**FORM 10-QSB**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2006**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                              to                                       .**

 

###### **Commission FileNumber:   0-30598**

###### ** **

**WHITTIER ENERGY CORPORATION**

(Exact Name of SmallBusiness Issuer as Specified in Its Charter)

 

| **Nevada**                       | ** ** | **20-0539412**                        |
|----------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)  |       |                                  |

 

**333 Clay Street, Suite 700**

**Houston, Texas 77002**

(Address of PrincipalExecutive Offices)

 

Issuer’s telephone number, including area code: **(713)850-1880**

 

Check whether the registrant: (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.

 

YES  ý                   NO  o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

YES  o                   NO ý

 

As of May 15, 2006 the Registrant had 12,515,625 shares of its $.001 parvalue common stock issued and outstanding.

 

 

----

 

**Part I – Summarized FinancialInformation**

**Item 1 – Financial Statements**

 

**Whittier Energy Corporation**

**Consolidated Balance Sheets**

**(In Thousands)**

** **
| ** **                                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
|                                                          |       |                |       |                   |       |
| **Assets**                                                    | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                               | ** ** | ** **          | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                                    |       | $                   | 4,365      |                   | $          | 5,091 |   |
| Accounts  receivable, net of allowances                       |       | 9,420               |       | 11,092                 |       |
| Deferred tax  asset - commodity price hedging contracts       |       | 1,459               |       | 2,080                  |       |
| Prepaid assets                                                |       | 1,087               |       | 982                    |       |
|                                                          |       |                |       |                   |       |
| Total current assets                                          |       | 16,331              |       | 19,245                 |       |
|                                                          |       |                |       |                   |       |
| Oil and gas properties on the basis of full cost  accounting: |       |                |       |                   |       |
| Proved  properties, subject to amortization                   |       | 98,274              |       | 94,111                 |       |
| Unproved  properties, not subject to amortization             |       | 17,565              |       | 14,990                 |       |
| Other equipment  and fixtures                                 |       | 445                 |       | 267                    |       |
| Accumulated  depletion, depreciation and amortization         |       | (18,055             | )          | (14,272                | )          |
|                                                          |       | 98,229              |       | 95,096                 |       |
| Goodwill                                                      |       | 1,485               |       | 1,485                  |       |
| Other assets                                                  |       | 681                 |       | 725                    |       |
|                                                          |       |                |       |                   |       |
| Total assets                                                  |       | $                   | 116,726    |                   | $          | 116,551 |   |

 

*See accompanying notes.*

 

2

----

* *
| ** **                                                                                                                                                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
|                                                                                                                                                                           |       |                |       |                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                                  | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                           | ** ** | ** **          | ** ** | ** **             | ** ** |
| Accounts payable                                                                                                                                                               |       | $                   | 7,664      |                   | $          | 9,944 |   |
| Commodity price  hedging contracts, current portion                                                                                                                            |       | 3,835               |       | 5,473                  |       |
| Other current  liabilities                                                                                                                                                     |       | 161                 |       | 353                    |       |
| Total current liabilities                                                                                                                                                      |       | 11,660              |       | 15,770                 |       |
|                                                                                                                                                                           |       |                |       |                   |       |
| Revolving credit facility                                                                                                                                                      |       | 14,000              |       | 14,000                 |       |
| Asset retirement obligation                                                                                                                                                    |       | 518                 |       | 488                    |       |
| Commodity price hedging contracts                                                                                                                                              |       | 1,496               |       | 2,309                  |       |
| Deferred income tax liability                                                                                                                                                  |       | 24,535              |       | 23,290                 |       |
|                                                                                                                                                                           |       | 52,209              |       | 55,857                 |       |
|                                                                                                                                                                           |       |                |       |                   |       |
| Commitments and contingencies                                                                                                                                                  |       |                |       |                   |       |
|                                                                                                                                                                           |       |                |       |                   |       |
| Stockholders’ equity:                                                                                                                                                     |       |                |       |                   |       |
|  Common  stock, $.001 par value, 100,000,000 shares authorized, 12,515,265 shares  issued and outstanding as of March 31, 2006 and December 31, 2005                      |       | 13                  |       | 13                     |       |
| Additional  paid-in capital                                                                                                                                                    |       | 53,739              |       | 53,446                 |       |
| Accumulated  other comprehensive income (loss), unrealized loss on marketable securities,  net of taxes of $39 and $35, at March 31, 2006 and December 31, 2005,  respectively |       | (63                 | )          | (57                    | )          |
| Accumulated  other comprehensive loss, hedging contracts, net of taxes of $1,903 and  $2,690, at March 31, 2006 and December 31, 2005, respectively                            |       | (3,106              | )          | (4,389                 | )          |
| Retained  earnings                                                                                                                                                             |       | 13,934              |       | 11,681                 |       |
| Total stockholders’ equity                                                                                                                                                |       | 64,517              |       | 60,694                 |       |
|                                                                                                                                                                           |       |                |       |                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                   | 116,726    |                   | $          | 116,551 |   |

 

*See accompanying notes.*

 

3

----

 

**Whittier Energy Corporation**

**Consolidated Statements ofOperations**

**(In Thousands, Except Share Data)**

**(Unaudited)**

 

| ** **                                 | ** ** | **Three Months  Ended  March 31,  2006** | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
|                                       |       |                                     |       |                                     |       |
| Oil and gas revenues                       |       | $                                        | 9,964      |                                     | $          | 2,801 |   |
|                                       |       |                                     |       |                                     |       |
| Costs and expenses:                        |       |                                     |       |                                     |       |
| Lease operating  expenses                  |       | 1,311                                    |       | 813                                      |       |
| Production taxes                           |       | 781                                      |       | 252                                      |       |
| Depreciation,  depletion, and amortization |       | 3,783                                    |       | 651                                      |       |
| Ineffective  portion of hedge contracts    |       | (396                                     | )          | 185                                      |       |
| General and  administrative expenses       |       | 1,326                                    |       | 389                                      |       |
|                                       |       |                                     |       |                                     |       |
| Total costs and expenses                   |       | 6,805                                    |       | 2,290                                    |       |
|                                       |       |                                     |       |                                     |       |
| Income from operations                     |       | 3,159                                    |       | 511                                      |       |
|                                       |       |                                     |       |                                     |       |
| Other income (expense):                    |       |                                     |       |                                     |       |
| Interest and  dividend income              |       | 17                                       |       | —                                   |       |
| Interest expense                           |       | —                                   |       | (104                                     | )          |
| Gain from sales  of marketable securities  |       | —                                   |       | 56                                       |       |
| Partnership  income                        |       | 167                                      |       | 57                                       |       |
|                                       |       |                                     |       |                                     |       |
| Other income                               |       | 184                                      |       | 9                                        |       |
|                                       |       |                                     |       |                                     |       |
| Income before income taxes                 |       | 3,343                                    |       | 520                                      |       |
| Provision for income taxes                 |       | 1,090                                    |       | 182                                      |       |
| Net income                                 |       | $                                        | 2,253      |                                     | $          | 338 |   |

 

*See accompanying notes.*

 

4

----

 

| ** **                                                              | ** ** | **Three Months  Ended  March 31,  2006** | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
|                                                                    |       |                                     |       |                                     |       |
| Basic earnings per share:                                               |       |                                     |       |                                     |       |
| Net income per share                                                    |       | $                                        | .18        |                                     | $          | .09 |   |
| Weighted average number of shares outstanding  (basic)                  |       | 12,515,265                               |       | 3,841,134                                |       |
|                                                                    |       |                                     |       |                                     |       |
| Diluted earnings per share:                                             |       |                                     |       |                                     |       |
| Net income per share                                                    |       | $                                        | .18        |                                     | $          | .09 |   |
| Weighted average number of shares outstanding  (dilutive)               |       | 12,692,290                               |       | 4,172,945                                |       |
|                                                                    |       |                                     |       |                                     |       |
| Net income                                                              |       | $                                        | 2,253      |                                     | $          | 338 |   |
| Diluted net income:                                                     |       |                                     |       |                                     |       |
| Interest on  convertible subordinated note                              |       | —                                   |       | 23                                       |       |
| Diluted net income                                                      |       | $                                        | 2,253      |                                     | $          | 361 |   |
|                                                                    |       |                                     |       |                                     |       |
| Dilutive securities outstanding:                                        |       |                                     |       |                                     |       |
| Basic shares  outstanding                                               |       | 12,515,265                               |       | 3,841,134                                |       |
| Stock options  and warrants                                             |       | 177,025                                  |       | 33,923                                   |       |
| Convertible  subordinated note                                          |       | —                                   |       | 297,888                                  |       |
| Diluted shares outstanding, assuming conversion of  dilutive securities |       | 12,692,290                               |       | 4,172,945                                |       |

 

*See accompanying notes.*

 

5

----

 

**Whittier Energy Corporation**

**Consolidated Statements of CashFlows**

**(In Thousands)**

**(Unaudited)**

 

| ** **                                                                     | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Cash flows from operating activities**                                       |       |                                    |       |                                    |       |
| Net income                                                                     |       | $                                       | 2,253      |                                    | $          | 338 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                    |       |                                    |       |
| Depreciation,  depletion, and amortization                                     |       | 3,783                                   |       | 651                                     |       |
| Deferred income  tax provision                                                 |       | 1,090                                   |       | 182                                     |       |
| Partnership  income                                                            |       | (167                                    | )          | (57                                     | )          |
| Stock based  compensation expense                                              |       | 267                                     |       | —                                  |       |
| Ineffective  portion of hedge loss (gain)                                      |       | (396                                    | )          | 185                                     |       |
| Gain on sale of  marketable securities                                         |       | —                                  |       | (56                                     | )          |
| Decrease in  accounts receivable                                               |       | 1,672                                   |       | 273                                     |       |
| Decrease  (increase) in prepaids and other receivables                         |       | (105                                    | )          | 13                                      |       |
| Increase  (decrease) in accounts payable                                       |       | (2,280                                  | )          | 442                                     |       |
| Increase in  taxes payable                                                     |       | —                                  |       | 13                                      |       |
| Net cash provided from operating activities                                    |       | 6,117                                   |       | 1,984                                   |       |
|                                                                           |       |                                    |       |                                    |       |
| **Cash flows from investing activities**                                       |       |                                    |       |                                    |       |
| Net investment in oil and gas properties                                       |       | (7,021                                  | )          | (1,410                                  | )          |
| Increase in restricted cash                                                    |       | —                                  |       | (1,000                                  | )          |
| Investments in partnerships                                                    |       | —                                  |       | (6                                      | )          |
| Distributions from partnerships                                                |       | 178                                     |       | 73                                      |       |
| Net cash used in investing activities                                          |       | (6,843                                  | )          | (2,343                                  | )          |
|                                                                           |       |                                    |       |                                    |       |
| **Cash flows from financing activities**                                       |       |                                    |       |                                    |       |
| Proceeds from revolving credit facility                                        |       | —                                  |       | (300                                    | )          |
| Payments on revolving credit facility                                          |       | —                                  |       | 1,000                                   |       |
| Net cash provided from financing activities                                    |       | —                                  |       | 700                                     |       |
|                                                                                |            |                                         |            |                                         |            |  |  |

 

6

----

 

| ** **                                                                | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                                                                      |       |                                    |       |                                    |       |
| Net decrease in cash and cash equivalents                                 |       | $                                       | (726       | )                                       | $          | 341 |   |
|                                                                      |       |                                    |       |                                    |       |
| Cash and cash equivalents at beginning of period                          |       | 5,091                                   |       | 1,461                                   |       |
|                                                                      |       |                                    |       |                                    |       |
| Cash and cash equivalents at end of period                                |       | $                                       | 4,365      |                                    | $          | 1,802 |   |
|                                                                      |       |                                    |       |                                    |       |
| **Supplemental cash flow disclosure**                                     | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Interest paid                                                             |       | $                                       | 248        |                                    | $          | 104 |   |
|                                                                      |       |                                    |       |                                    |       |
| **Supplemental schedule of non-cash investing and  financing activities** |       |                                    |       |                                    |       |
| Unrealized gain (loss) on marketable securities, net                      |       | $                                       | (6         | )                                  | $          | 215 |   |

 

*See accompanying notes.*

 

7

----

 

**Whittier Energy Corporation**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

** **

**1.****             General**

 

Whittier EnergyCorporation, a Nevada corporation (“Whittier”), is an independent oil and gasexploration and production company engaged in the acquisition, exploration anddevelopment of oil and gas properties in the continental United States. As of March31, 2006, Whittier had five wholly owned subsidiaries, including WhittierEnergy Company (“Whittier Energy”), a Nevada corporation, Whittier Operating,Inc. (“Whittier Operating”), a Texas corporation, Olympic Resources (Arizona)Ltd., an Arizona corporation, RIMCO Production Company, Inc. (“RIMCO”), aDelaware corporation, and Vaquero Gas Company, Inc. (“Vaquero”), a Texas corporation.Whittier Operating is a direct subsidiary of Whittier Energy and Vaquero is adirect subsidiary of RIMCO. References to the “Company” refer to Whittier andits subsidiaries.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been condensed or omitted. Reference should be made to therelevant notes to the financial statements included in the Company’s AnnualReport on Form 10-KSB for the fiscal year ended December 31, 2005. Theinformation furnished herein was taken from the books and records of theCompany without audit. However, the information reflects all adjustments, whichare, in the opinion of management, normal recurring adjustments necessary forthe fair statement of the results for the interim periods presented. Theresults of operations for the interim period are not necessarily indicative ofthe results to be expected for any future interim period or for the year.

 

On June 15, 2005, Whittier completed the acquisition of RIMCOProduction Company, Inc., a privately held Delaware corporation, forapproximately $57.1 million (the “Acquisition”). The Acquisition was structuredas a merger of RPC Acquisition Company, Inc., a Delaware corporation whollyowned by Whittier, into RIMCO. Upon closing of the Acquisition, Whittier becamethe sole owner of RIMCO. The Acquisition substantially increased Whittier’sproperties, production and undeveloped acreage. Whittier was the accounting andlegal acquirer of RIMCO. The Acquisition is further described in Note 10.

 

Contemporaneously with the Acquisition and to fund a portion of thepurchase price, Whittier issued and sold 852,912 shares of Series A 8%Automatically Convertible Preferred Stock (the “Series A Preferred Stock”) foran aggregate offering amount of approximately $50 million. The Company’s SeriesA Preferred Stock automatically converted into 8,529,120 shares of the Company’scommon stock on December 27, 2005, in conjunction with the Company’s listing onthe NASDAQ National Market (“NASDAQ”). Whittier also entered into a new $75million revolving credit facility (the “Credit Facility”) as part of theAcquisition, which is further described in Note 7.

 

In conjunction with the RIMCO acquisition, we adopted the full costmethod of accounting for our oil and gas activities. The Company believes thatthe full cost method of accounting more appropriately reflects the operatingresults of an independent oil and gas producer that expends significant amountsof capital on exploration activities in order to discover proved reserves.Accordingly, the Company believes full cost accounting is the preferred methodfor the post-acquisition Company. We arrived at this conclusion based on anumber of considerations, including: 1) the material size of the transactionand RIMCO’s historical use of full cost accounting; 2) the composition of RIMCO’sacquired assets; 3) the nature of RIMCO’s prospect generation business andtechnical personnel; and 4) the Company’s anticipated exploration projects andcapital expenditures subsequent to the Acquisition. Additionally, the full costmethod is used by many of Whittier’s peers, and management believes the changeenhances the overall transparency and peer group comparability of the Company’sfinancial statements.

 

8

----

 

A comparison of the Company’s previously presented net income, inthousands, and earnings per share under the successful efforts method ofaccounting to its results of operations disclosed herein are as follows (inthousands):

 

| ** **                                             | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
|                                                   |       |                                     |       |
| Net income, as originally presented                    |       | $                                        | 272        |   |
| Basic net income per share, as originally presented    |       | $                                        | 0.06       |   |
| Diluted net income per share, as originally  presented |       | $                                        | 0.06       |   |
|                                                   |       |                                     |       |
| Net income, as adjusted                                |       | $                                        | 338        |   |
| Basic net income per share, as adjusted                |       | $                                        | 0.09       |   |
| Diluted net income per share, as adjusted              |       | $                                        | 0.09       |   |

 

On July 1, 2005, the Company effected a one-for-three reverse split ofits authorized and outstanding shares of common stock. All historical weightedaverage share and per share amounts have been restated to reflect the reversestock split. In addition to the retroactive restatement to reflect theconversion to the full cost method and the one-for-three reverse stock split,certain prior period amounts have been reclassified to conform to the currentperiod presentation, including combining the Company’s investment in marketablesecurities with other assets. Such reclassifications had no effect on theCompany’s net income or stockholders’ equity.

 

**2.****             Earnings Per Common Share**

 

Basic earnings per common share is calculated by dividing net income bythe aggregate weighted average number of shares outstanding during the periods.Diluted earnings per share considers the dilutive effect of the average numberof common stock equivalents, consisting of the Company’s common stock optionsand warrants outstanding. The Company’s total weighted average number ofanti-dilutive common stock equivalents outstanding as of March 31, 2006 andMarch 31, 2005 were 521,745 and 569,938, respectively.

 

**3.****            ****New Accounting Standards**

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNon-monetary Assets.”  SFAS No. 153requires the use of fair value measurement for exchanges of non-monetaryassets. The statement was effective for the Company beginning in the thirdquarter of 2005. The adoption of SFAS No. 153 had no impact on theCompany’s financial position or results of operations.

 

9

----

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections: areplacement of APB Opinion No. 20 and FASB Statement No. 3.” SFASNo. 154 requires voluntary changes in accounting principles to be appliedretrospectively, unless it is impracticable to determine either the periodspecific effects or the cumulative effects of the change. SFAS No. 154’sretrospective application requirement replaces APB 20’s requirement torecognize most voluntary changes in accounting principle by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle. If retrospective application for all prior periods isimpracticable, the method used to report the change and the reason theretrospective application is impracticable are to be disclosed.

 

Under SFAS No. 154, retrospective application will be thetransition method in the unusual event that a newly issued accountingpronouncement does not provide specific transition guidance. It is expectedthat most pronouncements will specify transition methods other than the retrospectivemethod. SFAS No. 154 is effective for accounting changes made in fiscal yearsbeginning after December 15, 2005, and the adoption of this statement isexpected to have no impact on Whittier’s financial position or results ofoperations.

 

In February of 2006, the FASB issued SFAS No. 155 “Accounting forCertain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” and SFAS No. 140 “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.”  SFAS No. 155 permits fair value remeasurementfor any hybrid financial instrument that contains an embedded derivative thatwould otherwise require bifurcation, clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS No. 133, establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives and amends SFAS No. 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS No. 155 is effective for all financial instruments acquiredor issued after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006. At adoption, any difference between the totalcarrying amount of the individual components of the existing bifurcated hybridfinancial instrument and the fair value of the combined hybrid financialinstrument should be recognized as a cumulative-effect adjustment to beginningretained earnings. Adoption of this statement is expected to have no impact onthe Company’s financial position or results of operations.

 

**4.****             StockBased Compensation**

 

Prior to 2006 Whittier accounted for equity based compensation usingAPB Opinion No. 25 under which no compensation cost for employee stock optionswas recognized. On January 1, 2006 the Company adopted SFAS No. 123(R), “Share–BasedPayment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R)requires a company to recognize equity based compensation, including stockoption grants, at fair value in the income statement, and discontinuesaccounting for equity based compensation under APB Opinion No. 25, theintrinsic value method. The Companyadopted SFAS No. 123(R) on January 1, 2006, utilizing the modified prospectivemethod to record compensation expense for the unvested portion of all grantsoutstanding as of December 31, 2005 and for all future grants.

 

Under SFAS 123, the fair value of each option granted is estimated onthe date of grant. The Company estimates the fair value for options issuedduring the period, if any, as of the date of grant using the Black-Scholesoption pricing model by using weighted average assumptions, volatility factorsof the expected market price of the Company’s common stock, and the weightedaverage life expectancy of the options.

 

In December 2003, the Company’s Board of Directors approved a Long TermIncentive Plan (the “Plan”), which was ratified by the Company’s stockholdersin July 2004 and further amended in October 2005. The Plan sets aside a totalof 1,876,000 shares of the Company’s common stock for issuance to the Company’sofficers, directors,

 

10

----

 

employees, and consultants. During 2004, the Company granted a total of262,834 options to purchase the Company’s common stock at an average exerciseprice of $5.22 per share to certain directors, officers, and employees of theCompany, of which 5,000 options were cancelled in May 2004. The options vestratably over a three-year period from the date of grant and have a term of fiveyears. The fair market value of the options outstanding on the date of grantwas estimated to be $1.2 million, or $4.41 per share, using the Black-Scholesoption pricing model with the following weighted average assumptions: risk freeinterest rate of 4%, dividend yield of 0%, volatility factors of the expectedmarket price of the Company’s common stock of 4.74, and a weighted average lifeexpectancy of the options of 3.5 years.

 

The Company issued an additional 447,491 options to various directors,officers, employees and consultants of the Company during the year endedDecember 31, 2005, with an average exercise price of $8.16 per share. The fairmarket value of the options on the date of grant was estimated to beapproximately $1.3 million, or $2.67 per share, using the Black-Scholes optionpricing model with the following weighted average assumptions: risk freeinterest rate of 4.3%, dividend yield of 0%, volatility factors of the expectedmarket price of the Company’s common stock of .4, and a weighted average lifeexpectancy of the options of 3 years.

 

The Company granted a total of 702,852 options to various directors,officers, employees and consultants of the Company on January 24, 2006, with anexercise price of $9.97 per share. The fair market value of the options on thedate of grant was estimated to be approximately $2.2 million, or $3.06 pershare, using the Black-Scholes option pricing model with the following weightedaverage assumptions: risk free interest rate of 4.4%, dividend yield of 0%,volatility factors of the expected market price of the Company’s common stockof .4, and a weighted average life expectancy of the options of 3 years.

 

During the three months ended March 31, 2006as a result of the adoption, the Company recorded compensation expense of$301,000 to general and administrative expense of which $34,000 was capitalizedto oil and gas properties under the full cost method of accounting. There wereno cash flow effects of the Company’s stock based compensation during the threemonths ended March 31, 2006.

 

As of March 31, 2006, there was approximately$2.6 million of total unrecognized compensation expense related to unvestedstock based compensation that is expected to be recognized over a weightedaverage period of 2.8 years.

 

11

----

 

If compensation expense for the stock options granted to employees and directors had been determined using the fair value method, net income and diluted net income per share for the three months ended March 31, 2005, respectively, would have been reduced to the following pro forma amounts:

 

| ** **                                                                                          | ** ** | **Three Months  Ended  March 31,****2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                                |       |                                       |       |
| Net income under APB No. 25                                                                         |       | $                                          | 338        |   |
|                                                                                                |       |                                       |       |
| Deduct: Total  stock-based compensation expense determined under the fair value method, net  of tax |       | (62                                        | )          |
|                                                                                                |       |                                       |       |
| Pro forma net income                                                                                |       | $                                          | 276        |   |
|                                                                                                |       |                                       |       |
| Pro forma basic earnings per share                                                                  |       | $                                          | .07        |   |
|                                                                                                |       |                                       |       |
| Pro forma diluted earnings per share                                                                |       | $                                          | .07        |   |
|                                                                                                |       |                                       |       |
| As reported basic earnings per share                                                                |       | $                                          | .09        |   |
|                                                                                                |       |                                       |       |
| As reported diluted earnings per share                                                              |       | $                                          | .09        |   |

 

A summary of the Company’s stock option activity and relatedinformation follows:

 
| ** **                                   | ** ** | **Shares**     | ** ** | **Weighted**         | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------------|------------|----------------------|------------|---------------|------------|
| ** **                                   | ** ** | **Underlying** | ** ** | **Average Exercise** | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| ** **                                   | ** ** | **Options**    | ** ** | **Price**            | ** ** | **Contractual Term** | ** ** | **Value**     | ** ** |
| Options Outstanding as of  December 31, 2005 |       | 753,712        |       | $                    | 7.16       |                 |       |          |       |   |
| Options Issued                               |       | 702,852        |       | $                    | 9.97       |                 |       |          |       |   |
| Options Exercised                            |       | —         |       | —               |       |                 |       |          |       |
| Options Cancelled                            |       | (9,667         | )          | $                    | 8.57       |                 |       |          |       |   |
| Options Expired                              |       | —         |       | —               |       |                 |       |          |       |
| Options Outstanding as of  March 31, 2006    |       | 1,446,897      |       | $                    | 8.52       |                 | 4.3  Years |          | $          | 507,484 |   |
|                                         |       |           |       |                 |       |                 |       |          |       |   |   |
| Exercisable options March 31, 2006           |       | 484,082        |       | $                    | 7.17       |                 | 3.9  Years |          | $          | 330,044 |   |

 

12

----

 

**5.****             AssetRetirement Obligation**

 

**As of March 31, 2006, the Companyhad an estimated future abandonment obligation of $518,457, including $465,070 incosts capitalized to oil and gas properties and $53,420 in cumulative accretionexpense**.The activity related to the Company’s future assetretirement obligation for the three months ended March 31, 2006, and the yearended December 31, 2005 is as follows (in thousands):

** **

| ** **                             | ** ** | **Three Months  Ended March 31,** | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **2006**                          | ** ** | **2005**                     | ** ** |
| Beginning asset retirement obligation  |       | $                                 | 488        |                         | $          | 121 |   |
| Liabilities incurred during the period |       | 23                                |       | 341                          |       |
| Liabilities settled during the period  |       | —                            |       | —                       |       |
| Accretion expense                      |       | 7                                 |       | 26                           |       |
| Ending asset retirement obligation     |       | $                                 | 518        |                         | $          | 488 |   |

 

**6.****             Oil andGas Properties, Equipment and Fixtures**

 

In conjunction with theAcquisition, the Company adopted the full cost method of accounting for its oiland gas activities. Under the full cost method of accounting, all costsassociated with property acquisition, exploration, and development activitiesare capitalized. Exploration and development costs include dry hole costs,geological and geophysical costs, direct overhead related to exploration anddevelopment activities and other costs incurred for the purpose of finding oiland gas reserves. Salaries and benefits paid to employees directly involved inthe exploration and development of oil and gas properties as well as otherinternal costs that can be specifically identified with acquisition,exploration, and development activities are also capitalized. The Companycapitalizes interest costs to its unproved oil and gas properties, as well.

 

All capitalized costs of proved oil and gas properties, including theestimated future costs to develop proved reserves, are amortized on theunit-of-production method using total estimated proved reserves. Investments inunproved properties and major development projects are not amortized untilproved reserves associated with the projects can be determined or untilimpairment occurs. If the results of an assessment indicate that the propertiesare impaired, the amount of the impairment is added to the cost to beamortized.

 

The capitalized costs ofthe Company’s oil and gas properties, net of accumulated depreciation,depletion, and amortization, may not exceed the estimated future net cash flowsfrom proved oil and gas reserves discounted at 10 percent, plus the lowerof cost or fair market value of unproved properties as adjusted for related taxeffects (the “Ceiling Limitation”). If capitalized costs exceed the CeilingLimitation, the excess must be charged to expense. Whittier did not have anyadjustment to earnings due to the Ceiling Limitation for the periods presentedherein.

 

Sales of proved andunproved properties are accounted for as adjustments of capitalized costs withno gain or loss recognized, unless such adjustments would significantly alterthe relationship between capitalized costs and proved reserves of oil and gas,in which case the gain or loss is recognized in income. Abandonments of propertiesare accounted for as adjustments of capitalized costs with no loss recognized.

 

**Equipment and fixtures are statedat cost and depreciated over the estimated useful lives of the assets, whichrange from three to twelve years, using the straight-line method. Maintenanceand repairs, which neither materially add to the value of the property norappreciably prolong its life, are charged to expense as incurred. Gains orlosses on the dispositions of property and equipment, other than oil and gasproperty, are reflected in the Company’s results from operations.**

** **

**13**

----

 

**7.****             NotePayable**

 

Revolving Credit Agreement

 

In connection with the Acquisition, on June 15, 2005 Whittier enteredinto its $75 million revolving Credit Facility with BNP Paribas as the leadbank and administrative agent. Whittier initially borrowed $20 million from theCredit Facility to partially fund the Acquisition and to fully repayapproximately $8.5 million in principal and accrued interest outstanding on theCompany’s previous revolving credit facility with Compass Bank, as well as $1million of bank debt held by RIMCO. During 2005, the Company repaid $6 millionin principal outstanding on the Credit Facility, leaving $14 million inprincipal outstanding as of March 31, 2006. The borrowing base of the CreditFacility was $26.5 million as of March 31, 2006, and is subject to review andadjustment on a semi-annual basis. Redeterminations of the borrowing base arebased upon a number of factors, including commodity prices and reserve levels.Amounts outstanding under the revolver bear interest at specified margins overthe London Interbank Offered Rate (“LIBOR”) of 1.50% to 2.25% (6.63% at March31, 2006). Such margins fluctuate based on the utilization of the CreditFacility. All amounts drawn under the revolver mature June 15, 2008.

 

The Credit Facility is collateralized by substantially all of theCompany’s assets and the Company is subject to various covenants,representations and warranties. The Company is subject to certain financialcovenants pertaining to minimum working capital levels, minimum coverage ofinterest expenses, and a maximum leverage ratio. In addition, Whittier issubject to covenants limiting dividends and other restricted payments,transactions with affiliates, incurrence of debt, changes of control, assetsales, and liens on properties. The primary covenants under the Credit Facilityinclude the following:

 

**•**                  The Company will maintain a ratio of total debt toconsolidated EBITDAX (net income before interest expenses, taxes, depreciation,depletion, amortization, exploration costs, and other non-cash expenses lessnon-cash income and capitalized expenses) for the most recent period of fourfiscal quarters of no greater than 3.5 to 1.0, calculated on a pro-forma basisfor the Acquisition; and

** **

•                  The Company willmaintain a current ratio, determined quarterly, of current assets to currentliabilities, inclusive of available borrowing base under the Credit Facilityand exclusive of any current portion of principal outstanding under the CreditFacility, the current fair value of outstanding commodity price hedgingcontracts, and the current balance of asset retirement obligations under FAS143, of at least one to one.

 

In May 2006, the Company drew down an additional $2 million inprincipal outstanding from the Credit Facility. The money will be usedpartially to fund the purchase of the oil and gas properties discussed in Note11.

 

The Company was in compliance with these covenants as of March 31, 2006and has classified all of its outstanding indebtedness as long-term. TheCompany’s next borrowing base review is scheduled for July 1, 2006.

 

For the three months ended March 31, 2006, the Company incurred $273,269in interest cost, of which all was capitalized to its unevaluated oil and gas properties.For the three months ended March 31, 2005, the Company incurred interest costof $146,000 of which $42,000 was capitalized to its unevaluated oil and gasproperties.

 

Anticipated future maturities of the Credit Facility as of March 31, 2006,are as follows:

 

| **Year**   | ** ** | **Amount**         | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2006       |       | —             |       |
| 2007       |       | —             |       |
| 2008       |       | 14,000             |       |
|       |       |               |       |
| Total      |       | $                  | 14,000     |   |
|            |            |                    |            |  |

 

14

----

 

**8.****             CommodityPrice Risk Hedging Instruments**

 

**The Company held variousderivative instruments, including crude oil and natural gas option agreementsknown as “swaps” and “collars” as of March 31, 2006 and December 31, 2005.Swaps are designed to fix the price of anticipated sales of future production,while collars are designed to establish floor and ceiling prices on anticipatedsales of future production. The Company entered into the contracts at the timeit acquired certain operated oil and gas property interests as a means toreduce the future price volatility on its sales of oil and gas production, aswell as to achieve a more predictable cash flow from its oil and gasproperties. The Company has designated its price hedging instruments as cashflow hedges in accordance with SFAS No. 133.**

** **

Further details relating to the Company’s hedging activities are asfollows:

 

Hedging contracts held as of March 31, 2006:

 

| ** **                         | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
| **Contract Period and Type**       | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                         | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
| ** **                         | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Crude Oil Contracts (barrels)**  |       |              |       |                     |       |                    |       |   |   |
| Swap Contracts:                    |       |              |       |                     |       |                    |       |   |   |
| April 2006 –  December 2006   |       | 27,000            |       | N/A                      |       | $                       | 58.00      |   | $ | (291 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| Collar Contracts:                  |       |              |       |                     |       |                    |       |   |   |
| April 2006 –  December 2006   |       | 72,000            |       | $                        | 30.00      |                    | $          | 34.25 |   | (2,454 | ) |
| April 2006 –  December 2006   |       | 16,200            |       | $                        | 49.50      |                    | $          | 68.60 |   | (77 | ) |
| January 2007 –  December 2007 |       | 54,000            |       | $                        | 47.50      |                    | $          | 69.00 |   | (369 | ) |
| January 2007 –  December 2007 |       | 78,000            |       | $                        | 47.50      |                    | $          | 69.25 |   | (526 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| **Natural Gas Contracts (mmbtu)**  | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| Swap Contracts:                    | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| April 2006 –  October 2006    |       | 210,000           |       | N/A                      |       | $                       | 7.44       |   | (39 | ) |
| November 2006 –  March 2007   |       | 150,000           |       | N/A                      |       | $                       | 8.16       |   | (293 | ) |
| April 2007 –  October 2007    |       | 210,000           |       | N/A                      |       | $                       | 6.97       |   | (391 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| Collar Contracts:                  |       |              |       |                     |       |                    |       |   |   |
| April 2006 –  October 2006    |       | 280,000           |       | $                        | 6.75       |                    | $          | 8.40 |   | (38 | ) |
| April 2006 –  December 2006   |       | 120,000           |       | $                        | 5.00       |                    | $          | 6.45 |   | (149 | ) |
| November 2006 –  March 2007   |       | 200,000           |       | $                        | 7.25       |                    | $          | 9.75 |   | (283 | ) |
| April 2007 –  October 2007    |       | 280,000           |       | $                        | 6.25       |                    | $          | 7.95 |   | (421 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
|                               |       |              |       |                     |       | Total                   |       | $ | (5,331 | ) |

 

15

----

 

Hedging contracts held as of December 31, 2005:

 

| ** **                         | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
| **Contract Period and Type**       | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                         | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
|                               | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Crude Oil Contracts (barrels)**  |       |              |       |                     |       |                    |       |   |   |
| Swap Contracts:                    |       |              |       |                     |       |                    |       |   |   |
| January 2006 –  December 2006 |       | 36,000            |       | N/A                      |       | $                       | 58.00      |   | $ | (182 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| Collar Contracts:                  |       |              |       |                     |       |                    |       |   |   |
| January 2006 –  December 2006 |       | 96,000            |       | $                        | 30.00      |                    | $          | 34.25 |   | (2,709 | ) |
| January 2006 –  December 2006 |       | 21,600            |       | $                        | 49.50      |                    | $          | 68.60 |   | (57 | ) |
| January 2007 –  December 2007 |       | 54,000            |       | $                        | 47.50      |                    | $          | 69.00 |   | (253 | ) |
| January 2007 –  December 2007 |       | 78,000            |       | $                        | 47.50      |                    | $          | 69.25 |   | (359 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| **Natural Gas Contracts (mmbtu)**  | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| Swap Contracts:                    |       |              |       |                     |       |                    |       |   |   |
| January 2006 –  March 2006    |       | 90,000            |       | N/A                      |       | $                       | 8.43       |   | (261 | ) |
| April 2006 –  October 2006    |       | 210,000           |       | N/A                      |       | $                       | 7.44       |   | (604 | ) |
| November 2006 –  March 2007   |       | 150,000           |       | N/A                      |       | $                       | 8.16       |   | (488 | ) |
| April 2007 –  October 2007    |       | 210,000           |       | N/A                      |       | $                       | 6.97       |   | (505 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
| Collar Contracts:                  |       |              |       |                     |       |                    |       |   |   |
| January 2006 –  March 2006    |       | 150,000           |       | $                        | 7.50       |                    | $          | 10.10 |   | (215 | ) |
| April 2006 –  October 2006    |       | 280,000           |       | $                        | 6.75       |                    | $          | 8.40 |   | (627 | ) |
| January 2006 –  December 2006 |       | 120,000           |       | $                        | 5.00       |                    | $          | 6.45 |   | (464 | ) |
| November 2006 –  March 2007   |       | 200,000           |       | $                        | 7.25       |                    | $          | 9.75 |   | (505 | ) |
| April 2007 –  October 2007    |       | 280,000           |       | $                        | 6.25       |                    | $          | 7.95 |   | (553 | ) |
|                               |       |              |       |                     |       |                    |       |   |   |
|                               |       |              |       |                     |       | Total                   |       | $ | (7,782 | ) |

 

The Company accounts for its derivatives as cash flow hedginginstruments, and recognizes gains or losses on settlement of its hedginginstruments in oil and gas revenues, and changes in their fair value as acomponent of other comprehensive income, net of deferred taxes. The Companyrecognized pre-tax losses in oil and gas revenues of $917,910 and $567,126 forthe three months ended March 31, 2006, and March 31, 2005, respectively, due torealized settlements of its price hedge contracts during the respectiveperiods.

 

At March 31, 2006, the Company recorded unrealized losses on cash flowhedging contracts of $3.1 million, net of deferred taxes of $1.9 million, inaccumulated other comprehensive income. Comparatively, at December 31, 2005,the Company recorded unrealized losses of $4.4 million, net of deferred taxesof $2.7 million in accumulated other comprehensive income. As of March 31,2006, the Company anticipates $2.8 million of unrealized losses, net ofdeferred taxes of $1.5 million, will be reclassified into earnings during thetwelve months following March 31, 2006. The Company recorded a gain from hedgeineffectiveness of $396,489 for the three months ended March 31, 2006.

 

16

----

 

The following table details the activity of the cash flow hedges on apre-tax and after-tax basis for the period ending March 31, 2006 (inthousands).

 
| ** **                                               | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated other comprehensive loss, December 31,  2005 |       | $           | (7,079     | )             | $          | (4,389 | ) |
| Reclassified into earnings                               |       | 918         |       | 569           |       |
| Change in fair market value                              |       | 1,547       |       | 959           |       |
| Ineffective portion of cash flow hedges                  |       | (396        | )          | (245          | )          |
| Accumulated other comprehensive loss, March 31, 2006     |       | $           | (5,010     | )             | $          | (3,106 | ) |

 

**9.             Commitmentsand Contingencies**

 

The Company entered into a rental lease for approximately 2,910 squarefeet of corporate office space in Houston, Texas on April 1, 2004, for arenewable term of 90 months. The lease requires payments of approximately$5,000 per month. In December 2005, the Company executed an amendment to thelease, relocating the Company’s office space to approximately 15,043 squarefeet within the same building to allow the Company to consolidate theoperations of Whittier and RIMCO within one location. The lease, as amended,has a term of 144 months with expense recognized on a straight-line basis atapproximately $24,500 per month. The Company has an early cancellation optionon the lease at the end of the 72nd month and again at the end ofthe 108th month, as well as a preferential right to lease the spaceadjoining the lease.

 

As a result of the Acquisition, the Company assumed two office leasesheld by RIMCO, including a rental lease in Avon, Connecticut for 6,900 squarefeet, which expired in October 2005 and an office lease in Houston, Texas for9,110 square feet, which expires in October 2007. The RIMCO Houston leaserequires payments of $21,350 per month. The Company accrued the remaining costsof the RIMCO Houston lease as part of the purchase price of RIMCO. In March2006, the Company subleased the RIMCO Houston lease for total lease payments ofapproximately $194,000.

 

The Company’s existing future minimum annual lease payments for thenext five years as of March 31, 2006, are as follows (in thousands):

 

| **Year**   | ** ** | **Amount**         | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2006       |       |               | $          | 60 |   |
| 2007       |       |               | 267        |   |
| 2008       |       |               | 322        |   |
| 2009       |       |               | 322        |   |
| 2010       |       |               | 322        |   |
| Thereafter |       |               | 1,072      |   |
| Total      |       |               | $          | 2,365 |   |

 

17

----

 

**10.          Acquisitionof RIMCO Production Company, Inc.**

 

On June 15, 2005, Whittier acquired RIMCO by acquiring all of itsoutstanding capital stock for a total purchase price of $57.1 million. TheAcquisition substantially increased Whittier’s properties, production andundeveloped acreage. Specifically, Whittier acquired working interests inapproximately 116 active wells and one unit in 18 producing fields principallylocated in the Gulf Coast region in Texas, Louisiana, and Alabama, as well assignificant undeveloped acreage with multiple prospects.

 

The Acquisition was structured as a merger of RPC Acquisition Company,Inc., a Delaware corporation wholly owned by Whittier, into RIMCO. Upon closingof the Acquisition, Whittier became the sole owner of RIMCO. The existingshareholders of RIMCO received total consideration of approximately $55 millionin cash. Whittier treated the Acquisition as a stock purchase for federalincome tax purposes and is the accounting and legal acquirer. The Company’sfinancial statements for the year ended December 31, 2005 include RIMCO’soperating results for the period from June 16, 2005 through December 31, 2005.

 

Whittier funded the Acquisition using a combination of net proceedsfrom a private offering of the Company’s Series A Preferred Stock(approximately $46 million) and net borrowings from a new revolving CreditFacility entered into on June 15, 2005 (approximately $10.5 million). TheCompany’s Credit Facility is more fully described in Note 7.

 

The following table presents the allocation of the Company’s $57.1million purchase price, including professional fees and other relatedacquisition costs, to RIMCO’s assets acquired and liabilities assumed, basedupon their fair values as of June 15, 2006:

 
| ** **                          | ** ** | **As of June 15, 2005** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **(in thousands)**      | ** ** |
|                                |       |                    |       |
| Cash and cash equivalents           |       | $                       | 1,727      |   |
| Accounts receivable                 |       | 4,007                   |       |
| Current tax assets                  |       | 665                     |       |
| Other current assets                |       | 152                     |       |
| Oil and gas properties, evaluated   |       | 55,770                  |       |
| Oil and gas properties, unevaluated |       | 16,618                  |       |
| Other assets                        |       | 13                      |       |
| Total assets  acquired              |       | 78,952                  |       |
|                                |       |                    |       |
| Accounts payable                    |       | (930                    | )          |
| Asset retirement obligation         |       | (258                    | )          |
| Deferred income tax liability       |       | (20,660                 | )          |
|                                |       |                    |       |
| Total  liabilities assumed          |       | (21,848                 | )          |
| Net assets  acquired                |       | $                       | 57,104     |   |

 

18

----

 

The following unaudited pro forma consolidated results of operationshave been prepared as if the Acquisition had occurred as of the beginning ofthe period being reported (in thousands):

 
| ** **                                 | ** ** | **Three Months  Ended  March 31,  2006** | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
|                                       |       |                                     |       |                                     |       |
| Oil and gas revenues                       |       | $                                        | 9,964      |                                     | $          | 7,640 |   |
|                                       |       |                                     |       |                                     |       |
| Costs and expenses:                        |       |                                     |       |                                     |       |
| Lease operating  expenses                  |       | 1,311                                    |       | 1,286                                    |       |
| Production taxes                           |       | 781                                      |       | 525                                      |       |
| Depreciation,  depletion, and amortization |       | 3,783                                    |       | 2,532                                    |       |
| Ineffective  portion of hedge contracts    |       | (396                                     | )          | 185                                      |       |
| General and  administrative expenses       |       | 1,326                                    |       | 1,020                                    |       |
|                                       |       |                                     |       |                                     |       |
| Total costs and expenses                   |       | 6,805                                    |       | 5,548                                    |       |
|                                       |       |                                     |       |                                     |       |
| Income from operations                     |       | 3,159                                    |       | 2,092                                    |       |
| Other income (expense)                     |       | 184                                      |       | 87                                       |       |
|                                       |       |                                     |       |                                     |       |
| Income before income taxes                 |       | 3,343                                    |       | 2,179                                    |       |
| Provision for income taxes                 |       | 1,090                                    |       | 763                                      |       |
| Net income                                 |       | $                                        | 2,253      |                                     | $          | 1,416 |   |
|                                       |       |                                     |       |                                     |       |
| Basic net income per share                 |       | $                                        | 0.18       |                                     | $          | 0.37 |   |
| Diluted net income per share               |       | $                                        | 0.18       |                                     | $          | 0.11 |   |
| Weighted average shares outstanding:       |       |                                     |       |                                     |       |
| Basic                                      |       | 12,515,265                               |       | 3,841,134                                |       |
| Fully diluted                              |       | 12,692,290                               |       | 12,702,065                               |       |

 

**11.          SubsequentEvent - Entry into Material Definitive Agreements**

 

On May 1, 2006, the Company entered into twoseparate agreements to purchase oil and gas properties with an aggregate ofapproximately 18.9 billion cubic feet of gas equivalents (“Bcfe”) of estimatedproved reserves for a total cash purchase price of $31.9 million. Net currentproduction from the properties to be acquired is approximately 3.8 millioncubic feet of gas equivalents per day (“Mmcfe”). According to the terms ofthese agreements, the Company will acquire working interests in five operatedfields located in Texas, Louisiana, and Mississippi, as well as some minornon-operated property interests. The acquisition agreements are subject tospecific terms and conditions for closing, including completion of duediligence and obtaining regulatory approvals.

 

19

----

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**EXECUTIVEOVERVIEW**

 

Whittier Energy Corporation, a Nevada corporation, is an independentoil and gas exploration and production company primarily engaged in theacquisition, exploration and development of oil and gas properties in thecontinental United States. Our assets consist primarily of operated andnon-operated working interests, royalty interests, partnership interests, andmineral acreage in various oil and gas properties, principally located in theGulf Coast region, South Texas and the Permian Basin.

 

Financial and operating highlights for first quarter 2006 include thefollowing:

 

•      Net income of $2.3 million, a 567%increase over first quarter 2005;

 

•      Diluted earnings per share of $0.18, a100% increase over first quarter 2005;

 

•      A 153 % percent increase in dailyproduction over first quarter 2005; and

 

•      A 41% increase in the average realizedprice per Mcfe over first quarter 2005.

 

Additionally, Whittier completed its integration of RIMCO’s operationsincluding moving all of its Houston based personnel into one corporate officelocation.

 

On June 15, 2005,we acquired RIMCO Production Company, Inc., a privately held Delawarecorporation, for approximately $57.1 million, including $55 million in cash and$2.1 million in closing costs and net assumed liabilities. As a result of thistransaction, we acquired working interests in approximately 116 active wellsand one unit in 18 producing fields principally located in the Gulf Coastregion in Texas, Louisiana, Alabama and in the Permian Basin. On August 26, 2005, Whittier sold itsinterest in the Big Escambia Creek Field in Escambia County, Alabama for $4.2million, with an effective date of May 1, 2005. We had acquired a minornon-operated working interest in approximately 18 wells in the Big EscambiaCreek Field as part of our acquisition of RIMCO. The asset was sold as part ofour ongoing strategy of rationalization of non-core properties to redeploy thecapital into other investments that we believe will generate higher overallreturns for Whittier.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We finance our businessusing a combination of cash flow from operations, bank debt and the issuance ofequity and/or debt securities. Our future liquidity, in both the short andlong-term, is principally dependent upon the volume of our oil and gasproduction and the market price we receive on future sales of that productionas affected by any hedges we may have in place.

 

Our primary source of cash during the three months ended March 31, 2006was from cash flow from operations of our oil and gas properties. Operatingcash flow fluctuations are substantially driven by commodity prices and changesin our production volumes. Working capital is substantially influenced by thesevariables. Fluctuation in cash flow may result in an increase or decrease inour capital and exploration expenditures. Total cash flows provided byoperating activities of $6.1million for the three months ended March 31, 2006 were primarily used to fundour exploration and development expenditures.

 

We have approximately$1.5 million in available cash and $9 million in borrowing capacity under ourcredit facility as of May 15, 2006, after taking into account outstandingletters of credit and a draw down of $2 million in principal from the creditfacility in early May 2006. Additionally, we are producing at an average rateof approximately 15.2 Mmcfe per day and generating net positive cash flows fromoperations. We have budgeted $27.2 million in capital expenditures for 2006, ofwhich approximately $7.0 millionhad been incurred through March 31, 2006. We intend to fund our 2006 capitalexpenditures using operating cash flows and additional borrowings under ourcredit facility, if necessary.

 

Revolving Credit Facility

 

In connection with theacquisition of RIMCO, on June 15, 2005, Whittier entered into its $75 millionrevolving credit facility with BNP Paribas as the lead bank and administrativeagent. Whittier initially borrowed $20 million from the credit facility topartially fund the acquisition and to fully repay approximately $8.5 million inprincipal and accrued interest outstanding on our previous revolving creditfacility with Compass Bank, as well as $1 million of bank debt held by RIMCO.Through March 31, 2006, we repaid $6 million in principal outstanding on thecredit facility, leaving $14 million in principal outstanding as of March 31,2006. In May 2006, Whittier borrowed an additional $2 million in principal fromthe credit facility, approximately $1 million of which was used to fund thedown payment on certain oil and gas properties being acquired by Whittier.

 

The borrowing base of the credit facility was $26.5 million as of May2006, and is subject to review and adjustment on a semi-annual basis. Amountsoutstanding under the revolver bear interest at specified margins over theLondon Interbank Offered Rate (“LIBOR”) of 1.50% to 2.25% (6.63% at March 31,2006). Such margins fluctuate based on the utilization of the credit facility.All amounts drawn under the revolver mature on June 15, 2008.

 

20

----

 

DerivativeInstruments and Hedging Activities

 

We regularly hedge a portion of our production to reduce our exposureto oil and gas price volatility, as well as to achieve more predictable cashflows from our oil and gas properties. Our current policy is to hedge a portionof our anticipated future production, either when we believe it is justified byavailable future oil and gas prices, in order to finance a planned acquisitionof producing oil and gas properties, or to support operating cash flowsnecessary to fund our anticipated capital budget. Gains or losses on bothrealized and unrealized hedging transactions are determined as the differencebetween the contract price and an applicable settlement or reference price.Settlement gains and losses are determined monthly and are included asincreases or decreases in oil and gas revenues in the period the hedgedproduction is sold. Any ineffective portion of unrealized gains or losses ofsuch hedges is recognized in earnings in the period they occur. Our derivativecommodity positions outstanding at March 31, 2006 are disclosed in Note 8 toour consolidated financial statements contained herein.

 

**CAPITAL COMMITMENTS AND CONTINGENCIES**

 

On May 1, 2006, we entered into two separateagreements to purchase oil and gas properties with an aggregate ofapproximately 18.9 Bcfe of estimated proved reserves for a total cash purchaseprice of $31.9 million. Net current daily production from the properties to beacquired is approximately 3.8 Mmcfe. According to the terms of theseagreements, Whittier will acquire working interests in five operated fieldslocated in Texas, Louisiana, and Mississippi, as well as some minornon-operated property interests. The acquisition agreements are subject tospecific terms and conditions for closing, including completion of duediligence and obtaining regulatory approvals.

 

Whittier intends to acquire a 75% operatingworking interest in the Westhoff Ranch Field from various sellers forapproximately $19.9 million on or before May 31, 2006. The field includes 18active wells producing from the Frio formation at depths ranging from 5,000feet to 7,000 feet. Current net production from the field is 3.1 Mmcfed net.Typical of many South Texas producing properties, the Westhoff Ranch Fieldproduces at high rates and has multiple behind pipe and infill drillingopportunities. We have identified four locations to drill in 2006 and over 40behind-pipe opportunities that we expect to exploit over the next 12 to 36months. Approximately $2 million of additional capital spending has beenbudgeted to develop this property in 2006 and approximately $4 million ofcapital investment has been identified for 2007.

 

Whittier has also agreed to acquire variousonshore oil and gas properties from Imperial Petroleum, Inc. for $12 million onor before June 30, 2006. The Imperial properties include 12 operated producingwells, minor interests in 10 additional non-operated producing wells, and 18shut-in operated wells awaiting a workover rig. Net current daily production isapproximately 664 Mcfed. Whittier has identified an additional estimated 140Mcfed of shut-in net production capacity, which we expect to bring back onlineas soon as possible after closing. In addition, we have identified 18 provedundeveloped locations on the properties that have the potential to addapproximately 3.5 Mmcfed of additional net production for 2007. We havebudgeted an additional $8 million in capital to develop these properties in2006 and have identified $12 million of potential capital expenditures in 2007.The properties are located in large, long-lived producing fields including theCarthage Field in East Texas and the Bovina Field in Mississippi. Uponconsummation of the Imperial transaction, the Company will have an average 50%working interest and 36% net revenue interest in the acquired properties.

 

We intend to fund the entire purchase priceof the acquisitions using borrowings under our existing credit facility. Weanticipate funding the $10 million in additional capital expenditurerequirements for 2006 using cash flow from operations and additionalavailability under our existing credit facility, if necessary.

 

**RESULTS OF OPERATIONS**

 

We adopted the full cost method of accounting for our oil and gasproperties as of July 1, 2005. Under this method, all costs incurred in theacquisition, exploration and development of oil and gas properties arecapitalized into cost centers (the amortization base). Such amounts include thecost of drilling and equipping productive wells, dry hole costs, lease acquisitioncosts and delay rentals. Costs associated with production and general corporateactivities are expensed in the period incurred. The capitalized costs of ouroil and gas properties, plus an estimate of our future development andabandonment costs, are amortized on a unit-of-production method based on ourestimate of total proved reserves.

 

21

----

 

Pro forma financial information for theperiods presented in these financial statements for the combined results ofWhittier and RIMCO as if the acquisition had occurred at the beginning of eachapplicable interim period is presented in Note 10 to our financial statementsincluded herein.

 

*For the Quarter Ended March 31, 2006compared with the Quarter Ended March 31, 2005*

 

We generated net income of approximately $2.3 million, or $0.18 perdiluted share, for the quarter ended March 31, 2006, compared to $338,000, or$.09 per diluted share, for the period ended March 31, 2005. The $1.9 millionfavorable variance was primarily attributable to higher oil and gas production,the acquisition of RIMCO in June 2005, and higher commodity prices. Thesignificant components of Whittier’s results of operations for the quartersended March 31, 2006 and 2005 are as follows:

 

Oil and Gas Revenues. Oil and gasrevenues increased 256% from approximately $2.8 million, or $5.64 per Mcfe, forthe quarter ended March 31, 2005 to $10.0 million, or $7.94 per Mfce, for thequarter ended March 31, 2006, based upon a 153% increase in production and 41%increase in realized commodity prices per Mcfe after hedge settlements.Whittier recognized pre-tax losses in oil and gas revenues of $918,000 and$567,000 during the quarters ended March 31, 2006 and 2005, respectively, dueto realized settlements of its price hedge contracts. Whittier produced 1,256Mmcfe during the quarter ending March 31, 2006, consisting of 77,005 Bbls ofoil and 793,581 Mcf of gas, compared to production of 497 Mmcfe for the quarterending March 31, 2005, consisting of 45,286 Bbls of oil and 225,226 Mcf of gas.The increase in production was principally due to Whittier’s June 2005acquisition of RIMCO, as well as our successful drilling program during 2005and the first quarter of 2006.

 

Costs and Expenses. Total operatingcosts and expenses increased by 197% from $2.3 million for the quarter endingMarch 31, 2005 to $6.8 million for the quarter ending March 31, 2006,principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year. The breakdown of variances for thecomponents of operating costs and expenses is as follows:

 

•                  Lease operatingexpenses increased 61% from $813,000 for the quarter ending March 31, 2005 to$1,311,000 for the quarter ending March 31, 2006. Lease operating expenses perMcfe, however, fell 36% from $1.64 per Mcfe for the quarter ended March 31,2005 to $1.04 per Mcfe for the quarter ended March 2006, principally due to ahigher ratio of gas production from our properties;

 

•                  Production taxesincreased 210%, from $252,000, or $0.51 per Mcfe, for the quarter ending March31, 2005, to $781,000, or $0.62 per Mcfe, for the quarter ending March 31,2006. The 22% increase in production taxes per Mcfe was attributable to highertaxes incurred on Louisiana production, which is based on a percentage ofrevenue versus actual production volumes, and a larger ratio of natural gasproduction compared to overall production from the prior period;

 

•                  Depreciation,depletion and amortization (“DD&A”) increased by 480%, from $651,000, or$1.31 per Mcfe, for the quarter ending March 31, 2005 to $3,783,000, or $3.01per Mcfe, for the quarter ending March 31, 2006. The 130% increase in DD&Aper Mcfe is related primarily to higher relative production and cost depletionrates from Whittier’s RIMCO acquisition in June 2005

 

•                  The Companyrecognized a non-cash gain of $396,000 due to the ineffective portion of thefair value adjustment to our hedge contracts for the quarter ending March 31,2006 compared to a non-cash loss of $185,000 for the quarter ended March 31,2005; and

 

•                  General andadministrative expense increased from $389,000 for the quarter ending March 31,2005 to $1,326,000 for the quarter ending March 31, 2006, reflecting ourenhanced operational activity from the prior year, including increasing theCompany’s staff from five to 20 full-time employees, as well as $267,000 innon-cash compensation expense from the issuance of stock options recognized dueto the adoption of FAS 123(R).

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

We adopted Statement of Financial Accounting Standards No. 123(R)“Share-Based Payment,” (“SFAS No. 123(R)”) as of January 1, 2006 using themodified prospective method in which compensation cost is recognized based (1)on the requirements of SFAS No. 123(R) for all share-based payments grantedafter January 1, 2006 and (2) on the requirements of SFAS No. 123 for allawards granted to employees prior to January 1, 2006, that remain unvested onJanuary 1, 2006. For the three months ended March 31, 2006, we recordedapproximately $301,000 of pretax expense relating to this pronouncement, ofwhich $34,000 was capitalized to oil and gas properties under the full costmethod of accounting. See Note 4 to the Consolidated Financial Statements foradditional information.

 

Off-Balance Sheet Arrangements

 

We are not a party to any off balance sheet arrangements.

 

22

----

 

**Forward-Looking Information**

 

The statements regarding future financial and operating performance andresults, market prices, future hedging activities, and other statements thatare not historical facts contained in this report are forward-lookingstatements. The words “expect,” “project,” “estimate,” “believe,” “anticipate,”“intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,” “could,”“will” and similar expressions are also intended to identify forward-lookingstatements. These statements involve risks and uncertainties, including, butnot limited to, market factors, market prices (including regional basisdifferentials) of natural gas and oil, results of future drilling and marketingactivity, future production and costs, and other factors detailed in thisdocument and in our other Securities and Exchange Commission (SEC) filings. Ifone or more of these risks or uncertainties materialize, or if underlyingassumptions prove incorrect, actual outcomes may vary materially from thoseincluded in this Form 10-QSB.

 

**Item 3. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

### **The term“disclosure controls and procedures” (defined in Rule 13a-15(e)) refers to thecontrols and procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it filesunder the Securities and Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within required time periods. Bryce W.Rhodes, the Company’s principal executive officer, and Michael B. Young, theCompany’s principal financial officer, have evaluated the effectiveness of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this quarterly report, and each of them has concluded that, as ofsuch date, Whittier’s controls and procedures were effective. There were no changesin the Company’s internal controls over financial reporting that occurredduring the quarter covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.**

 

23

----

 

**Part II– Other Information**

 

#### **Item6 – Exhibits**

 

(a)                                  Theinformation required by this Item 6 is set forth in the Index to Exhibitsaccompanying this quarterly report on Form 10-QSB.

 

### **Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

Dated:    May 15, 2006

 
|   | Whittier Energy Corporation |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         | */s/ Bryce W. Rhodes* | * * |
|   |                        | Bryce W. Rhodes |
|   |                        | President, Chief Executive Officer, and Director |
|   |                        |   |
|   |                        |   |
|   | By:                         | */s/ Michael B. Young* | * * |
|   |                        | Michael B. Young |
|   |                        | Chief Financial Officer |
|   |                        | (Principal Financial and Accounting Officer) |

 

24

----

 

**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                    |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| 10.1        |       | Purchase and Sale Agreement dated May 1, 2006 by and  among Whittier Energy Company, on the one hand, and Drilling & Xtraction,  L.P., Oloma Energy, LP, Westhoff Ranch, LP, Cookin with Gas, LP, JC 2 Under  Par, LP, and McDowell Partners, LP, on the other hand, incorporated by  reference to Exhibit 10.1 of Whittier’s Form 8-K filed May 5, 2006. |
|        |       |                                                                                                                                                                                                                                                                                                                                                               |
| 10.2        |       | Purchase and Sale Agreement dated May 1, 2006 by and  among Whittier Energy Company and Premier Natural Resources, LLC, on the one  hand, and Imperial Petroleum, Inc., on the other hand, incorporated by  reference to Exhibit 10.2 of Whittier’s Form 8-K filed May 5, 2006.                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                               |
| **31.1**    | ** ** | **Certification of Chief Executive  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or  15d-14(a).**                                                                                                                                                                                                                                            |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| **31.2**    | ** ** | **Certification of Chief Financial  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or  15d-14(a).**                                                                                                                                                                                                                                            |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| **32.1**    | ** ** | **Certification of Chief Executive  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or  15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.**                                                                                                                                          |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| **32.2**    | ** ** | **Certification of Chief Financial  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or  15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.**                                                                                                                                          |

 

25

----