**FORM10-QSB**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2004**

 

**OR**

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

 

**Forthe transition period from                            to                             .**

 

###### **Commission File Number:   0-30598**

###### ** **

**WHITTIERENERGY CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Nevada**                                                      | ** ** | **20-0539412**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **333 Clay Street, Suite 1100  Houston, Texas 77002**           |
| (Address of Principal Executive Offices)                        |

 

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

 

Indicate by check mark whetherthe Registrant: (1) has filed all reports required to be filed bySection 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

 

As ofAugust 16, 2004 the Registrant had 11,478,202 shares of its $.001 parvalue common stock issued and outstanding.

 

 

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**Part I – Summarized Financial Information**

**Item 1 – Financial Statements**

 

**Whittier Energy Corporation**

**Consolidated Balance Sheets**

**(In Thousands)**

 
| ** **                                                                              | ** ** | **June 30,  2004**

**(Unaudited)** | ** ** | **December 31,  2003  (Audited)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
|                                                                                    |       |                                     |       |                                   |       |
|                                                                                    |       |                                     |       |                                   |       |
| **Assets**                                                                              |       |                                     |       |                                   |       |
| Current assets:                                                                         |       |                                     |       |                                   |       |
| Cash and cash equivalents                                                               |       | $                                        | 1,888      |                                   | $          | 1,037 |   |
| Accounts receivable                                                                     |       | 2,112                                    |       | 1,199                                  |       |
| Income tax receivable                                                                   |       | 38                                       |       | 38                                     |       |
| Prepaid assets                                                                          |       | 92                                       |       | 76                                     |       |
|                                                                                    |       |                                     |       |                                   |       |
| Total current assets                                                                    |       | 4,130                                    |       | 2,350                                  |       |
|                                                                                    |       |                                     |       |                                   |       |
| Deferred income tax assets                                                              |       | 734                                      |       | 883                                    |       |
| Investments in partnerships                                                             |       | 243                                      |       | 240                                    |       |
| Investments in marketable securities                                                    |       | 870                                      |       | 775                                    |       |
| Oil and gas properties (successful efforts  method), furniture and equipment,  net |       | 18,791                                   |       | 10,369                                 |       |
|                                                                                    |       |                                     |       |                                   |       |
| Total assets                                                                            |       | $                                        | 24,768     |                                   | $          | 14,617 |   |

 

*Seeaccompanying notes.*

 

2

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| ** **                                                                                                                                                                                                      | ** ** | **June 30,  2004  (Unaudited)** | ** ** | **December 31,  2003  (Audited)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | ** **                           | ** ** | ** **                             | ** ** |
|                                                                                                                                                                                                            |       |                                 |       |                                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                   |       |                                 |       |                                   |       |
| Current liabilities:                                                                                                                                                                                            |       |                                 |       |                                   |       |
| Accounts payable                                                                                                                                                                                                |       | $                                    | 2,870      |                                   | $          | 1,304 |   |
| Taxes payable                                                                                                                                                                                                   |       | 19                                   |       | 19                                     |       |
| Note payable, current portion                                                                                                                                                                                   |       | 2,475                                |       | 560                                    |       |
| Total current liabilities                                                                                                                                                                                       |       | 5,364                                |       | 1,883                                  |       |
|                                                                                                                                                                                                            |       |                                 |       |                                   |       |
| Deferred income tax liability                                                                                                                                                                                   |       | 1,699                                |       | 1,513                                  |       |
| Note payable                                                                                                                                                                                                    |       | 5,840                                |       | 3,945                                  |       |
| Subordinated note payable                                                                                                                                                                                       |       | 1,787                                |       |                                   |       |
| Asset retirement obligation                                                                                                                                                                                     |       | 97                                   |       | 69                                     |       |
| Commodity price hedging contracts                                                                                                                                                                               |       | 859                                  |       | 574                                    |       |
| Total liabilities                                                                                                                                                                                               |       | 15,646                               |       | 7,984                                  |       |
|                                                                                                                                                                                                            |       |                                 |       |                                   |       |
| Stockholders’ equity:                                                                                                                                                                                      |       |                                 |       |                                   |       |
| Common stock, no par value, 100,000,000  shares authorized,  11,478,202 and  10,046,296 shares issued and outstanding as of June 30, 2004 and  December 31, 2003,  Respectively             |       | 11                                   |       | 10                                     |       |
| Additional paid-in capital                                                                                                                                                                                      |       | 5,204                                |       | 2,694                                  |       |
| Accumulated other comprehensive loss,  unrealized loss on marketable securities, net of taxes of $9,476 and  $270,882,  for the periods ended  June 30, 2004 and December 31, 2003, respectively |       | (18                                  | )          | (503                                   | )          |
| Accumulated other comprehensive loss,  hedging contracts,  net of taxes of  $305,362 and $200,912 for the periods ended June 30, 2004 and  December 31, 2003, respectively                       |       | (567                                 | )          | (373                                   | )          |
| Retained earnings                                                                                                                                                                                               |       | 4,492                                |       | 4,805                                  |       |
| Total stockholders’ equity                                                                                                                                                                                 |       | 9,122                                |       | 6,633                                  |       |
|                                                                                                                                                                                                            |       |                                 |       |                                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                 |       | $                                    | 24,768     |                                   | $          | 14,617 |   |

 

*Seeaccompanying notes.*

 

3

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**Whittier Energy Corporation**

**Consolidated Statements of Operations (Unaudited)**

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

 
| ** **                                                                        | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Three Months  Ended  June 30,  2003** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2003** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Oil and gas revenues                                                              |       | $                                            | 2,171      |                                         | $          | 1,406                                      |       | $                                          | 4,075      |   | $ | 2,907 |   |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Costs and expenses:                                                               |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Lease operating expenses                                                          |       | 664                                          |       | 658                                          |       | 1,139                                      |       | 1,162                                      |       |
| Production taxes                                                                  |       | 213                                          |       | 133                                          |       | 373                                        |       | 315                                        |       |
| Depreciation, depletion, and amortization                                         |       | 515                                          |       | 262                                          |       | 1,034                                      |       | 497                                        |       |
| Exploration expense                                                               |       | 539                                          |       | —                                       |       | 539                                        |       | —                                     |       |
| General and administrative expenses                                               |       | 328                                          |       | 316                                          |       | 737                                        |       | 456                                        |       |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Total costs and expenses                                                          |       | 2,259                                        |       | 1,369                                        |       | 3,822                                      |       | 2,430                                      |       |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Income (loss) from operations                                                     |       | (88                                          | )          | 37                                           |       | 253                                        |       | 477                                        |       |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Other income (expense):                                                           |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Interest and dividend income                                                      |       | 1                                            |       | —                                       |       | 1                                          |       | 1                                          |       |
| Interest expense                                                                  |       | (60                                          | )          | (49                                          | )          | (111                                       | )          | (100                                       | )          |
| Gain (loss) from sales                                                            |       | 4                                            |       | (31                                          | )          | 246                                        |       | (31                                        | )          |
| Partnership income                                                                |       | 85                                           |       | —                                       |       | 121                                        |       | 4                                          |       |
| Impairment of partnership investments                                             |       | —                                       |       | (733                                         | )          | —                                     |       | (733                                       | )          |
| Impairment of marketable securities                                               |       | —                                       |       | —                                       |       | (645                                       | )          | —                                     |       |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Other expense                                                                     |       | 30                                           |       | (813                                         | )          | (388                                       | )          | (859                                       | )          |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Loss before income taxes and cumulative  effect of change in accounting principle |       | (58                                          | )          | (776                                         | )          | (135                                       | )          | (382                                       | )          |
| Provision for income taxes                                                        |       | 21                                           |       | 136                                          |       | (178                                       | )          | —                                     |       |
| Loss before cumulative effect of change in  accounting principle                  |       | (37                                          | )          | (640                                         | )          | (313                                       | )          | (382                                       | )          |
| Cumulative effect of change in accounting  principle                              |       | —                                       |       | —                                       |       | —                                     |       | (6                                         | )          |
| Net loss                                                                          |       | $                                            | (37        | )                                            | $          | (640                                       | )          | $                                          | (313       | ) | $ | (388 | ) |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Basic and dilutive loss per share:                                                |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Loss per share before cumulative effect of  change in accounting principle        |       | $                                            | (.00       | )                                            | $          | (.06                                       | )          | $                                          | (.03       | ) | $ | (.04 | ) |
| Cumulative effect of change in accounting  principle                              |       | —                                       |       | —                                       |       | —                                     |       | (.00                                       | )          |
| Net loss per share                                                                |       | $                                            | (.00       | )                                            | $          | (.06                                       | )          | $                                          | (.03       | ) | $ | (.04 | ) |
|                                                                              |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Weighted average number of shares  outstanding (basic and dilutive)               |       | 10,258,667                                   |       | 10,046,296                                   |       | 10,165,344                                 |       | 10,046,296                                 |       |

 

*Seeaccompanying notes.*

 

4

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**Whittier Energy Corporation**

**Consolidated Statements of Cash Flows (Unaudited)**

**(In Thousands)**

 
| ** **                                                                            | ** ** | **Six Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| **Cash flows from operating activities**                                              |       |                                      |       |                                      |       |
| Net income/(loss)                                                                     |       | $                                         | (313       | )                                         | $          | (388 | ) |
| Adjustments to reconcile net income/(loss)  to net cash used in operating activities: |       |                                      |       |                                      |       |
| Depreciation, depletion, and amortization                                             |       | 1,034                                     |       | 497                                       |       |
| Exploration expense                                                                   |       | 539                                       |       |                                      |       |
| Deferred income taxes                                                                 |       | 178                                       |       | —                                    |       |
| (Gain)/loss on the sale of oil and gas  properties                                    |       | (246                                      | )          | 31                                        |       |
| Partnership income                                                                    |       | (121                                      | )          | (4                                        | )          |
| Impairment of marketable securities                                                   |       | 645                                       |       | —                                    |       |
| Impairment of partnership investments                                                 |       | —                                    |       | 733                                       |       |
| Cumulative effect of change in accounting  principle                                  |       | —                                    |       | 6                                         |       |
| (Increase)/decrease in restricted cash                                                |       | —                                    |       | 25                                        |       |
| (Increase)/decrease in accounts receivable                                            |       | (913                                      | )          | (441                                      | )          |
| (Increase)/decrease in prepaids and other  receivables                                |       | (16                                       | )          | —                                    |       |
| Increase/(decrease) in accounts payable                                               |       | 1,566                                     |       | 449                                       |       |
| Increase/(decrease) in taxes payable                                                  |       | —                                    |       | (3                                        | )          |
| Net cash provided by operating activities                                             |       | 2,353                                     |       | 905                                       |       |
|                                                                                  |       |                                      |       |                                      |       |
| **Cash flows from investing activities**                                              |       |                                      |       |                                      |       |
| Investment in oil and gas properties                                                  |       | (10,119                                   | )          | (1,031                                    | )          |
| Proceeds from sale of oil and gas  properties                                         |       | 525                                       |       | 36                                        |       |
| Net proceeds from private placement                                                   |       | 2,359                                     |       | —                                    |       |
| Investments in partnerships                                                           |       | (22                                       | )          | (68                                       | )          |
| Distributions from partnerships                                                       |       | 158                                       |       | 76                                        |       |
| Net cash used in investing activities                                                 |       | (7,099                                    | )          | (987                                      | )          |
|                                                                                  |       |                                      |       |                                      |       |
| **Cash flows from financing activities**                                              |       |                                      |       |                                      |       |
| Loan payments                                                                         |       | (240                                      | )          | (70                                       | )          |
| Proceeds from senior credit facility                                                  |       | 4,050                                     |       | 560                                       |       |
| Proceeds from subordinated convertible note                                           |       | 1,787                                     |       | —                                    |       |
| Net cash provided by financing activities                                             |       | 5,597                                     |       | 490                                       |       |
|                                                                                  |       |                                      |       |                                      |       |
| Net increase (decrease) in cash and cash  equivalents                                 |       | $                                         | 851        |                                      | $          | 408 |   |
|                                                                                  |       |                                      |       |                                      |       |
| Cash and cash equivalents at beginning of  period                                     |       | 1,037                                     |       | 302                                       |       |
|                                                                                  |       |                                      |       |                                      |       |
| Cash and cash equivalents at end of period                                            |       | $                                         | 1,888      |                                      | $          | 710 |   |

 

*Seeaccompanying notes.*

 

5

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**WHITTIER ENERGY CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****             General**

 

Whittier EnergyCorporation (“Whittier”), a Nevada corporation, 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 ofJune 30, 2004, Whittier had three wholly owned subsidiaries, includingWhittier Energy Company (“Whittier Energy”), a Nevada corporation, WhittierOperating, Inc. (“Whittier Operating”), a Texas corporation, and OlympicResources (Arizona) Ltd. (“Olympic Arizona”), an Arizona corporation. WhittierOperating is a direct subsidiary of Whittier Energy. References to the“Company” refer to Whittier and its subsidiaries.

 

Whittier was originallyincorporated in the Province of British Columbia, Canada, in 1986, under thename Global Data Systems Corp. Global Data Systems was later renamed ComtronEnterprises Inc. in November 1989. In October 1993, ComtronEnterprises changed its name to Olympic Resources Ltd. (“Olympic”). OnSeptember 10, 2003, Olympic’s wholly owned subsidiary, WEC Acquisition,Inc. (“WEC”), a Wyoming corporation, merged into Whittier Energy, triggering achange in control of the Company (the “Merger”). WEC was formed by Olympicduring the quarter ended September 30, 2003, solely for the Merger. WEC mergedwith and into Whittier Energy with Whittier Energy surviving the Merger tobecome the wholly owned subsidiary of the Company. In exchange for theirWhittier Energy common stock, the Whittier Energy shareholders received sharesof the Company’s voting common stock and Series AConvertible Preferred Stock.

 

As part of the corporaterestructuring of the Company, in December 2003 the Company’s stockholdersapproved a one-for-ten reverse stock split of the Company’s common stock andthe merger of Olympic into a newly formed, wholly owned subsidiary, “WhittierEnergy Corporation,” a Nevada corporation. On December 31, 2003, Olympiceffected the one-for-ten reverse split of its common stock and consummated themerger of Olympic with and into Whittier Energy Corporation. As a result of thereverse split, the Company’s Series A Preferred Stockautomatically converted into shares of the Company’s split-adjusted commonstock and Whittier Energy’s former shareholders owned approximately 85% of theCompany’s outstanding voting common stock. After consideration of the Company’sprivate placement of its common stock completed in June 2004 (see Note11), Whittier Energy’s former shareholders now own approximately 79% of theCompany’s outstanding common stock.

 

Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted. Reference should be made to the relevant notesto the financial statements included in the Company’s Annual Report on Form10-KSB for the fiscal year ended December 31, 2003.

 

The information furnishedherein was taken from the books and records of the Company without audit.However, the information reflects all adjustments, which are, in the opinion ofmanagement, normal recurring adjustments necessary for the fair statement ofthe results for the interim period presented. The results of operations for theinterim period are not necessarily indicative of the results to be expected forany future interim period or for the year.

 

6

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**2.****             Loss Per Share**

 

Basic and dilutive earnings orloss per common share is calculated by dividing net income or loss by theaggregate weighted average number of shares outstanding during the period.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 during the period. Diluted loss per share is notpresented as the Company incurred net losses for the periods presented. Commonstock and common stock equivalents outstanding for the three and six monthsended June 30, 2003, reflect the Company’s common stock outstanding as ofthe date of the Merger. Whittier Energy did not have any common stockequivalents outstanding as of June 30, 2003 and all stock options andwarrants acquired from the Company as part of the Merger are reflected on aprospective basis from the date of the Merger.

 

All share amounts for theperiods ended June 30, 2004 and June 30, 2003, respectively, havebeen adjusted to reflect the Company’s one-for-ten reverse stock split andconversion of its Series A Preferred Stock into commonstock on December 31, 2003.

 

**3.****             Comprehensive Income(Loss)**

 

TheCompany applies the provisions of Statement of Financial Accounting Standards(“SFAS”) No. 130 “Reporting Comprehensive Income,” which establishes standardsfor reporting comprehensive income (loss). In addition to net income,comprehensive income (loss) includes all changes to equity during a period,except those resulting from investments and distributions to the owners of theCompany.

 

TheCompany recorded unrealized losses on cash flow hedging contracts as componentsof other comprehensive income (loss) of $567,101, net of deferred taxes of$305,362, and $373,128, net of deferred taxes of $200,912, for the periodsended June 30, 2004 and December 31, 2003, respectively. The Companyalso recorded unrealized losses on marketable securities as components of othercomprehensive income (loss) of $17,600, net of deferred tax of $9,476, and$503,067, net of deferred taxes of $270,882, for the periods endedJune 30, 2004 and December 31, 2003, respectively.

 

Totalcomprehensive income (loss) was $6,535 and ($21,882) for the three and sixmonths ended June 30, 2004, respectively. Comparatively, the Companyrecorded total comprehensive income (loss) of ($617,693) and ($428,602) for thethree and six months ended June 30, 2003, respectively.

 

**4.****             Stock BasedCompensation**

 

The Company accounts for stockbased compensation using the intrinsic value method under APB 25 “Accountingfor Stock Issued to Employees.” SFAS 123 requires that pro forma informationregarding net income or loss per share be determined as if the Company hadaccounted for its employee stock options under the fair value method as definedin SFAS 123. We estimate the fair value for options issued during the period,if any, as of the date of grant using the Black-Scholes option pricing model byusing weighted average assumptions, volatility factors of the expected marketprice of the Company’s common stock, and the weighted average life expectancyof the options.

 

7

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In December 2003, theCompany’s Board of Directors approved a Long Term Incentive Plan (the “Plan”),which was ratified by the Company’s stockholders in July 2004. The Plansets aside a total of 1.56 million shares of the Company’s common stock forissuance to the Company’s officers, directors, employees, and consultants.During January 2004, the Company granted a total of 729,000 options topurchase the Company’s common stock at an average exercise price of $1.75 pershare to certain directors, officers, and employees of the Company, of which15,000 options were cancelled in May 2004. The options vest ratably over athree-year period from the date of grant and have a term of five years. Thefair market value of the net options outstanding on the date of grant wasestimated to be $1,088,611 using the Black-Scholes option pricing model withthe following weighted average assumptions: risk free interest rate of 4%,dividend yield of 0%, volatility factors of the expected market price of theCompany’s common stock of 1.58, and a weighted average life expectancy of theoptions of 3.5 years. The Company issued an additional 19,500 options tovarious employees of the Company during the six months ended June 30,2004, with an average exercise price of $1.65 per share, also subject to threeyear ratable vesting with a term of five years. The fair market value of theoptions on the date of grant was estimated to be approximately $19,000 usingthe Black Scholes option pricing model using weighted average assumptionsapplicable on the date of grant.

 

The Company did not have anyoptions outstanding as of June 30, 2003. The Company acquired 187,500options previously issued by Olympic as part of the Merger, all of which werefully vested as of the date of the Merger.

 

In December 2002,the FASB issued SFAS No. 148, *Accounting forStock-Based Compensation, an Amendment of SFAS No. 123 (“SFAS 123”)*in an effort to encourage the recognition of compensation expense for theissuance of stock options.  The Companyhas elected to continue accounting for stock-based compensation under APBOpinion No. 25 and disclose pro forma net income and earnings per share, as ifthe fair value based method of accounting defined in Statement 123 and 148 hadbeen applied.

 

For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the option’s vesting period. The Company’s pro forma information, inthousands, is as follows:

 
| ** **                                             | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Three Months  Ended  June 30,  2003** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2003** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                   |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Net loss under APB 25                                  |       | $                                            | (37        | )                                            | $          | (640                                       | )          | $                                          | (313       | ) | $ | (388 | ) |
|                                                   |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Effect of SFAS 123                                     |       | (92                                          | )          | —                                       |       | (175                                       | )          | —                                     |       |
|                                                   |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Pro forma net loss                                     |       | $                                            | (129       | )                                            | $          | (640                                       | )          | $                                          | (488       | ) | $ | (388 | ) |
|                                                   |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Pro forma basic and diluted earnings (loss)  per share |       | $                                            | (.01       | )                                            | $          | (.06                                       | )          | $                                          | (.05       | ) | $ | (.04 | ) |

 

8

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**5.****             New AccountingStandards**

#### ** **

In June 2001, the FASB issued SFAS 143,“Accounting for Asset Retirement Obligations.” The Statement requires entitiesto record the fair value of a liability for legal obligations associated withthe retirement obligations of tangible long-lived assets in the period in whichit is incurred. When the liability is initially recorded, the entity increasesthe carrying amount of the related long-lived asset. Over time, accretion ofthe liability is recognized each period, and the capitalized cost isdepreciated over the useful life of the related asset. Upon settlement of theliability, an entity either settles the obligation for its recorded amount orincurs a gain or loss upon settlement. SFAS 143 is effective for fiscal yearsbeginning after June 15, 2002. The Company adopted SFAS 143 for thecalendar year beginning January 1, 2003. As a result of the adoption, theCompany recorded an asset retirement obligation of approximately $35,546, anincrease to oil and gas properties of $32,156 and a non-cash charge of $6,361,which was recorded as a Cumulative Effect of Change in Accounting Principle atJanuary 1, 2003. The pro-forma effect of the Company’s adoption of SFAS143 as of December 31, 2002 was insignificant to the Company’s financialresults and has not been presented.

 

As of June 30, 2004, the Company’s futureabandonment obligation was estimated to be $96,900, including $86,550 in costscapitalized to oil and gas properties subject to depletion and $10,350 incumulative accretion expense. The Company incurred $1,943 and $3,595 inaccretion expense for the three and six months ended June 30, 2004,respectively. Comparatively, the Company had a total future abandonmentobligation outstanding as of December 31, 2003, of $68,698 including$60,168 in costs capitalized to oil and gas properties and $8,530 in cumulativeaccretion expense. The Company incurred $1,308 and $2,144 in accretion expensefor the three and six months ended June 30, 2003, respectively.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”SFAS 149 amends SFAS No.133, “Accounting for Derivative Instruments and hedgingActivities.” SFAS 149 requires that contracts with comparable characteristicsbe accounted for similarly.  In addition,SFAS 149 also clarifies under what circumstances a contract with an initial netinvestment meets the characteristic of a derivative and clarifies when aderivative contains a financing component. This statement became effective forcontracts entered into or modified after June 30, 2003. The adoption ofthis statement did not have any material impact the Company’s financialposition, results of operations, or cash flows.

 

InJanuary 2003, the FASB issued Interpretation 46 “Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin No. 51”(“FIN 46”) (revised December 2003). FIN 46 will significantly changewhether certain variable interest entities (“VIEs”) are consolidated with theirsponsors, transferors, or investors. FIN 46 introduces a new variable interestconsolidation model, which determines control (and consolidation) based onpotential variability in gains and losses of the entity being evaluated forconsolidation. These provisions apply immediately to variable interests in VIEscreated after January 15, 2003 and are effective for periods ending afterDecember 15, 2003 for VIEs in which the Company holds a variable interestthat it acquired prior to February 1, 2003. The Company does not believeit has any ownership interests in applicable VIEs and, therefore, applicationof the Interpretation will not have any material impact on the Company’sfinancial statements.

 

In May2003, the FASB issued SFAS 150 “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.” This statement setsstandards for classifying and measuring certain financial instruments withcharacteristics of both liabilities and equity. This statement was effectivefor financial instruments entered into after May 31, 2003.  The adoption of SFAS 150 had no effect on theCompany’s financial statements.

 

9

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In June 2001, the FASBissued SFAS No. 141, “Business Combinations,” which requires that all businesscombinations after June 30, 2001 be accounted for using the purchasemethod of accounting and intangible assets be reported separately fromgoodwill. The FASB also issued SFAS No. 142, “Goodwill and Intangible Assets,”which established that goodwill and other indefinite lived intangible assetsshould be reviewed annually for impairment and not amortized ratably over agiven time period. An issue has arisen regarding the application of SFAS 141and SFAS 142 to the upstream oil and gas industry, among other extractiveindustries, whether acquisition costs relating to underlying oil and gasreserves should be reclassified as “intangible costs” other than capitalizedoil and gas property costs. In March 2004, the Emerging Issues Task Force(“EITF”) reached a consensus that mineral rights are tangible assets. The FASB,ratifying the EITF’s consensus, issued FASB Staff Position 141-1 and 142-2 inApril 2004, amending SFAS No. 141 and SFAS No. 142 to define mineralrights as tangible assets. The recent staff positions have had no impact on theCompany’s consolidated financial statements.

 

**6.****             Marketable Securities**

 

The Company’s investments inmarketable securities are classified as “available-for-sale” in accordance withSFAS 115, “Accounting for Certain Investments in Debt and EquitySecurities.”  As a result, theseinvestments are carried at fair market value as of the relevant balance sheetdates.  Unrealized gains and losses areexcluded from net income and reported in a separate component of stockholder’sequity as cumulative other comprehensive income (loss).

 

The carrying amount andestimated market value of these investments as of June 30, 2004 andDecember 31, 2003 are as follows:

 
| ** **                                | ** ** | **As of June 30, 2004** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Cost**                     | ** ** | **Fair Value** | ** ** |
|                                      |       |                         |       |   |   |
| Chaparral Resources, Inc., 543,850 Shares |       | $                            | 543,850    |   | $ | 625,428 |   |
|                                      |       |                         |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | 327,723                      |       | 213,559 |   |
|                                      |       |                         |       |   |   |
| Vangold Resources, Inc., 80,000 Shares    |       | 25,412                       |       | 30,922 |   |
|                                      |       |                         |       |   |   |
| Total                                     |       | $                            | 896,985    |   | $ | 869,909 |   |

 
|                                      |   | **As of December 31, 2003** |       |
|-------------------------------------------|--------|----------------------------------|------------|
|                                      |   | **Cost**                         | ** ** | **Fair Value** | ** ** |
|                                      |   |                             |       |   |   |
| Chaparral Resources, Inc., 543,850 Shares |   | $                                | 1,189,326  |   | $ | 549,288 |   |
|                                      |   |                             |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |   | 327,723                          |       | 168,416 |   |
|                                      |   |                             |       |   |   |
| Vangold Resources, Inc., 100,000 Shares   |   | 31,765                           |       | 57,160 |   |
|                                      |   |                             |       |   |   |
| Total                                     |   | $                                | 1,548,814  |   | $ | 774,864 |   |

 

10

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The Company recognizes any unrealized gain orloss on its marketable securities when the securities are sold or when theCompany determines that a permanent impairment has occurred. As ofMarch 31, 2004, the Company reclassified its unrealized loss in ChaparralResources, Inc. (“Chaparral”) as “other than temporary” and recognized animpairment of $645,476, reducing the Company’s book basis in the securities to$543,850. The Company is evaluating its options to dispose of its investment inChaparral in order to utilize the proceeds for the acquisition, exploration anddevelopment of oil and gas properties. Given the capital nature of any losseswhich would result from the disposition of the Chaparral stock, the Companyrecorded a 100% valuation allowance on the deferred tax asset resulting fromthe impairment.

 

After considering the write-down of theChaparral common stock, the Company has classified the remaining unrealizedgains and losses in its marketable securities as temporary in nature. TheCompany recorded unrealized losses as a component of other comprehensive income(loss) of $17,600, net of deferred taxes of $9,476, and $585,584, net ofdeferred taxes of $315,314, for the periods ended June 30, 2004 and 2003,respectively.

 

The Company’s President and Chief ExecutiveOfficer, Bryce Rhodes, currently serves as an independent director on PYR’sboard of directors, which classifies Mr. Rhodes as an insider of the company.Furthermore, Whittier Ventures, LLC, an affiliate of the Company, ownsapproximately 10% of the outstanding common stock of Chaparral.

 

**7.****             Investments inPartnerships**

 

**The original cost basis, cumulativedistributions and book value of the Company’s partnership investments as ofJune 30, 2004, and December 31, 2003, were as follows:**

** **
| ** **                                                           | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **June 30, 2004  Net Book Value** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------------------|------------|
|                                                                 |       |                       |       |                          |       |                                   |       |
| KAB Acquisition L.P. - II, 8.0% Limited  Partnership Interest        |       | $                          | 150,000    |                          | $          | (242,710                               | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited  Partnership Interest    |       | 150,000                    |       | (161,993                      | )          | —                                 |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited  Partnership Interest    |       | 150,000                    |       | (188,775                      | )          | —                                 |       |
| KAB Acquisition L.L.L.P. - V, 7.5% Limited  Partnership Interest     |       | 150,000                    |       | (123,663                      | )          | 26,337                                 |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825%  Limited Partnership Interest |       | 150,000                    |       | (38,925                       | )          | 111,075                                |       |
| Avalanche Royalty Partners LLC, 8.925%  Membership Interest          |       | 341,000                    |       | (383,510                      | )          | —                                 |       |
| Rincon Energy Partners, LLC, 10% Membership  Interest                |       | 105,530                    |       | —                        |       | 105,530                                |       |
|                                                                 |       |                       |       |                          |       |                                   |       |
| Total                                                                |       | $                          | 1,196,530  |                          | $          | (1,139,576                             | )          | $ | 242,942 |   |

** **

**11**

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** **
| ** **                                                           | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **December 31, 2003  Net Book Value** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|
|                                                                 |       |                       |       |                          |       |                                       |       |
| KAB Acquisition L.P. - II, 8.0% Limited  Partnership Interest        |       | $                          | 150,000    |                          | $          | (198,781                                   | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited  Partnership Interest    |       | 150,000                    |       | (150,258                      | )          | —                                     |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited  Partnership Interest    |       | 150,000                    |       | (165,735                      | )          | —                                     |       |
| KAB Acquisition L.L.L.P. - V, 7.5% Limited  Partnership Interest     |       | 150,000                    |       | (108,860                      | )          | 41,140                                     |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825%  Limited Partnership Interest |       | 150,000                    |       | (20,085                       | )          | 129,915                                    |       |
| Avalanche Royalty Partners LLC, 8.925%  Membership Interest          |       | 341,000                    |       | (338,027                      | )          | 2,973                                      |       |
| Rincon Energy Partners, LLC, 10% Membership  Interest                |       | 66,000                     |       | —                        |       | 66,000                                     |       |
|                                                                 |       |                       |       |                          |       |                                       |       |
| Total                                                                |       | $                          | 1,157,000  |                          | $          | (981,746                                   | )          | $ | 240,028 |   |

 

**The Company records its book valuein partnership investments at the lower of cost or fair market value, lesscumulative cash distributions from each investment. Cash distributions inexcess of basis are recorded as partnership income and any impairment ofpartnership investment is recorded as a charge to income.  The Company periodically reviews itspartnership investments for impairment by comparing each investment’s bookvalue against its fair value. Management uses its best efforts to estimate fairvalue in its partnership investments, based on the historical and expectedfuture performance of each investment, as well as consideration of anysignificant events affecting the underlying assets of each partnership, whichmay limit the Company’s ability to recover its investment. Any resultingimpairment is recorded in earnings in the period the Company determines suchimpairment exists.**

 

**The Company recognized partnershipincome of $84,801 and $121,213 for the three and six months ended June 30,2004, respectively. Comparatively, the Company recognized partnership income of$3,576 for both the three and six months ended June 30, 2003. The Companyalso recognized a loss from the impairment of partnership investments of$733,244 for quarter ended June 30, 2003, due to the total impairment ofthe Company’s investments in the Odin Spirit and the Odin Neptune drillingpartnerships. The general partner of the Odin Neptune partnership disposed ofits principal asset, a semi-submersible rig, for nominal value inJuly 2003 and the partnership was fully liquidated. The Odin Spiritpartnership’s principal assets, two jack-up drilling rigs, were disposed of tosatisfy its third party creditor, which had foreclosed on the rigs in May 2003.Consequently, the Company fully impaired both investments as of the quarterended June 30, 2003.**

 

**8.****             Oil and GasProperties**

 

Oil and gas properties areaccounted for using the successful efforts method.  Under this method, exploration costs(drilling costs of unsuccessful exploration wells, geological and geophysicalcosts, and non-producing leasehold amortization and delay rentals) are chargedto expense when incurred.  Costs todevelop producing properties, including drilling costs and applicable leaseholdacquisition costs, are capitalized. Costs to drill exploratory wells that result in additions to reservesare also capitalized.

 

Depreciation, depletion andamortization of producing properties, including depreciation of well andsupport equipment and amortization of related lease costs, are determined byusing a unit-of-production method based upon estimated proved reserves.  Acquisition costs of unproved properties arecarried at cost until exploration activities commence.

 

12

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Under the successful effortsmethod of accounting for oil and gas properties, the Company periodicallyassesses its proved properties for impairments by comparing the aggregate netbook value of its proved properties with their aggregate estimated future netcash flows. The Company performs a periodic review for impairment of provedproperties on a field by field basis. Unamortized capital costs are measured ona field basis and are reduced to fair value if it is determined that the sum ofexpected future net cash flows is less than the net book value. The Companydetermines if impairments have occurred through either adverse changes or as aresult of its periodic review of its oil and gas properties. Impairment ismeasured on discounted cash flows utilizing a discount rate appropriate forrisks associated with the related properties or based on fair market values. Noimpairment losses were recorded during the interim periods ended June 30,2004 and 2003, respectively.

 

The Company recognized $538,530in exploration expense for the three and six months ended in June 30,2004. The Company incurred $75,926 in exploration expense as a result of itsunsuccessful attempt to sidetrack the Cavenham Forest 5-1 well in the BeaverDam Creek Field due to mechanical problems. Additionally, the Company expensed$462,604 relating to its non-operated interest in the Anvil Bar #75-26 well,drilled in the San Antonio prospect in Monterey County, California. Attempts tocomplete and stimulate the well in July 2004 were unsuccessful and theCompany fully expensed its costs related to the project in the quarter endedJune 30, 2004. All of the applicable costs had been previously accrued bythe Company as of December 31, 2003.

 

The Company recognized$1,033,764 in depletion, depreciation and amortization expense for the sixmonths ended June 30, 2004, compared to $496,886 for the six months endedJune 30, 2003. Comparatively, the Company recognized $514,531 indepletion, depreciation and amortization expense for the three months endedJune 30, 2004, compared to $262,394 for the three months endedJune 30, 2003.

 

In May 2004, the Companyacquired an average 73% working interest in the Cut OffField, located in Lafourche Parish, Louisiana, for $1.65 million dollars. InJuly 2004, the Company acquired an additional 14% average working interest in thefield from two other non-related parties for approximately $400,000, increasingthe Company’s working interest in the field to approximately 87%. The Companyfinanced the May 2004 acquisition of the Cut Off Fieldusing $1.0 million in principal from its existing credit facility and availableworking capital.

 

**9.****             Acquisition of SouthTexas Gas Properties**

 

In June 2004, the Companyacquired various operated working interests in three gas fields in South Texasfor approximately $7.5 million (the “Properties”) from various third partyowners (the “Sellers”). The Properties were used by the Sellers for theexploration, development and production of oil and gas, which is the intendedcontinued use for the acquired assets by the Company.

 

The Company acquired an average78% working interest in the Properties’ seven existing wells and an average 61%working interest in any future undeveloped locations. Specifically, theProperties consist of working interests in the Tom Lyne Field in Live OakCounty, Texas, the Scott & Hopper Field in Brooks County, Texas, and theNorth Rincon Field in Starr County, Texas.

 

The consideration paid for theProperties consisted of i) the payment of approximately $5.7 million in cash;ii) the issuance of a six year, approximate $1.8 million subordinated notebearing an interest rate of 7% and convertible into the Company’s common stockat a conversion price of $2.00 per share (the “Convertible Subordinated Note”);iii) a commitment to drill four wells over a 24-month period and pay certaindrilling costs on behalf of the Sellers’ retained working interests in thosewells (the “Drilling Commitment”); iv) certain future price sharingarrangements through June 30, 2008 in the event actual prices per Mcfreceived by the Company exceed agreed upon pricing levels

 

13

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(the “Upside Price SharingAgreement”); and v) the issuance of a three year warrant to purchase 300,000shares of the Company’s common stock at an exercise price of $2.50 per share.

 

The $5.7 million cash portionof the purchase price was funded through $3.05 million in additional borrowingsunder the Company’s existing credit agreement (see Note 10), cash proceeds fromthe sale by the Company of equity in a private offering (see Note 11), andavailable working capital including the Company’s net revenues from theProperties from the March 1, 2004 effective date of the transaction. Theapproximate $1.8 million Convertible Subordinated Note is more fully describedin Note 10.

 

Under the terms of the DrillingCommitment, the Company must drill a total of four wells, including two wellsin the Scott & Hopper Field and two wells in the North Rincon Field, orreassign a portion of the undeveloped acreage in the Scott & Hopper andNorth Rincon fields to the Sellers.  TheCompany must begin drilling the first two wells on or before March 2005and June 2005, respectively, in order for the Company to retain itsundeveloped acreage rights in each field. The Company must begin drilling the next two wells on or before March 2006and June 2006, respectively, or the Company will reassign 50% of itsundeveloped acreage rights in each field. The Company has also agreed to carrythe Sellers’ drilling costs for the four wells up to “casing election point”(i.e. the decision point on whether to complete the well or abandon it as a dryhole). The estimated capital costs to drill these wells, net to the Company’sinterest and including the Sellers’ carried interests, is approximately $3.1million, which we expect to fund using future cash flows from operations. Inthe event the Company does not drill the required wells, the Company’sinterests in existing wells on the Properties would be unaffected, as well asthe Company’s undeveloped acreage in the Tom Lyne Field, which is not subjectto the Drilling Commitment.

 

The Company has also enteredinto a four-year gas price sharing agreement from July 1, 2004 throughJune 30, 2008. Under the terms of the Upside Price Sharing Agreement, theSellers will receive 50% of the excess, if any, of the Company’s net revenuesfor prices per Mcf received on production from the Properties in excess of anagreed target price during the sharing period. The Company has hedged asignificant portion of the gas production from the Properties in a mannerconsistent with the Company’s hedging arrangements on production from itsexisting properties. The net revenues per Mcf received would be calculated asnet revenues less hedge settlements, transportation and marketing costs,divided by net volumes produced. Any resulting payments due to the Sellersunder the Upside Price Sharing Agreement at the end of each 12 month periodwould be netted for any applicable production taxes, as well. The target pricesare $6.25, $6.50, $6.75, and $7.00 for the fiscal years ended June 30,2005, 2006, 2007, and 2008, respectively.

 

Unaudited field level operatingresults for the Properties for the two years ended December 31, 2002 and2003, respectively, and the interim three months ended March 31, 2004 areas follows (in thousands):

 
| ** **                             | ** ** | **Three Months  Ended  March 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
|                                   |       |                                         |       |                                   |       |                                   |       |
| Oil and gas sales                      |       | $                                            | 811        |                                   | $          | 2,363                                  |       | $ | 694 |   |
| Production taxes                       |       | (60                                          | )          | (174                                   | )          | (51                                    | )          |
| Lease operating expenses               |       | (75                                          | )          | (239                                   | )          | (129                                   | )          |
|                                   |       |                                         |       |                                   |       |                                   |       |
| Field operating income before DD&A |       | $                                            | 676        |                                   | $          | 1,950                                  |       | $ | 514 |   |

 

14

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**10.****          Notes Payable**

 

On July 17, 2002, theCompany signed a revolving credit agreement with a financial institution toborrow up to $15,000,000, based upon the amount of proved reserves attributableto the Company’s oil and gas properties. Interest expense is payable monthly atan interest rate equal to 3/4% over prime, as published by the Wall StreetJournal. The credit agreement was amended in April 2004 to extend itsmaturity date to March 1, 2006.

 

The Company had net borrowingsunder the credit agreement of $8,315,000 and $4,505,000 as of June 30,2004, and December 31, 2003, respectively. During the six months endedJune 30, 2004, the Company borrowed a total of $4.05 million under the creditagreement to finance its May 2004 acquisition of the Cut Off field ($1.0million) and its June 2004 acquisition of three South Texas gas propertiesfurther described in Note 9 ($3.05 million). The Company also repaid $240,000in principal in the quarter ended March 31, 2004 in accordance with theterms of the credit agreement.

 

Under the credit agreement, theCompany incurred interest expense of $106,548 and $100,747 during the sixmonths ended June 30, 2004 and 2003, respectively, all of which was expensedas incurred. As of June 30, 2004, the Company utilized a total of $280,000of its available borrowing base under the credit facility to provide letters ofcredit against required state bonds in Louisiana and Texas relating to theCompany’s operated oil and gas properties. The costs of maintaining the lettersof credit, which are not reflected as principal draw downs under the creditfacility, are included in interest expense.

 

The credit agreement iscollateralized by substantially all of the Company’s assets and the Company issubject to various covenants, representations and warranties as established bythe credit agreement. The primary covenants agreed to by the Company includethe following:

 

**•**      The Company will maintain a total Tangible Net Worth of not less than$4,900,000, plus (a) fifty percent (50%) of net income (excluding losses), and(b) one hundred (100%) of any increases in shareholders’ equity resulting fromthe sale or issuance of equity interests.

** **

•      The Company will maintain aratio of quarterly EBITDAX (net income before interest expenses, taxes,depreciation, depletion, amortization, exploration costs, and other non-cashexpenses less non-cash income and capitalized expenses) to quarterly interestexpense of not less than 3.00.

 

•      The Company will maintain acurrent ratio, determined quarterly, of Current Assets to Current Liabilities,not inclusive of any current portion of principal outstanding under the creditagreement, of at least one to one.

 

The Company was in compliancewith these covenants as of the three and six months ended June 30, 2004and 2003, respectively.

 

As of June 30, 2004, theCompany has classified $2,475,000 of the outstanding principal under the creditagreement as a current liability, based on monthly principal payments requiredas a result of the Company’s latest borrowing base review by the bank performedin May 2004. The bank reviews the Company’s borrowing base every six months orin conjunction with a material acquisition. The Company’s next borrowing base reviewis scheduled for September 2004.

 

15

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Anticipated future maturitiesof the credit line, based on principal outstanding as of June 30, 2004,are as follows:

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2004       |       | $          | 1,125,000  |   |
| 2005       |       | 2,700,000  |       |
| 2006       |       | 2,700,000  |       |
| 2007       |       | 1,790,000  |       |
| Thereafter |       | —     |       |
|       |       |       |       |
| Total      |       | $          | 8,315,000  |   |

 

As discussed in Note 9, theCompany issued to the Sellers of the Properties a Convertible Subordinated Notein the amount of $1,787,330. The Convertible Subordinated Note, including anyaccrued interest thereon, is convertible at any time during its term at aconversion price of $2.00 per share. No principal payments are required on theConvertible Subordinated Note during the first two years it is outstanding. Inthe event the Convertible Subordinated Note is not converted into the Company’scommon stock during this two year period, the Company will repay the principaloutstanding ratably over 48 months until either the Convertible SubordinatedNote has been fully repaid or the remaining principal outstanding on theConvertible Subordinated Note is converted into the Company’s common stock. TheCompany granted “piggy back” registration rights to the Sellers with regards tothe Convertible Subordinated Note, which is fully subordinated to the Company’sexisting credit agreement and may be paid off at any time without penalty tothe Company.

 

**11.****          Common Stock and CommonStock Equivalents**

 

In December 2003, theCompany’s stockholders approved a corporate reorganization of the Company,which included a one-for-ten reverse stock split, the reincorporation of theCompany from Wyoming to Nevada, and the change of the Company’s legal name fromOlympic Resources Ltd. to Whittier Energy Corporation. All common stock andcommon stock equivalents have been retroactively adjusted to reflect theone-for-ten reverse split, which was consummated as of December 31, 2003.

 

In June 2004, the Companyclosed a private placement with accredited investors for 1.38 million shares ofthe Company’s common stock priced at $1.75 per share and three-year warrants to purchase an additional 1.38 million shares of commonstock at an exercise price of $2.50 per share. The private offering was fullysubscribed and resulted in total proceeds to the Company of $2,415,000.  The Company also issued 29,613 shares ofcommon stock and a related warrant to purchase an additional 29,613 shares ofcommon stock at an exercise price of $2.50 per share to a registered broker/dealeras payment for services rendered as a placement agent in connection with theprivate placement.

 

The Company used a significantportion of the net proceeds to finance, in part, its recently announcedacquisition of various operated working interests in three gas fields in SouthTexas. See Note 9.

 

The Company is obligated tofile a registration statement to register the common stock issued in theoffering and the common stock to be issued upon exercise of the warrants forresale.  If the registration statement isnot declared effective on or before December 31, 2004, the Company will beobligated to issue an additional 345,000 shares of common stock and anadditional 345,000 related common stock warrants to the participants in theoffering.

 

16

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In December 2003, theCompany’s Board of Directors approved the Long Term Incentive Plan, which setsaside a total of 1.56 million shares of the Company’s common stock for issuanceto the Company’s officers, directors, employees, and consultants. During thesix months ended June 30, 2004, the Company granted a total of 733,500options to purchase the Company’s common stock at an average exercise price of$1.75 per share to certain employees, officers, and directors of the Company.The options vest ratably over a three-year period from the date of grant andhave a term of five years. The Plan was ratified by the Company’s stockholdersat the Company’s annual meeting held in July 2004.

 

In March 2004, 35,000options to acquire the Company’s common stock at an exercise price of $1.93 pershare expired unexercised.

 

In June 2004, warrants topurchase 120,000 shares of the Company’s common stock at an exercise price of$2.70 per share expired unexercised.

 

As discussed in Note 9, inJune 2004, the Company issued the Sellers of the Properties a three-yearwarrant to purchase 300,000 shares of the Company’s common stock at an exerciseprice of $2.50 per share. The fair market value of the warrant on the date ofgrant was estimated to be $135,000 using the Black-Scholes option pricing modelwith the following weighted average assumptions: risk free interest rate of3.26%, dividend yield of 0%, volatility factors of the expected market price ofthe Company’s common stock of .71, and a weighted average life expectancy ofthe options of 1.5 years.

 

**12.****          Commodity Price RiskHedging Instruments**

 

**The Company held various derivativeinstruments, including crude oil and natural gas option agreements known as“swaps” and “collars” as of June 30, 2004 and 2003, respectively. Swapsare designed to fix the price of anticipated sales of future production, whilecollars are designed to establish floor and ceiling prices on anticipated salesof future production. The Company entered into the contracts at the time itacquired certain operated oil and gas property interests as a means to reducethe future price volatility on its sales of oil and gas production, as well asto achieve a more predictable cash flow from its oil and gas properties. TheCompany has designated its price hedging instruments as cash flow hedges inaccordance with SFAS 133.**

 

The Company accounts for itsderivatives as cash flow hedging instruments, recognizes gains or losses onsettlement of its hedging instruments in oil and gas revenues, and reflectschanges in their fair value as a component of other comprehensive income, netof deferred taxes. The Company considers the ineffective portion of its hedginginstruments to be immaterial. The Company recognized pre-tax losses in oil andgas revenues of $305,213 and $504,602, for the three and six months endedJune 30, 2004, respectively, due to realized settlements of its pricehedge contracts during the relevant periods. Comparatively, the Companyrecognized pre-tax losses in oil and gas revenues of $131,992 and $365,020, forthe three and six months ended June 30, 2003, respectively. The Companyrecorded unrealized losses on cash flow hedging contracts of $567,101, net ofdeferred taxes of $305,362, and $373,128, net of deferred taxes of $200,912,for the periods ended June 30, 2004 and December 31, 2003,respectively.

 

17

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Further details relating to theCompany’s hedging activities are as follows:

 

Hedging Contracts Held as ofJune 30, 2004:

 
| ** **                                  | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** |
|---------------------------------------------|------------|-------------------|------------|--------------------------|------------|
| **Contract Period and Type**                | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** |
|                                        |       |              |       |                     |       |   |   |
| **Crude Oil Contracts (barrels)**           |       |              |       |                     |       |   |   |
| Swap Contracts:                             |       |              |       |                     |       |   |   |
| July 2004 – December 2004    |       | 7,500             |       | N/A                      |       | $ | 22.15 |   |
| July 2004 – December 2004    |       | 6,000             |       | N/A                      |       | $ | 31.05 |   |
| July 2004 – December 2004    |       | 12,000            |       | N/A                      |       | $ | 38.38 |   |
| January 2005 – December 2005 |       | 36,000            |       | N/A                      |       | $ | 34.75 |   |
|                                        |       |              |       |                     |       |   |   |
| Collar Contracts:                           |       |              |       |                     |       |   |   |
| July 2004 – September 2004   |       | 3,000             |       | $                        | 24.50      |   | $ | 29.55 |   |
| July 2004 – December 2004    |       | 17,500            |       | $                        | 18.00      |   | $ | 22.00 |   |
| July 2004 – December 2004    |       | 12,000            |       | $                        | 24.00      |   | $ | 29.25 |   |
| January 2005 – April 2005    |       | 15,000            |       | $                        | 19.75      |   | $ | 22.75 |   |
| January 2005 – December 2005 |       | 12,000            |       | $                        | 26.00      |   | $ | 29.20 |   |
| April 2005 – December 2005   |       | 9,000             |       | $                        | 26.00      |   | $ | 28.25 |   |
| January 2005 – December 2005 |       | 18,000            |       | $                        | 31.00      |   | $ | 36.95 |   |
| January 2006 – December 2006 |       | 96,000            |       | $                        | 30.00      |   | $ | 34.25 |   |
|                                        |       |              |       |                     |       |   |   |
| **Natural Gas Contracts (mmbtu)**           |       |              |       |                     |       |   |   |
| Swap Contracts                              |       |              |       |                     |       |   |   |
| January 2005 – December 2005 |       | 120,000           |       | N/A                      |       | $ | 6.02 |   |
|                                        |       |              |       |                     |       |   |   |
| Collar Contracts:                           |       |              |       |                     |       |   |   |
| July 2004 – December 2004    |       | 12,000            |       | $                        | 4.07       |   | $ | 8.00 |   |
| July 2004 – December 2004    |       | 19,800            |       | $                        | 4.00       |   | $ | 6.70 |   |
| January 2005 – December 2005 |       | 120,000           |       | $                        | 4.00       |   | $ | 7.20 |   |
| July 2004 – September 2004   |       | 90,000            |       | $                        | 6.30       |   | $ | 6.65 |   |
| October 2004 – December 2004 |       | 90,000            |       | $                        | 6.30       |   | $ | 7.50 |   |
| January 2005 – March 2005    |       | 72,000            |       | $                        | 6.20       |   | $ | 8.40 |   |
| April 2005 – September 2005  |       | 144,000           |       | $                        | 5.75       |   | $ | 6.05 |   |
| October 2005 – December 2005 |       | 72,000            |       | $                        | 5.75       |   | $ | 6.75 |   |
| January 2006 – December 2006 |       | 120,000           |       | $                        | 5.00       |   | $ | 6.45 |   |

 

18

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Hedging Contracts Held as ofDecember 31, 2003:

 
| ** **                                   | ** ** | ** **       | ** ** | **Nymex Contract Price** | ** ** |
|----------------------------------------------|------------|------------------|------------|--------------------------|------------|
| **Contract Period and Type**                 | ** ** | **Total Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap Price** | ** ** |
|                                         |       |             |       |                     |       |   |   |
| **Crude Oil Contracts (barrels)**            |       |             |       |                     |       |   |   |
| Swap Contracts:                              |       |             |       |                     |       |   |   |
| January 2004 – December 2004  |       | 15,000           |       | N/A                      |       | $ | 22.15 |   |
|                                         |       |             |       |                     |       |   |   |
| Collar Contracts:                            |       |             |       |                     |       |   |   |
| January 2004 – September 2004 |       | 9,000            |       | $                        | 24.50      |   | $ | 29.55 |   |
| January 2004 – December 2004  |       | 35,000           |       | $                        | 18.00      |   | $ | 22.00 |   |
| January 2004 – December 2004  |       | 24,000           |       | $                        | 24.00      |   | $ | 29.25 |   |
| January 2005 – April 2005     |       | 15,000           |       | $                        | 19.75      |   | $ | 22.75 |   |
|                                         |       |             |       |                     |       |   |   |
| **Natural Gas Contracts (mmbtu)**            |       |             |       |                     |       |   |   |
| Collar Contracts:                            |       |             |       |                     |       |   |   |
| January 2004 – March 2004     |       | 39,900           |       | $                        | 4.00       |   | $ | 8.75 |   |

 

19

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**Item 2.** Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

BusinessCombination of the Company and Whittier Energy 

 

OnSeptember 10, 2003, WEC merged with and into Whittier Energy with WhittierEnergy surviving the Merger to become a wholly owned subsidiary of theCompany.  Although the Company was thelegal acquirer of Whittier Energy and continues as a publicly traded entity,Whittier Energy was the acquirer for accounting purposes. As a result, theCompany has conformed to Whittier Energy’s accounting methods following theMerger, including the use of a calendar year-end and reporting our oil and gasactivities using the successful efforts method of accounting. The Merger ismore fully described in the Company’s Form 8-K filed with the SEC onSeptember 25, 2003, as amended on November 20, 2003.

 

CompanyBackground 

 

Whittier’sprincipal business is the acquisition, exploration, and development of oil andgas properties in the continental United States. Our assets consist of operatedand non-operated working interests, royalty interests, partnership interests,and mineral acreage in various oil and gas properties, principally located inLouisiana, Texas, Oklahoma, and California, with minor property interests inColorado, Utah, New Mexico, Wyoming, and Pennsylvania.

 

Priorto 2002, the Company invested in non-operated working interests, royaltyinterests, and various limited partnership interests in oil and gas properties,as well as other investments related to the oil and gas industry, such asdrilling rig partnerships and private placements in marketable securities inpublic energy companies. These investments were funded through internallygenerated cash flows from operations. During 2002, we expanded our investment strategy to include theacquisition of oil and gas properties we would operate directly and completedtwo significant operated property acquisitions. In April 2002, WhittierEnergy acquired an 89% working interest in the Beaver Dam Creek Unit in St.Helena Parish, Louisiana for approximately $3.5 million. In July 2002,Whittier Energy acquired a 100% working interest in the Big Wells Field inDimmit County, Texas, for approximately $1.65 million. We financed the purchaseof the two properties using a combination of available working capital andapproximately $3.55 million in debt provided by a revolving credit facilityfrom a third party bank (the “Credit Facility”). The Credit Facility isdiscussed in more detail below.

 

Throughout2003, we continued to execute our strategy to invest in operated andnon-operated oil and gas properties, including $400,000 to acquire anapproximate 21% operated working interest in the Rayne Field in Acadia Parish,Louisiana in March 2003, the effective acquisition of our non-operated gasproperties (principally in California) through the September 2003 businesscombination with Olympic (non-cash), and the $1.2 million acquisition of a61.38% operated working interest in the Bonnie View Field in Refugio County,Texas in November 2003. The Company financed the purchase of the RayneField using available working capital and $360,000 in borrowings from theCredit Facility, while the Bonnie View Field acquisition was financed using$600,000 in working capital and $600,000 in principal from the Company’s CreditFacility.

 

As of December 31, 2003,the Company had total proved reserves of 1,960,862 barrels of oil equivalent(“Boe”), consisting of 1,462,770 barrels of oil and 2,989 million cubic feet ofgas (“Mmcf”), of which 97% is considered proved developed producing.Comparatively, we had total provedreserves of 1,802,769 Boe and 302,183 Boe as of December 31, 2002 andDecember 31, 2001, respectively. This represents an 8.8% increase inproved reserves from 2002 and a 549% increase from 2001.

 

Duringthe six months ended June 30, 2004, the Company has accelerated its growththrough acquisitions and operated and non-operated drilling activities. InFebruary and March 2004, the Company acquired an additional 10%working interest in the Bonnie View Field for approximately $195,000, utilizingproceeds from its February 2004 sale of its non-operating interest in theCascade Unit for $525,000.

 

In May 2004, the Companyacquired an approximate 73% operated working interest in the Cut Off Field in Lafourche Parish, Louisiana for approximately$1.65 million. The Company funded the acquisition utilizing a combination ofworking capital and $1.0 million in additional principal borrowed under theCredit Facility. The Company acquired an additional 14% working interest in theCut Off field in July 2004 from two third partysellers for approximately $400,000, increasing its overall interest in thefield to approximately 87%.

 

20

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In June 2004, the Companyacquired various operated working interests in three gas fields in South Texasfor approximately $7.5 million (the “Properties”), of which approximately 50%is considered undeveloped. The Company acquired an average 78% working interestin the Properties’ existing wells and an average 61% working interest in anyfuture undeveloped locations. The Properties consist of working interests inthe Tom Lyne Field in Live Oak County, Texas, the Scott & Hopper Field inBrooks County, Texas, and the North Rincon Field in Starr County, Texas.

 

The Company financed theacquisition of the Properties using a mixture of operating cash flow, equityfinancing, bank financing, and convertible subordinated debt. The considerationpaid for the Properties consisted of i) the payment of approximately $5.7million in cash; ii) the issuance of a six-year, approximate $1.8 millionsubordinated note bearing an interest rate of 7% and convertible into theCompany’s common stock at a conversion price of $2.00 per share (the“Convertible Subordinated Note”); iii) a commitment to drill four wells over a24 month period and pay certain drilling costs on behalf of the Sellers’retained working interests in those wells (the “Drilling Commitment”); iv)certain future price sharing arrangements through June 30, 2008 in theevent actual prices per Mcf received by the Company exceed agreed upon pricinglevels; and v) the issuance of a three-year warrant to purchase 300,000 sharesof the Company’s common stock at an exercise price of $2.50 per share.

 

The $5.7 million cash portionof the purchase price was funded through $3.05 million in additional borrowingsunder the Company’s Credit Facility, cash proceeds from the sale by the Companyof equity in a private offering, and available working capital including theCompany’s net revenues from the Properties from the March 1, 2004effective date of the transaction. In June 2004, the Company closed theprivate placement, raising $2.4 million through the issuance of 1.38 millionshares of the Company’s common stock and an accompanying three year warrant topurchase 1.38 million shares of common stock at an exercise price of $2.50 pershare.

 

The terms of the acquisitionare more fully described in Note 9 to the Company’s financial statementsincluded herein.

 

Liquidityand Capital Resources

 

Duringthe six months ended June 30, 2004, the Company generated approximately$2.4 million in net cash flows from operations and had a net working capitaldeficit of approximately $1.2 million. Not considering the current portion ofits Credit Facility, which includes anticipated principal payments throughJune 30, 2005, the Company had positive net working capital ofapproximately $1.2 million as of June 30, 2004.  The Company is currently producing, net toits interest, approximately 1,050 Boe per day, including 590 barrels of oil perday (“Bopd”) and 2.7 million cubic feet of gas per day (“Mmcfd”), and isgenerating net positive cash flow from its operations.

 

TheCredit Facility provides for a total potential revolving credit line of $15million, the availability of which is determined based on the value of theCompany’s proved oil and gas reserves. During the current period, we borrowed atotal of $4.05 million in principal from the Credit Facility in order tofinance producing property acquisitions, as well as repaid $240,000 inprincipal during the quarter ended March 31, 2004. The Credit Facility iscollateralized by substantially all of the Company’s assets and subjects theCompany to various covenants, representations and warranties as established bythe underlying credit agreement. The terms and conditions of the CreditFacility are more fully described in Note 10 to the Company’s financialstatements included herein.

 

Asof June 30, 2004, the Company had $8.32 million in principal outstandingunder the Credit Facility, of which $2.48 million was classified as a currentliability payable on or before June 30, 2005. The Company is required torepay principal at a rate of $225,000 per month beginning on August 1,2004, subject to adjustment at the Company’s next borrowing base review by thebank scheduled for September 2004. The Company expects to fully fund itsfuture principal payments required on the Credit Facility and its futurecapital requirements for the exploration and development of its existing oiland gas properties using cash flows generated from operations. The ConvertibleSubordinated Note does not require any principal payments prior to June 2006and will not have any significant impact on the Company’s short-term liquidity.

 

TheCompany’s future liquidity, in both the short and long-term, is principallydependent upon the volume of our oil and gas production, as well as the marketprice we receive on future sales of that production. The Company’s provedreserves primarily consist of proved developed producing reserves, which webelieve provide a core basis of future

 

21

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productionand internal cash flow necessary to fund our day-to-day business activities.

 

Thelong-term growth of the Company depends on our ability to replace and extendour existing proved oil and gas reserve base, as well as to increase rates ofproduction from new and existing properties in order to generate higher oil andgas revenues. The Company seeks to accomplish steady and sustainable growth ofits proved reserves and future production rates through the acquisition,exploration and development of additional oil and gas properties, as well ascontinued exploitation and development of existing properties. We presentlyintend to fund future growth using a combination of available working capital,third party debt financing, and the issuance of our equity and/or debtsecurities. The Company is also considering options to dispose of itsinvestment in certain marketable securities in order to reinvest the proceedsinto oil and gas properties.

 

CapitalCommitments and Contingencies 

 

Under the terms of the DrillingCommitment, the Company must drill a total of four wells, including two wellsin the Scott & Hopper Field and two wells in the North Rincon Field, orreassign a portion of the undeveloped acreage in the Scott & Hopper andNorth Rincon fields’ to the Sellers.  TheCompany must begin drilling the first two wells on or before March 2005and June 2005, respectively, in order for the Company to retain itsundeveloped acreage rights in each field. The Company must begin drilling the next two wells on or beforeMarch 2006 and June 2006, respectively, or the Company will reassign50% of its undeveloped acreage rights in each field. The Company has alsoagreed to carry the Sellers’ drilling costs for the four wells up to “casingelection point” (i.e. the decision point on whether to complete the well orabandon it as a dry hole). The estimated capital costs to drill these wells,net to the Company’s interest and including the Sellers’ carried interests, isapproximately $3.1 million, which we expect to fund using future cash flows fromoperations. In the event the Company does not drill the required wells, theCompany’s interests in existing wells on the Properties would be unaffected, aswell as the Company’s undeveloped acreage in the Tom Lyne Field which is notsubject to the Drilling Commitment.

 

Resultsof Operations 

 

*For theQuarter Ended June 30, 2004 compared with the Quarter Ended June 30,2003*

 

Wegenerated a net loss of approximately $37,000, or $0.00 per share, for thequarter ended June 30, 2004, compared to a net loss of $640,000, or $0.06per share, for the comparable period ended June 30, 2003. The $603,000variance primarily relates to the $733,000 impairment of the Company’sinvestment in certain drilling rig partnerships taken by the Company in theprior period. The Company’s net loss for the current period is due to $539,000in exploration costs incurred in the drilling of two exploratory wells.

 

Duringthe quarter ended June 30, 2004, we generated oil and gas revenues ofapproximately $2.2 million, or $31.13 per Boe, on production of approximately69,746 Boe (42,248 Bbls oil and 165 Mmcf gas). For the comparable period in2003, we generated revenues of approximately $1.4 million, or $25.00 per Boe,on production of approximately 56,242 Boe (41,267 Bbls oil and 90 Mmcf gas).The 54% increase in revenues was based upon a combination of 24% higherproduction volumes as well as 25% higher average prices obtained for oil andgas sold during the current period. The increase in production in the currentperiod resulted from the Company’s producing property acquisitions sinceJune 2003, including the East Corning field (September 2003) theBonnie View field (November 2003 and February 2004), the Cut Offfield (May 2004), and the Tom Lyne, Scott & Hopper and North Rincon fields inJune 2004. The Company also experienced higher production from theCompany’s investment in the Greater Mayfield area in Oklahoma.

 

22

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Lease operating expenses(“LOE”) increased by $6,000, or 1%, from $658,000 for the quarter ended June30, 2003 to $664,000 for the quarter ended June 30, 2004, while LOE per unit ofproduction decreased by 19% from $11.70 per Boe to $9.52 per Boe between thetwo periods. Depletion, depreciation, and amortization (“DD&A”) increasedfrom approximately $262,000, or $4.66 per Boe, for the quarter ended June 30,2003, to $515,000, or $7.38 per Boe, for the quarter ended June 30, 2004. Thedecrease in operating costs relates to non-recurring workover and stimulationcosts incurred during 2003 in the Beaver Dam Creek and Big Wells Fields inorder to enhance production. The increase in DD&A is related to greatertotal production during the current period as a result of our acquisitionscompleted in late 2003 and 2004, as well as a higher DD&A rate per unit ofproduction associated with our California and South Texas gas propertyacquisitions.

 

The Company recognizedapproximately $539,000 in exploration expense during the three months endedJune 30, 2004. The Company incurred approximately $76,000 in explorationexpense as a result of its unsuccessful attempt to sidetrack the Cavenham Forest 5-1 well in the Beaver Dam Creek field due to mechanicalproblems. Additionally, the Company expensed $463,000 relating to itsnon-operated interest in the Anvil Bar #75-26 well, drilled in the San Antonioprospect in Monterey County, California. Attempts to complete and stimulate thewell in July 2004 were unsuccessful and the Company fully expensed itscosts related to the project in the quarter ended June 30, 2004. All ofthe applicable costs associated with the Anvil Bar well had been previouslyaccrued by the Company as of December 31, 2003.

 

Generaland administrative expenses were approximately $328,000 for the three monthsended June 30, 2004, compared to $316,000 for the comparable period endedJune 30, 2003.

 

Duringthe quarter ended June 30, 2003, the Company recognized a loss onimpairment of partnership investments of approximately $733,000, due to thetotal impairment of our investments in the Odin Spirit and the Odin Neptunedrilling rig partnerships. The general partner of the Odin Neptune partnershipdisposed of its principal asset, a semi-submersible rig, for nominal value inJuly 2003 and the partnership was fully liquidated. The Odin Spiritpartnership’s principal assets, two jack-up drilling rigs, were disposed of tosatisfy its third party creditor, which had foreclosed on the rigs in May 2003.Consequently, the Company fully impaired both investments as of the quarterended June 30, 2003.

 

*For theSix Months Ended June 30, 2004 compared with the Six Months EndedJune 30, 2003*

 

Wegenerated a net loss of approximately $313,000, or $0.03 per share, for the sixmonths ended June 30, 2004, compared to a net loss of $388,000, or $0.04 pershare, for the comparable period ended June 30, 2003. The net lossgenerated during the period ended June 30, 2004 was driven by $539,000 inexploration expenses incurred during the latest quarter, as well as the$645,000 impairment of the Company’s investment in certain marketablesecurities. The Company’s net loss for the six months ended June 30, 2003was principally due to the $733,000 impairment of the Company’s investment incertain drilling rig partnerships.

 

Duringthe six months ended June 30, 2004, we generated oil and gas revenues ofapproximately $4.1 million, or $30.50 per Boe, on production of approximately133,611 Boe (82,924 Bbls oil and 304 Mmcf gas). For the comparable period in2003, we generated revenues of approximately $2.9 million, or $26.85 per Boe,on production of approximately 108,257 Boe (82,297 Bbls oil and 156 Mmcf gas).The 40% increase in revenues was based primarily upon higher production volumes(23%), as well as higher prices obtained for oil and gas sold during the currentperiod (14%). The increase in production in the current period resulted fromthe Company’s producing property acquisitions since June 2003, includingthe East Corning field (September 2003) the Bonnie View field(November 2003 and February 2004), the Cut Off field (May 2004), andthe Tom Lyne, Scott & Hopper and North Rincon fields in June 2004. TheCompany also experience higher production from the Company’s investment in theGreater Mayfield area in Oklahoma.

 

23

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LOE decreased by $23,000, or2%, from $1,162,000 for the period ended June 30, 2003 to $1,139,000 for theperiod ended June 30, 2004, while LOE per unit of production decreased by 21%from $10.73 per Boe to $8.52 per Boe between the two periods. DD&Aincreased from approximately $497,000, or $4.59 per Boe, for the six monthsended June 30, 2003, to $1,034,000, or $7.74 per Boe, for the six months endedJune 30, 2004. The decrease in operating costs relates to non-recurringworkover and stimulation costs incurred during 2003 in the Beaver Dam Creek andBig Wells Fields in order to enhance production. The increase in DD&A isrelated to greater total production during the current period as a result ofour acquisitions completed in late 2003 and 2004, as well as a higher DD&Arate per unit of production associated with our California and South Texas gasproperty acquisitions.

 

The Company recognizedapproximately $539,000 in exploration expense during the six months endedJune 30, 2004. The Company incurred approximately $76,000 in explorationexpense as a result of its unsuccessful attempt to sidetrack the CavenhamForest 5-1 well in the Beaver Dam Creek field due to mechanical problems.Additionally, the Company expensed $463,000 relating to its non-operatedinterest in the Anvil Bar #75-26 well, drilled in the San Antonio prospect inMonterey County, California. Attempts to complete and stimulate the well inJuly 2004 were unsuccessful and the Company fully expensed its costsrelated to the project in the quarter ended June 30, 2004. All of theapplicable costs associated with the Anvil Bar well had been previously accruedby the Company as of December 31, 2003.

 

Generaland administrative expenses were approximately $737,000 for the six monthsended June 30, 2004, compared to $456,000 for the comparable period endedJune 30, 2003. The increase of $281,000 reflects our enhanced operationalactivity from the prior year, including establishing new corporate headquartersin Houston, Texas, transitioning from a private to a public company, andincreasing the Company’s staff from one to five full-time employees. Additionalnon-recurring costs relating to the Merger include approximately $68,000 ingeneral and administrative costs associated with the maintaining an office inVancouver through March 31, 2004.

 

Forthe six months ended June 30, 2004, the Company recognized a gain ofapproximately $242,000 on the sale of an approximate 5% working interest in theCascade Unit in Los Angeles County, California, for $525,000. The comparableperiod in 2003, the Company recognized a loss of $31,000 on the sale of anon-operated oil and gas property interest for approximately $36,000.

 

In the period ended June 30, 2004, theCompany reclassified its unrealized loss in Chaparral as “other than temporary”and recognized an impairment of approximately $645,000. The Company isevaluating its options to dispose of its investment in Chaparral and intends tomonetize its investment in order to utilize the proceeds for the acquisition,exploration and development of oil and gas properties. Given the capital natureof any losses which would result from the future disposition of the Company’sinvestment in Chaparral, the Company recorded a 100% valuation allowance on thedeferred tax asset resulting from the impairment.

 

Duringthe period ended June 30, 2003, the Company recognized a loss onimpairment of partnership investments of approximately $733,000, due to thetotal impairment of our investments in the Odin Spirit and the Odin Neptunedrilling rig partnerships. The general partner of the Odin Neptune partnershipdisposed of its principal asset, a semi-submersible rig, for nominal value inJuly 2003 and the partnership was fully liquidated. The Odin Spiritpartnership’s principal assets, two jack-up drilling rigs, were disposed of tosatisfy its third party creditor, which had foreclosed on the rigs in May 2003.Consequently, the Company fully impaired both investments as of the quarterended June 30, 2003.

 

Off-BalanceSheet Arrangements

 

Weare not a party to any off balance sheet arrangements.

 

**Item 3.****Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

### **The term “disclosure controls andprocedures” (defined in Rule 13a-15(e)) refers to the controls and proceduresof a company that are designed to ensure that information required to bedisclosed by a company in the reports that it files under the Securities andExchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedand reported within required time periods. Whittier’s Chief Executive Officer and Chief Financial Officer, who alsoserves as the principal accounting officer, have evaluated the effectiveness ofthe Company’s disclosure controls and**

 

24

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### **procedures** as of a date within 90 days before the filing ofthis quarterly report, and they concluded that, as of such date, Whittier’scontrols and procedures were effective.

### ** **

**Part II– Other Information**

 

**Item2 – Changes in Securities**

 

In June 2004, the Companyissued 1,380,000 shares of common stock at an equivalent price of $1.75 pershare, as well as warrants to purchase 1,380,000 additional shares of theCompany’s common stock at an exercise price of $2.50 per share, to variousaccredited investors, including certain directors, officers and an affiliate ofthe Company, in a private placement of the Company’s securities. The Companyreceived $2,415,000 in gross cash proceeds in exchange for its securities.Global Resource Investments, a registered broker/dealer, acted as placementagent for a portion of the private offering, consisting of 397,500 shares ofcommon stock and warrants to purchase an additional 397,500 shares of commonstock.  As payment for these services,the Company issued 29,613 shares of common stock and a related warrant topurchase an additional 29,613 shares of common stock at an exercise price of$2.50 per share to Global Resource Investments. The Company issued the shares and the common stock warrants in relianceupon the exemption from registration under Section 4(2) of the SecuritiesAct of 1933, as amended. The recipients had available all material informationconcerning the Company and the stock certificates bear an appropriaterestrictive legend under the Securities Act of 1933, as amended.

 

#### **Item 6 – Exhibits and Reports on Form 8-K**

 

**Open**

 
| (a)    | Exhibits             |   |                                                                                                                                                                                                 |
|--------|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                 |   |                                                                                                                                                                                                 |
|   | Exhibit  31.1        |   | Certification  of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule  13a-14(a) or 15d-14(a)                                                                                   |
|   |                 |   |                                                                                                                                                                                                 |
|   | Exhibit  31.2        |   | Certification  of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule  13a-14(a) or 15d-14(a)                                                                                   |
|   |                 |   |                                                                                                                                                                                                 |
|   | Exhibit 32.1         |   | Certifications  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 |
|   |                 |   |                                                                                                                                                                                                 |
| (b)    | Reports on  Form 8-K |

 
| (i)    |   | 8-K Report filed on May  18, 2004 – Item 5. Other Events,       |
|--------|--------|----------------------------------------------------------------------|
|   |   |                                                                 |
| (ii)   |   | 8-K Report filed on  June 18, 2004 – Item 5. Other Events. |
|   |   |                                                                 |
| (iii)  |   | 8-K Report filed on  June 18, 2004 – Item 5. Other Events. |
|   |   |                                                                 |
| (iv)   |   | 8-K Report filed on  June 18, 2004 – Item 5. Other Events. |

 

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**Signatures**

 

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

 
| Dated: | August 16,  2004        |                                               |
|--------|------------------------------|----------------------------------------------------|
|   |                         |
|   |                         |
|   | 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, Treasurer and Controller |
|   |                         | (Principal  Financial and Accounting Officer)      |

 

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