           $  59,774            $  39,516            $  26,677
Unproved properties.................................................               1,360                   --                   --
                                                                               ---------            ---------            ---------
 Total capitalized costs............................................              61,134               39,516               26,677
 Accumulated depreciation, depletion and amortization...............             (11,724)              (6,378)              (2,993)
                                                                               ---------            ---------            ---------
  Net capitalized costs.............................................           $  49,410            $  33,138            $  23,684
                                                                               =========            =========            =========
TOTAL
Proved properties...................................................           $ 937,004            $ 942,612            $ 765,937
Unproved properties.................................................              22,344               41,661               44,661
                                                                               ---------            ---------            ---------
 Total capitalized costs............................................             959,348              984,273              810,598
 Accumulated depreciation, depletion and amortization...............            (412,863)            (321,416)            (201,017)
                                                                               ---------            ---------            ---------
  Net capitalized costs.............................................           $ 546,485            $ 662,857            $ 609,581
                                                                               =========            =========            =========
</TABLE>
----------------
*  Restated

                                       69
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Results of operations for producing activities (amounts in thousands) --

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                               ---------------------------------------------------
                                                                                 1998                 1997*                1996*
                                                                               ---------            ---------             --------
<S>                                                                            <C>                  <C>                  <C>
DOMESTIC
Revenues from oil and gas producing activities......................           $ 224,200            $ 309,179             $259,191
Production costs....................................................            (122,816)            (108,074)             (82,119)
Exploration costs...................................................              (5,137)              (9,813)              (4,566)
Depreciation, depletion and amortization............................             (78,555)             (95,263)             (68,806)
Provision for impairment of oil and gas properties..................             (68,529)             (30,000)                  --
Income tax benefit (provision)......................................              13,234              (26,449)             (42,828)
                                                                               ---------            ---------             --------
Results of operations from producing activities (excluding
 corporate overhead and interest costs).............................           $ (37,603)           $  39,580             $ 60,872
                                                                               =========            =========             ========
FOREIGN
Revenues from oil and gas producing activities......................           $  15,810            $  22,794             $ 20,668
Production costs....................................................             (11,888)             (11,968)             (10,943)
Exploration costs...................................................             (11,425)              (1,269)                  (5)
Depreciation, depletion and amortization............................              (4,971)              (3,385)              (2,473)
Provision for impairment of oil and gas properties..................                (375)                  --                   --
Income tax benefit (provision)......................................               3,174               (2,469)              (2,993)
                                                                               ---------            ---------             --------
Results of operations from producing activities (excluding
 corporate overhead and interest costs).............................           $  (9,675)           $   3,703             $  4,254
                                                                               =========            =========             ========
TOTAL
Revenues from oil and gas producing activities......................           $ 240,010            $ 331,973             $279,859
Production costs....................................................            (134,704)            (120,042)             (93,062)
Exploration costs...................................................             (16,562)             (11,082)              (4,571)
Depreciation, depletion and amortization............................             (83,526)             (98,648)             (71,279)
Provision for impairment of oil and gas properties..................             (68,904)             (30,000)                  --
Income tax benefit (provision)......................................              16,408              (28,918)             (45,821)
                                                                               ---------            ---------             --------
Results of operations from producing activities (excluding
 corporate overhead and interest costs).............................           $ (47,278)           $  43,283             $ 65,126
                                                                               =========            =========             ========
</TABLE>
--------------
*  Restated

Per unit sales prices and costs:

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                ----------------------------------------------
                                                                                 1998                1997                1996
                                                                                ------             -------             -------
<S>                                                                             <C>                <C>                 <C>
DOMESTIC
Average sales price:
  Oil (per barrel)................................................              $ 9.10              $14.88              $15.99
  Gas (per MCF)...................................................              $ 2.00              $ 2.06              $ 2.08
Average production cost per equivalent barrel.....................              $ 5.33              $ 4.96              $ 4.63
FOREIGN
Average sales price:
  Oil (per barrel)................................................              $10.82              $14.66              $14.56
Average production cost per equivalent barrel.....................              $ 8.14              $ 7.70              $ 7.71
TOTAL
Average sales price:
  Oil (per barrel)................................................              $ 9.25              $14.86              $15.84
  Gas (per MCF)...................................................              $ 2.00              $ 2.06              $ 2.08
Average production cost per equivalent barrel.....................              $ 5.56              $ 5.14              $ 4.86
</TABLE>

                                       70
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The Company's estimated total proved and proved developed reserves of oil and
gas are as follows:

<TABLE>
<CAPTION>
                                                              For the Year Ended December 31,
                                              --------------------------------------------------------------
                                                     1998                  1997                  1996
                                              ------------------    ------------------    ------------------
                                                Oil*       Gas        Oil*       Gas        Oil*       Gas
                                               (Mbbl)     (Mmcf)     (Mbbl)     (Mmcf)     (Mbbl)     (Mmcf)
                                              -------    -------    -------    -------    -------    -------
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>
DOMESTIC
Proved reserves at beginning of year.......   202,771    390,691    165,839    394,630      9,700    301,311
Revisions of previous estimates............   (41,399)    (8,953)    10,177     (5,105)     5,581     (1,388)
Extensions and discoveries.................    17,694     55,575     39,911     35,682      3,615     18,291
Production.................................   (17,345)   (32,521)   (15,854)   (35,625)   (11,924)   (34,775)
Sales of reserves in-place.................    (1,595)    (1,536)       (15)      (675)    (2,506)   (30,588)
Purchase of reserves in-place..............     4,174         --      2,713      1,784    161,373    141,779
                                              -------    -------    -------    -------    -------    -------
Proved reserves at end of year.............   164,300    403,256    202,771    390,691    165,839    394,630
                                              =======    =======    =======    =======    =======    =======
Proved developed reserves--
  Beginning of year........................   143,486    266,179    122,088    236,013      8,289    142,012
                                              =======    =======    =======    =======    =======    =======
  End of year..............................   123,077    308,667    143,486    266,179    122,088    236,013
                                              =======    =======    =======    =======    =======    =======
FOREIGN
Proved reserves at beginning of year.......    24,493         --     20,214         --     20,826         --
Revisions of previous estimates............      (420)        --     (1,313)        --       (107)        --
Extensions and discoveries.................        --         --      7,147         --        915         --
Production.................................    (1,461)        --     (1,555)        --     (1,420)        --
Sales of reserves in-place.................        --         --         --         --         --         --
Purchase of reserves in-place..............     3,229         --         --         --         --         --
                                              -------    -------    -------    -------    -------    -------
Proved reserves at end of year.............    25,841         --     24,493         --     20,214         --
                                              =======    =======    =======    =======    =======    =======
Proved developed reserves--
  Beginning of year........................     9,526         --     16,727         --     14,787         --
                                              =======    =======    =======    =======    =======    =======
  End of year..............................    10,242         --      9,526         --     16,727         --
                                              =======    =======    =======    =======    =======    =======
TOTAL
Proved reserves at beginning of year.......   227,264    390,691    186,053    394,630     30,526    301,311
Revisions of previous estimates............   (41,819)    (8,953)     8,864     (5,105)     5,474     (1,388)
Extensions and discoveries.................    17,694     55,575     47,058     35,682      4,530     18,291
Production.................................   (18,806)   (32,521)   (17,409)   (35,625)   (13,344)   (34,775)
Sales of reserves in-place.................    (1,595)    (1,536)       (15)      (675)    (2,506)   (30,588)
Purchase of reserves in-place..............     7,403         --      2,713      1,784    161,373    141,779
                                              -------    -------    -------    -------    -------    -------
Proved reserves at end of year.............   190,141    403,256    227,264    390,691    186,053    394,630
                                              =======    =======    =======    =======    =======    =======
Proved developed reserves--
  Beginning of year........................   153,012    266,179    138,815    236,013     23,076    142,012
                                              =======    =======    =======    =======    =======    =======
  End of year..............................   133,319    308,667    153,012    266,179    138,815    236,013
                                              =======    =======    =======    =======    =======    =======
</TABLE>
--------------
*  Includes estimated NGL reserves.

                                       71
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Discounted future net cash flows (amounts in thousands) --

   The standardized measure of discounted future net cash flows and changes
therein are shown below:

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                    -------------------------------------------------------------
                                                                       1998                     1997                     1996
                                                                    -----------              -----------              -----------
<S>                                                                 <C>                      <C>                      <C>
DOMESTIC                                                      
Future cash inflows...........................................      $ 1,989,898              $ 3,566,450              $ 4,476,523
Future production costs.......................................       (1,061,638)              (1,643,774)              (1,739,219)
Future development costs......................................         (289,686)                (329,997)                (309,365)
                                                                    -----------              -----------              -----------
Future net inflows before income tax..........................          638,574                1,592,679                2,427,939
Future income taxes...........................................               --                 (427,618)                (736,788)
                                                                    -----------              -----------              -----------
Future net cash flows.........................................          638,574                1,165,061                1,691,151
10% discount factor...........................................         (360,611)                (454,023)                (702,996)
                                                                    -----------              -----------              -----------
Standardized measure of discounted future net cash flows......      $   277,963              $   711,038              $   988,155
                                                                    ===========              ===========              ===========
FOREIGN                                                       
Future cash inflows...........................................      $   260,627              $   360,959              $   414,383
Future production costs.......................................         (134,549)                (171,331)                (248,222)
Future development costs......................................          (66,715)                 (59,985)                  (2,625)
                                                                    -----------              -----------              -----------
Future net inflows before income tax..........................           59,363                  129,643                  163,536
Future income taxes...........................................               --                  (39,243)                 (55,083)
                                                                    -----------              -----------              -----------
Future net cash flows.........................................           59,363                   90,400                  108,453
10% discount factor...........................................          (37,393)                 (36,653)                 (33,659)
                                                                    -----------              -----------              -----------
Standardized measure of discounted future net cash flows......      $    21,970              $    53,747              $    74,794
                                                                    ===========              ===========              ===========
TOTAL                                                         
Future cash inflows...........................................      $ 2,250,525              $ 3,927,409              $ 4,890,906
Future production costs.......................................       (1,196,187)              (1,815,105)              (1,987,441)
Future development costs......................................         (356,401)                (389,982)                (311,990)
                                                                    -----------              -----------              -----------
Future net inflows before income tax..........................          697,937                1,722,322                2,591,475
Future income taxes...........................................               --                 (466,861)                (791,871)
                                                                    -----------              -----------              -----------
Future net cash flows.........................................          697,937                1,255,461                1,799,604
10% discount factor...........................................         (398,004)                (490,676)                (736,655)
                                                                    -----------              -----------              -----------
Standardized measure of discounted future net cash flows......      $   299,933              $   764,785              $ 1,062,949
                                                                    ===========              ===========              ===========
</TABLE>

                                       72
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following are the principal sources of change in the standardized measure of
discounted future net cash flows:

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                             ------------------------------------------------  
                                                                               1998                1997                1996
                                                                             ---------         ----------          ----------
<S>                                                                          <C>               <C>                 <C>
DOMESTIC
Standardized measure -- beginning of year.....................               $ 711,038         $  988,155          $  236,920
Sales, net of production costs................................                (101,383)          (201,198)           (177,072)
Purchases of reserves in-place................................                   2,278             18,293             605,210
Net change in prices and production costs.....................                (466,018)          (581,640)            505,108
Extensions, discoveries and improved recovery, net of future                                                   
 production and development costs.............................                  46,713            180,146              38,572
Net changes in estimated future development costs.............                  79,410             87,606              10,151
Revisions of quantity estimates...............................                 (86,459)            33,358              79,185
Accretion of discount.........................................                  83,281            125,138              26,207
Net change in income taxes....................................                 121,770            141,452            (238,071)
Sales of reserves in-place....................................                    (356)            (1,598)            (41,969)
Changes in production rates and other.........................                (112,311)           (78,674)            (56,086)
                                                                             ---------         ----------          ----------
Standardized measure -- end of year...........................               $ 277,963         $  711,038          $  988,155
                                                                             =========         ==========          ==========
FOREIGN                                                                                                        
Standardized measure -- beginning of year.....................               $  53,747         $   74,794          $   74,166
Sales, net of production costs................................                  (3,923)           (10,826)             (9,725)
Purchases of reserves in-place................................                   2,750                 --                  --
Net change in prices and production costs.....................                 (56,690)           (22,193)             (1,557)
Extensions, discoveries and improved recovery, net of future                                                   
 production and development costs.............................                      --              5,486               4,930
                                                                                                               
Net changes in estimated future development costs.............                   8,990             (6,212)              3,892
Revisions of quantity estimates...............................                    (750)            (5,609)               (598)
Accretion of discount.........................................                   6,830             10,720              11,288
Net change in income taxes....................................                  14,552             17,857               6,304
Changes in production rates and other.........................                  (3,536)           (10,270)            (13,906)
                                                                             ---------         ----------          ----------
Standardized measure -- end of year...........................               $  21,970         $   53,747          $   74,794
                                                                             =========         ==========          ==========
TOTAL                                                                                                          
Standardized measure -- beginning of year.....................               $ 764,785         $1,062,949          $  311,086
Sales, net of production costs................................                (105,306)          (212,024)           (186,797)
Purchases of reserves in-place................................                   5,028             18,293             605,210
Net change in prices and production costs.....................                (522,708)          (603,833)            503,551
Extensions, discoveries and improved recovery, net of future                                                   
 production and development costs.............................                  46,713            185,632              43,502
                                                                                                               
Net changes in estimated future development costs.............                  88,400             81,394              14,043
Revisions of quantity estimates...............................                 (87,209)            27,749              78,587
Accretion of discount.........................................                  90,111            135,858              37,495
Net change in income taxes....................................                 136,322            159,309            (231,767)
Sales of reserves in-place....................................                    (356)            (1,598)            (41,969)
Changes in production rates and other.........................                (115,847)           (88,944)            (69,992)
                                                                             ---------         ----------          ----------
Standardized measure -- end of year...........................               $ 299,933         $  764,785          $1,062,949
                                                                             =========         ==========          ==========
</TABLE>

                                       73
<PAGE>
 
                             NUEVO ENERGY COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

SELECTED QUARTERLY FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED):

<TABLE>
<CAPTION>
                                                                     Quarter Ended (4)
                                                    ------------------------------------------------------
                                                    March 31,    June 30,    September 30,    December 31,
                                                      1998        1998           1998            1998
                                                    ---------   ---------    -------------    ------------
<S>                                                 <C>         <C>          <C>              <C>
Revenues.......................................      $67,661     $61,512        $ 65,966        $ 57,564
Operating earnings (loss) (1)..................      $ 4,011     $ 3,317        $ (5,369)       $(66,858)
Net loss (1)...................................      $(6,582)    $(7,622)       $(11,245)       $(68,823)
Loss per Common share -- Basic.................      $ (0.33)    $ (0.39)       $  (0.57)       $  (3.47)
Loss per Common share -- Diluted...............      $ (0.33)    $ (0.39)       $  (0.57)       $  (3.47)
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Quarter Ended (4)(5)
                                                           -----------------------------------------------------------------------
                                                           March 31,           June 30,          September 30,        December 31,
                                                             1997                1997                1997                 1997
                                                           ---------           --------          -------------        ------------
<S>                                                        <C>                  <C>                 <C>                 <C>
Revenues.......................................            $102,410             $85,976             $82,120             $ 86,772
Operating earnings (loss) (2)..................            $ 39,872             $26,204             $17,410             $(34,688)
Net income (loss) (2)(3).......................            $ 14,609             $ 2,964             $   352             $(31,625)
Earnings (loss) per Common share -- Basic......            $   0.73             $  0.15             $  0.02             $  (1.60)
Earnings (loss) per Common share -- Diluted....            $   0.70             $  0.15             $  0.02             $  (1.60)
</TABLE>
_________
(1)  Includes a fourth quarter charge of $68.9 million to record an impairment
     of oil and gas properties and a fourth quarter $3.7 million positive
     revision to a prior period impairment on assets held for sale.
(2)  Includes fourth quarter charges of $23.9 million to record an impairment on
     assets held for sale and $30.0 million to record an impairment of oil and
     gas properties and a second quarter gain on sale of $3.0 million that was
     adjusted downward by $752,000 in the third quarter (see Note 4).
(3)  Includes an extraordinary loss on early extinguishment of debt of $3.0
     million, net of income tax benefit, in the second quarter.
(4)  Certain reclassifications of prior period amounts have been made to conform
     with the current presentation.
(5)  Restated.

                                       74
<PAGE>
 
                             NUEVO ENERGY COMPANY

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998.  Such information is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998.  Such information is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998.  Such information is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998.  Such information is incorporated herein by reference.

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    1. and 2. Financial Statements:

See index to Consolidated Financial Statements and Supplemental Information in
Item 8, which information is incorporated herein by reference.

3. Exhibits

(3)  Articles of Incorporation and by-laws.

3.1 Certificate of Incorporation of Nuevo Energy Company (incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-4 (No. 33-33873)
filed under the Securities Act of 1933).

3.2 By-laws of Nuevo Energy Company (incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-4 (No. 33-33873) filed under the Securities Act
of 1933).

(4)  Instruments defining the rights of security holders, including indentures.

4.1  Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-4 (No. 33-33873) filed under the Securities Act
of 1933).

4.2  1990 Stock Option Plan of the Company, as amended (incorporated by
reference from Exhibit 10.8 to Form S-1 dated July 13, 1992).

4.3 Indenture dated April 1, 1996 among Nuevo Energy Company as Issuer, various
Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the
Trustee - 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference
from Form S-3 (No. 333-1504).

4.4 Form of Amended and Restated Declaration of Trust dated December 23, 1996,
among the Company, as Sponsor, Wilmington Trust Company, as Institutional
Trustee and Delaware Trustee, and Michael D. Watford, Robert L. Gerry, III and
Robert M. King, as Regular Trustees. (Incorporated by reference from Exhibit 4.1
to Form 8-K filed on December 23, 1996).

                                       75
<PAGE>
 
                             NUEVO ENERGY COMPANY

4.5 Form of Subordinated Indenture dated as of November 25, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by
reference from Exhibit 4.2 to Form 8-K filed on December 23, 1996).

4.6 Form of First Supplemental Indenture dated December 23, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by
reference from Exhibit 4.3 to Form 8-K filed on December 23, 1996).

4.7 Form of Preferred Securities Guarantee Agreement dated as of December 23,
1996, between the Company and Wilmington Trust Company, as Guarantee Trustee.
(Incorporated by reference from Exhibit 4.4 to Form 8-K filed on December 23,
1996).

4.8 Form of Certificate representing TECONS. (Incorporated by reference from
Exhibit 4.5 to Form 8-K filed on December 23, 1996).

4.9 1993 Stock Incentive Plan, as amended (incorporated by reference to Exhibit
4.2 to Form S-8 (No. 333-21063) filed on February 4, 1997).

4.10 Shareholder Rights Plan, dated March 5, 1997, between Nuevo Energy Company
and American Stock Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Company's Form 8-A filed on April 1, 1997).

4.11 Release and Termination of Subsidiary Guarantees with respect to the 9 1/2%
Senior Subordinated Notes due 2006. (Incorporated by reference to Exhibit 4.11 
to Form 10-K for the year ended December 31, 1997.)

4.12 Indenture dated June 8, 1998 among Nuevo Energy Company as Issuer, various
Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the
Trustee - 8 7/8% Senior Subordinated Notes due 2008. (Incorporated by reference
from Form S-4 (No. 333-60655).

(10)    Material Contracts.

10.1 Purchase and sale agreement dated April 14, 1994, between Nuevo Energy
Company (Seller) and Beauregard Corporation (Buyer). (Incorporated by reference
from Exhibit 10.1 to form 10-Q for the quarter ended June 30, 1994).

10.2 First Additional Production Payment dated July 1, 1994, under the Purchase
and Sale Agreement dated April 14, 1994, between Nuevo Energy Company as Seller
and Beauregard Corporation as Buyer. (Incorporated by reference from Exhibit
10.21 to Form 10-K for the year ended December 31, 1994).

10.3 Second Additional Production Payment dated December 15, 1994, under the
Purchase and Sale Agreement dated as of April 14, 1994, between Nuevo Energy
Company, as Seller, and Beauregard Corporation as Buyer. (Incorporated by
reference from Exhibit 10.22 to Form 10-K for the year ended December 31, 1994).

10.4 Stock Purchase Agreement, dated as of June 30, 1994, among Amoco Production
Company ("APC"), Walter International Inc. ("Walter"), Walter Congo Holdings,
Inc. ("Walter Holdings"), Walter International Congo, Inc. (before the merger
"Walter Congo" and after the merger "Old Walter Congo"), Nuevo, Nuevo Holding
and The Nuevo Congo Company (before the merger, "Nuevo Congo" and after the
merger, "Old Nuevo Congo"). (Incorporated by reference from Exhibit (2.1) to
Form 8-K dated March 10, 1995).

10.5 Amendment to Stock Purchase Agreement dated as of September 19, 1994, among
APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.2) to Form 8-K dated March 10,
1995).

                                       76
<PAGE>
 
                             NUEVO ENERGY COMPANY

10.6 Second Amendment to Stock Purchase Agreement dated as of October 15, 1994,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.3) to Form 8-K dated March 10,
1995).

10.7 Third Amendment to Stock Purchase Agreement dated as of December 2, 1994,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.4) to Form 8-K dated March 10,
1995.

10.8 Fourth Amendment to Stock Purchase Agreement dated as of February 23, 1995,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.5) to Form 8-K dated March 10,
1995).

10.9 Tax Agreement dated as of February 23, 1995, executed by APC, Amoco Congo
Exploration Company ("ACEC"), Amoco Congo Production Company ("ACPC"), Walter,
Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo.
(Incorporated by reference from Exhibit (2.6) to Form 8-K dated March 10, 1995).

10.10 Agreement and Plan of Merger executed by Nuevo Congo, Nuevo Holding and
APC dated February 24, 1995. (Incorporated by reference from Exhibit (2.7) to
Form 8-K dated March 10, 1995).

10.11 Finance Agreement dated as of December 28, 1994, among Nuevo Holding,
Nuevo Congo and The Overseas Private Investment Corporation ("OPIC").
(Incorporated by reference from Exhibit (2.8) to Form 8-K dated March 10, 1995).

10.12 Subordination Agreement dated December 28, 1994, among Nuevo Congo, Nuevo
Holding, Walter Congo, Walter Holdings and APC. (Incorporated by reference from
Exhibit (2.9) to Form 8-K dated March 10, 1995).

10.13 Guaranty covering the obligations of Nuevo Congo and Walter Congo under
the Stock Purchase Agreement dated February 24, 1995, executed by Walter and
Nuevo. (Incorporated by reference from Exhibit (2.10) to Form 8-K dated March
10, 1995).

10.14 Inter-Purchaser Agreement dated as of December 28, 1994, among Walter, Old
Walter Congo, Walter Holdings, Nuevo, Old Nuevo Congo and Nuevo Holding.
(Incorporated by reference from Exhibit (2.11) to Form 8-K dated March 10,
1995).

10.15 Latent ORRI Contract dated February 25, 1995, among Walter, Walter
Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo. (Incorporated by
reference from Exhibit (2.12) to Form 8-K dated March 10, 1995).

10.16 Latent Working Interest Contract dated February 25, 1995, among Walter,
Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo.
(Incorporated by reference form Exhibit (2.13) to Form 8-K dated March 10,
1995).

10.17 Loan agreement dated April 1, 1996 between Nuevo Energy Company (Borrower)
and certain subsidiaries and NationsBank of Texas, N.A. (Administrative Agent),
Morgan Guaranty Trust Company of New York (Documentation Agent) and certain
lenders. (Incorporated by reference from Exhibit 10.1 to Form S-3 (No. 333-
1504).

10.18 Asset Purchase Agreement dated as of February 16, 1996 between Nuevo
Energy Company, the Purchaser, and Union Oil Company of California as Seller.
(Incorporated by reference from Exhibit 2.1 to Form S-3 (No. 333-1504).

10.19 Administrative Services Agreement among the Company and Torch Energy
Advisors Incorporated as amended through January 1, 1996. (Incorporated by
reference from Exhibit 10.22 to Form 10-K filed March 5, 1997).

                                       77
<PAGE>
 
                             NUEVO ENERGY COMPANY

10.20 Asset Purchase Agreement dated as of April 4, 1997, by and among Torch
California Company and Express Acquisition Company, as Sellers, and Nuevo Energy
Company, as Purchaser. (Incorporated by reference from Exhibit 2.2 to Form S-3
(No. 333-1504)).

10.21 Separation Agreement with Michael D. Watford. (Incorporated by reference
from Exhibit 10.1 to Form 10-Q filed November 14, 1997).

10.22 Amended and restated Credit Agreement dated February 13, 1998 between
Nuevo Energy Company (Borrower) and certain subsidiaries and NationsBank of
Texas, N.A. (Administrative Agent), Morgan Guaranty Trust Company of New York
(Documentation Agent) and certain lenders.

10.23 Employment Agreement with Douglas L. Foshee. (Incorporated by reference to
Exhibit 10.23 to Form 10-K for the year ended December 31, 1997.)

10.24 Employment Agreement with Robert M. King.

10.25 Employment Agreement with Robert S. Gaston. (Incorporated by reference to 
Exhibit 10.25 to Form 10-K for the year ended December 31, 1997.)

10.26 Employment Agreement with Dennis Hammond. (Incorporated by reference to 
Exhibit 10.26 to Form 10-K for the year ended December 31, 1997.)

10.27 Employment Agreement with Michael P. Darden. (Incorporated by reference
from Exhibit 10.1 to Form 10-Q filed November 13, 1998).

10.28 Purchase and sale agreement dated October 16, 1998 between Nuevo Energy
Company (Seller) and Samson Lone Star Limited Partnership (Buyer).

10.29 Master Services Agreement among the Company and Torch Energy Advisors
Incorporated, Torch Operating Company, Torch Energy Marketing, Inc., and
Novistar, Inc. dated January 1, 1999.

(22) Subsidiaries of the Registrant

(23) Consents of experts and counsel:

23.1    Consent of KPMG LLP

(b)    Reports on Form 8-K:

1. Report filed on Form 8-K on February 4, 1999, regarding the completion of the
Company's sale of its East Texas natural gas assets on January 6, 1999.

2. Report filed on Form 8-K on March 10, 1999, regarding the election of Mr.
David H. Batchelder to the Company's board of directors.

                                       78
<PAGE>
 
                                   SIGNATURES
                                        

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


                              NUEVO ENERGY COMPANY
                                  (Registrant)

Date:  March 31, 1999                      By:  /s/Douglas L. Foshee
      ---------------------                     --------------------------------
                                           Douglas L. Foshee
                                           Chairman of the Board of Directors,
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                                               <C>
By:  /s/ Douglas L. Foshee                                        Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Douglas L. Foshee
     Chairman of the Board of Directors,
     President and Chief Executive Officer
     (Principal Executive Officer)
 
By:  /s/ Robert M. King                                           Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Robert M. King
     Senior Vice President and
     Chief Financial Officer 
     (Principal Financial Officer)
 
By:  /s/ Sandra D. Kraemer                                        Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Sandra D. Kraemer
     Controller (Principal Accounting Officer)
 
By:  /s/ Robert L. Gerry III                                      Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Robert L. Gerry III
     Director
 
By:  /s/ Gary R. Petersen                                         Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Gary R. Petersen
     Director
 
By:  /s/ Thomas D. Barrow                                         Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Thomas D. Barrow
     Director
 
By:  /s/ Isaac Arnold, Jr.                                        Date:   March 31, 1999 
     --------------------------------------                             ------------------------
     Isaac Arnold, Jr.
     Director
 
By:  /s/ David Ross III                                           Date:   March 31, 1999
     --------------------------------------                             ------------------------
     David Ross III
     Director
 
By:  /s/ Robert W. Shower                                         Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Robert W. Shower
     Director
 
By:  /s/ Charles M. Elson                                         Date:   March 31, 1999
     --------------------------------------                             ------------------------
     Charles M. Elson
     Director
 
By:  /s/ David H. Batchelder                                      Date:   March 31, 1999
     --------------------------------------                             ------------------------
     David H. Batchelder
     Director
</TABLE> 

                                      79

<PAGE>
 
                                   SIGNATURES
                                        

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

                              NUEVO ENERGY COMPANY
                                  (Registrant)

<TABLE> 
<CAPTION> 
<S>                                                        <C>
Date: _____________________________________________        By: _________________________________________________ 
                                                               Douglas L. Foshee
                                                               Chairman of the Board of Directors,
                                                               President and Chief Executive Officer
</TABLE> 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE> 
<CAPTION> 
<S>                                                        <C>
By: _______________________________________________        Date: _______________________________________________ 
    Douglas L. Foshee
    Chairman of the Board of Directors,
    President and Chief Executive Officer
    (Principal Executive Officer)

By: _______________________________________________        Date: _______________________________________________
    Robert M. King
    Senior Vice President and
    Chief Financial Officer (Principal Financial Officer)

By: _______________________________________________        Date: _______________________________________________
    Sandra D. Kraemer
    Controller (Principal Accounting Officer)

By: _______________________________________________        Date: _______________________________________________ 
    Robert L. Gerry III
    Director

By: _______________________________________________        Date: _______________________________________________ 
    Gary R. Petersen
    Director

By: _______________________________________________        Date: _______________________________________________ 
    Thomas D. Barrow
    Director

By: _______________________________________________        Date: _______________________________________________ 
    Isaac Arnold, Jr.
    Director

By: _______________________________________________        Date: _______________________________________________ 
    David Ross III
    Director

By: _______________________________________________        Date: _______________________________________________ 
    Robert W. Shower
    Director

By: _______________________________________________        Date: _______________________________________________ 
    Charles M. Elson
    Director

By: _______________________________________________        Date: _______________________________________________ 
    David H. Batchelder
    Director
</TABLE> 

                                       80