**FORM 10-QSB**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**x****                             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 30, 2006**

**OR**

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from                                to                                .**

**CommissionFile Number:  000-30598**

**WHITTIER ENERGY CORPORATION**

(Exact Name of Small BusinessIssuer as Specified in Its Charter)

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

 

**333 Clay Street, Suite 700**

**Houston, Texas 77002**

(Address ofPrincipal Executive Offices)

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

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

YES  x               NO  o

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

YES  o               NO  x

As of November 9, 2006 the Registrant had 12,563,465 shares of its $.001par value common stock issued and outstanding.

 

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**Part I – Summarized FinancialInformation**

**Item 1 –Financial Statements**

**WhittierEnergy Corporation**

**ConsolidatedBalance Sheets**

**(InThousands, Except Share Data)**
|                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                             |       |                   |       |                  |       |
| Current assets:                                                        |       |                   |       |                  |       |
| Cash and cash  equivalents                                             |       | $                      | 4,509      |                  | $          | 5,091 |   |
| Restricted cash  (Note 2)                                              |       | 1,200                  |       | —                |       |
| Accounts  receivable, net of allowances                                |       | 10,006                 |       | 11,092                |       |
| Commodity price  hedging contracts, current portion (Note 6)           |       | 1,143                  |       | —                |       |
| Deferred tax asset  - commodity price hedging contracts                |       | —                 |       | 2,080                 |       |
| Prepaid assets                                                         |       | 1,819                  |       | 982                   |       |
|                                                                   |       |                   |       |                  |       |
| Total current assets                                                   |       | 18,677                 |       | 19,245                |       |
|                                                                   |       |                   |       |                  |       |
| Oil and gas properties  on the basis of full cost accounting (Note 3): |       |                   |       |                  |       |
| Proved  properties, subject to amortization                            |       | 134,591                |       | 94,111                |       |
| Unproved  properties, not subject to amortization                      |       | 25,391                 |       | 14,990                |       |
| Other equipment  and fixtures                                          |       | 496                    |       | 267                   |       |
| Accumulated depletion,  depreciation and amortization                  |       | (25,862                | )          | (14,272               | )          |
|                                                                   |       | 134,616                |       | 95,096                |       |
| Goodwill                                                               |       | 1,485                  |       | 1,485                 |       |
| Commodity price hedging  contracts (Note 6)                            |       | 925                    |       | —                |       |
| Other assets                                                           |       | 738                    |       | 725                   |       |
|                                                                   |       |                   |       |                  |       |
| Total assets                                                           |       | $                      | 156,441    |                  | $          | 116,551 |   |

 

*See accompanying notes.*

2

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|                                                                                                                                                                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Liabilities  and stockholders’ equity**                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Accounts payable                                                                                                                                                                     |       | $                            | 9,378      |                        | $          | 9,944 |   |
| Commodity price hedging contracts, current portion  (Note 6)                                                                                                                         |       | —                       |       | 5,473                       |       |
| Deferred tax liability - commodity price hedging  contracts                                                                                                                          |       | 430                          |       | —                      |       |
| Other current liabilities                                                                                                                                                            |       | 138                          |       | 353                         |       |
| Total current  liabilities                                                                                                                                                           |       | 9,946                        |       | 15,770                      |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Credit facility  (Note 4)                                                                                                                                                            |       | 45,500                       |       | 14,000                      |       |
| Asset retirement  obligation (Note 5)                                                                                                                                                |       | 687                          |       | 488                         |       |
| Commodity price  hedging contracts (Note 6)                                                                                                                                          |       | —                       |       | 2,309                       |       |
| Deferred income  tax liability                                                                                                                                                       |       | 26,830                       |       | 23,290                      |       |
|                                                                                                                                                                                 |       | 82,963                       |       | 55,857                      |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Commitments and  contingencies                                                                                                                                                       |       |                         |       |                        |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                                                                                          |       |                         |       |                        |       |
| Common stock, $.001 par value, 100,000,000 shares  authorized, 12,563,465 and 12,515,265 shares issued and outstanding as of  September 30, 2006 and December 31, 2005, respectively |       | 13                           |       | 13                          |       |
| Additional paid-in capital                                                                                                                                                           |       | 54,726                       |       | 53,446                      |       |
| Accumulated other comprehensive loss, unrealized  loss on marketable securities, net of tax benefits of $62 and $35, at  September 30, 2006 and December 31, 2005, respectively      |       | (102                         | )          | (57                         | )          |
| Accumulated other comprehensive income (loss),  hedging contracts, net of taxes of $593  at September 30, 2006 and net of a tax benefit of $2,690 at December  31, 2005 (Note 6)     |       | 966                          |       | (4,389                      | )          |
| Retained earnings                                                                                                                                                                    |       | 17,875                       |       | 11,681                      |       |
| Total  stockholders’ equity                                                                                                                                                     |       | 73,478                       |       | 60,694                      |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                     |       | $                            | 156,441    |                        | $          | 116,551 |   |

 

*See accompanying notes.*

3

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**WhittierEnergy Corporation**

**Consolidated Statements ofOperations**

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

**(Unaudited)**
|                                           | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Oil and gas  revenues                     |       | $                                                      | 11,372     |                                                   | $          | 9,595                                                 |       | $                                                     | 32,189     |   | $ | 16,253 |   |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Costs and  expenses:                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Lease operating expenses                  |       | 1,878                                                  |       | 1,381                                                  |       | 4,788                                                 |       | 3,374                                                 |       |
| Production taxes                          |       | 825                                                    |       | 777                                                    |       | 2,398                                                 |       | 1,343                                                 |       |
| Depreciation, depletion, and amortization |       | 4,834                                                  |       | 2,835                                                  |       | 12,802                                                |       | 4,492                                                 |       |
| Ineffective portion of hedge contracts    |       | (516                                                   | )          | 687                                                    |       | (1,222                                                | )          | 798                                                   |       |
| General and administrative expenses       |       | 1,511                                                  |       | 1,186                                                  |       | 4,083                                                 |       | 2,042                                                 |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Total costs and  expenses                 |       | 8,532                                                  |       | 6,866                                                  |       | 22,849                                                |       | 12,049                                                |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Income from  operations                   |       | 2,840                                                  |       | 2,729                                                  |       | 9,340                                                 |       | 4,204                                                 |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Other income  (expense):                  |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Interest and dividend income              |       | 2                                                      |       | 6                                                      |       | 24                                                    |       | 15                                                    |       |
| Interest expense                          |       | (290                                                   | )          | —                                                 |       | (424                                                  | )          | (224                                                  | )          |
| Gain from sales of marketable securities  |       | —                                                 |       | 902                                                    |       | —                                                |       | 1,267                                                 |       |
| Partnership income                        |       | 72                                                     |       | 75                                                     |       | 305                                                   |       | 198                                                   |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Other income  (expense)                   |       | (216                                                   | )          | 983                                                    |       | (95                                                   | )          | 1,256                                                 |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Income before  income taxes               |       | 2,624                                                  |       | 3,712                                                  |       | 9,245                                                 |       | 5,460                                                 |       |
| Provision for  income taxes               |       | (866                                                   | )          | (1,299                                                 | )          | (3,051                                                | )          | (1,911                                                | )          |
| Net income                                |       | $                                                      | 1,758      |                                                   | $          | 2,413                                                 |       | $                                                     | 6,194      |   | $ | 3,549 |   |

 

*Seeaccompanying notes.*

4

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**WhittierEnergy Corporation**

**Consolidated Statements ofOperations**

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

**(Unaudited)**
|                                                                         | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                    |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Basic earnings per  share:                                              |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Net income per share                                                    |       | $                                                      | .14        |                                                   | $          | .61                                                   |       | $                                                     | .49        |   | $ | .91 |   |
| Weighted average number  of shares outstanding (basic)                  |       | 12,558,139                                             |       | 3,954,756                                              |       | 12,531,491                                            |       | 3,885,515                                             |       |
|                                                                    |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Diluted earnings per  share:                                            |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Net income per share                                                    |       | $                                                      | .14        |                                                   | $          | .19                                                   |       | $                                                     | .49        |   | $ | .47 |   |
| Weighted average number  of shares outstanding (dilutive)               |       | 12,595,426                                             |       | 12,733,270                                             |       | 12,616,163                                            |       | 7,578,127                                             |       |
|                                                                    |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Net income                                                              |       | $                                                      | 1,758      |                                                   | $          | 2,413                                                 |       | $                                                     | 6,194      |   | $ | 3,549 |   |
| Diluted net income:                                                     |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Interest on  convertible subordinated note                              |       | —                                                 |       | —                                                 |       | —                                                |       | 38                                                    |       |
| Diluted net income                                                      |       | $                                                      | 1,758      |                                                   | $          | 2,413                                                 |       | $                                                     | 6,194      |   | $ | 3,587 |   |
|                                                                    |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Dilutive securities  outstanding:                                       |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Basic shares  outstanding                                               |       | 12,558,139                                             |       | 3,954,756                                              |       | 12,531,491                                            |       | 3,885,515                                             |       |
| Stock options  and warrants                                             |       | 37,287                                                 |       | 181,397                                                |       | 84,672                                                |       | 98,039                                                |       |
| Convertible  subordinated note                                          |       | —                                                 |       | 67,997                                                 |       | —                                                |       | 220,416                                               |       |
| Series A  preferred stock                                               |       | —                                                 |       | 8,529,120                                              |       | —                                                |       | 3,374,157                                             |       |
| Diluted shares  outstanding, assuming conversion of dilutive securities |       | 12,595,426                                             |       | 12,733,270                                             |       | 12,616,163                                            |       | 7,578,127                                             |       |

 

*See accompanying notes.*

5

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**WhittierEnergy Corporation**

**Consolidated Statements of CashFlows**

**(In Thousands)**

**(Unaudited)**
|                                                                                | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Cash  flows from operating activities**                                      |       |                                                      |       |                                                      |       |
| Net income                                                                     |       | $                                                         | 6,194      |                                                      | $          | 3,549 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                      |       |                                                      |       |
| Depreciation, depletion, and amortization                                      |       | 12,802                                                    |       | 4,492                                                     |       |
| Amortization of debt issue costs                                               |       | 93                                                        |       | —                                                    |       |
| Deferred income tax provision                                                  |       | 2,803                                                     |       | 1,911                                                     |       |
| Partnership income                                                             |       | (305                                                      | )          | (198                                                      | )          |
| Stock based compensation expense                                               |       | 801                                                       |       | —                                                    |       |
| Ineffective portion of hedge loss (gain)                                       |       | (1,222                                                    | )          | 798                                                       |       |
| Gain on sale of marketable securities                                          |       | —                                                    |       | (1,267                                                    | )          |
| (Increase) decrease in accounts receivable                                     |       | 1,087                                                     |       | (2,640                                                    | )          |
| Increase in prepaids and other receivables                                     |       | (837                                                      | )          | (822                                                      | )          |
| Increase (decrease) in accounts payable                                        |       | (566                                                      | )          | 2,150                                                     |       |
| Increase (decrease) in other current liabilities                               |       | (215                                                      | )          | 58                                                        |       |
| Excess tax benefits from share-based payment  arrangements                     |       | (39                                                       | )          | —                                                    |       |
| Net cash  provided from operating activities                                   |       | 20,596                                                    |       | 8,031                                                     |       |
| ** **                                                                     | ** ** | ** **                                                | ** ** | ** **                                                | ** ** |
| **Cash  flows from investing activities**                                      |       |                                                      |       |                                                      |       |
| Investment in  oil and gas properties                                          |       | (28,104                                                   | )          | (8,556                                                    | )          |
| Acquisition of  RIMCO, net of cash acquired                                    |       | —                                                    |       | (55,377                                                   | )          |
| Acquisitions of  Westhoff Ranch Field and Imperial, net of restricted cash     |       | (28,643                                                   | )          | —                                                    |       |
| Proceeds from  sale of oil and gas properties                                  |       | 3,644                                                     |       | 4,119                                                     |       |
| Investments in  partnerships                                                   |       | (16                                                       | )          | (6                                                        | )          |
| Distributions  from partnerships                                               |       | 382                                                       |       | 231                                                       |       |
| Proceeds from  sale of marketable securities                                   |       | —                                                    |       | 1,810                                                     |       |
| Net cash used in  investing activities                                         |       | (52,737                                                   | )          | (57,779                                                   | )          |
|                                                                           |       |                                                      |       |                                                      |       |
| **Cash  flows from financing activities**                                      |       |                                                      |       |                                                      |       |
| Proceeds from  credit facility                                                 |       | 31,500                                                    |       | 21,000                                                    |       |
| Payments on  credit facility                                                   |       | —                                                    |       | (11,745                                                   | )          |
| Payments on  convertible note                                                  |       | —                                                    |       | (1,072                                                    | )          |
| Debt issue costs                                                               |       | (238                                                      | )          | (266                                                      | )          |
| Net proceeds  from preferred stock offering                                    |       | —                                                    |       | 46,066                                                    |       |
| Proceeds from  stock options exercises                                         |       | 258                                                       |       | 131                                                       |       |
| Excess tax benefits  from share-based payment arrangements                     |       | 39                                                        |       | —                                                    |       |
| Net cash provided from  financing activities                                   |       | $                                                         | 31,559     |                                                      | $          | 54,114 |   |

 

6

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Cash Flows**

**(In Thousands)**

**(Unaudited)**
|                                                                           | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net increase (decrease) in cash and cash equivalents                      |       | $                                                         | (582       | )                                                         | $          | 4,366 |   |
|                                                                      |       |                                                      |       |                                                      |       |
| Cash and cash equivalents at beginning of period                          |       | 5,091                                                     |       | 1,461                                                     |       |
|                                                                      |       |                                                      |       |                                                      |       |
| Cash and cash equivalents at end of period                                |       | $                                                         | 4,509      |                                                      | $          | 5,827 |   |
|                                                                      |       |                                                      |       |                                                      |       |
| **Supplemental cash flow disclosure**                                     | ** ** | ** **                                                | ** ** | ** **                                                | ** ** |
| Interest paid                                                             |       | $                                                         | 1,324      |                                                      | $          | 706 |   |
| Income taxes paid                                                         |       | $                                                         | 248        |                                                      | $          | — |   |
|                                                                      |       |                                                      |       |                                                      |       |
| **Supplemental schedule of non-cash investing and  financing activities** |       |                                                      |       |                                                      |       |
| Repayment of principal on convertible note using  common stock            |       | $                                                         | —     |                                                      | $          | 715 |   |
| Unrealized gain (loss) on marketable securities, net                      |       | $                                                         | (45        | )                                                         | $          | 30 |   |

 

*Seeaccompanying notes.*

7

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**Whittier Energy Corporation**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

**1.             General**

WhittierEnergy Corporation, a Nevada corporation (“Whittier” or the “Company”), is anindependent oil and gas exploration and production company engaged in theacquisition, exploration and development of oil and gas properties in thecontinental United States. As of September 30, 2006, Whittier had five whollyowned subsidiaries, including Whittier Energy Company (“Whittier Energy”), aNevada corporation, Whittier Operating, Inc. (“Whittier Operating”), a Texascorporation, Olympic Resources (Arizona) Ltd., an Arizona corporation, RIMCOProduction Company, Inc. (“RIMCO”), a Delaware corporation, and Vaquero GasCompany, Inc. (“Vaquero”), a Texas corporation. Whittier Operating is a directsubsidiary of Whittier Energy and Vaquero is a direct subsidiary of RIMCO. Whenthe terms the “Company,” “we,” “us,” or “our” are used it is in reference toWhittier and its subsidiaries. 

Theconsolidated financial statements as of and for the three and nine months endedSeptember 30, 2006 and 2005 are unaudited. These consolidated financial statements have been prepared in a mannerconsistent with the accounting policies described in the Company’s annualreport on Form 10-KSB for the year ended December 31, 2005 and should beread in conjunction therewith.  In theopinion of management, these financial statements reflect all adjustments,which are normal recurring adjustments necessary for the fair presentation ofthe results for the interim periods presented. The results of operations forthe interim periods are not necessarily indicative of the results to beexpected for any future interim period or for the year.

Thepreparation of financial statements in conformity with United States generallyaccepted accounting principles requires management to make numerous estimates and assumptions that affect theaccounting for and recognition of assets, liabilities, stockholders’ equity,revenues and expenses.  Significantestimates relate to volumes of oil and natural gas reserves used in calculatingdepletion of proved oil and natural gas properties. Oil and natural gas reserveestimates, which are the basis for unit-of-production depletion and the ceilingtest, have numerous inherent uncertainties. The accuracy of any reserveestimate is a function of the quality of available data and of engineering andgeological interpretation and judgment. Results of drilling, testing andproduction subsequent to the date of the estimate may justify revision of suchestimate. Accordingly, reserve estimates are often different from thequantities of oil and natural gas that are ultimately recovered. In addition,reserve estimates are vulnerable to changes in market prices. Such prices havebeen volatile in the past and can be expected to be volatile in thefuture.  Actual results could differ materially from the estimatesand assumptions that we use in the preparation of our financial statements.

**2.             Acquisitions**

The Company continuously reviews opportunities to acquireproperties in the Company’s core areas of operation that will add revenuegrowth and production improvements.  Thefollowing is a summary of the Company’s acquisition activity through the firstnine months of 2006.

On June 1, 2006, Whittier acquired a 75% operated working interest inthe Westhoff Ranch Field for approximately $18 million in cash from variousthird party sellers.  The effective dateof this acquisition was February 1, 2006. The Westhoff Ranch Field is a 2,300 acre property located in JacksonCounty, Texas. The full purchase price was allocated to oil and gasproperties.  The acquired properties andtheir related operations are included in Whittier’s consolidated financial statementsfrom the date of closing.

8

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The followingunaudited pro forma consolidated results of operations have been prepared forthe Westhoff acquisition as if the Company had attained the working interestsas of the beginning of the period being reported (in thousands):   
|                                           | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Oil and gas  revenues                     |       | $                                                      | 11,372     |                                                   | $          | 11,626                                                |       | $                                                     | 36,066     |   | $ | 20,463 |   |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Costs and  expenses:                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Lease operating expenses                  |       | 1,878                                                  |       | 1,498                                                  |       | 5,196                                                 |       | 3,714                                                 |       |
| Production taxes                          |       | 825                                                    |       | 928                                                    |       | 2,640                                                 |       | 1,627                                                 |       |
| Depreciation, depletion, and amortization |       | 4,834                                                  |       | 4,087                                                  |       | 14,056                                                |       | 6,452                                                 |       |
| Ineffective portion of hedge contracts    |       | (516                                                   | )          | 687                                                    |       | (1,222                                                | )          | 798                                                   |       |
| General and administrative expenses       |       | 1,511                                                  |       | 1,186                                                  |       | 4,083                                                 |       | 2,042                                                 |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Total costs and  expenses                 |       | 8,532                                                  |       | 8,386                                                  |       | 24,753                                                |       | 14,633                                                |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Income from  operations                   |       | 2,840                                                  |       | 3,240                                                  |       | 11,313                                                |       | 5,830                                                 |       |
| Other income  (expense)                   |       | (216                                                   | )          | 833                                                    |       | (424                                                  | )          | 899                                                   |       |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Income before  income taxes               |       | 2,624                                                  |       | 4,073                                                  |       | 10,889                                                |       | 6,729                                                 |       |
| Provision for  income taxes               |       | (918                                                   | )          | (1,426                                                 | )          | (3,811                                                | )          | (2,355                                                | )          |
| Net income                                |       | $                                                      | 1,706      |                                                   | $          | 2,647                                                 |       | $                                                     | 7,078      |   | $ | 4,374 |   |
|                                      |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Basic net income  per share               |       | $                                                      | .14        |                                                   | $          | .67                                                   |       | $                                                     | .56        |   | $ | 1.13 |   |
| Diluted net  income per share             |       | $                                                      | .14        |                                                   | $          | .21                                                   |       | $                                                     | .56        |   | $ | .58 |   |
| Weighted average  shares outstanding:     |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Basic                                     |       | 12,558,139                                             |       | 3,954,756                                              |       | 12,531,491                                            |       | 3,885,515                                             |       |
| Fully diluted                             |       | 12,595,426                                             |       | 12,733,270                                             |       | 12,616,163                                            |       | 7,578,127                                             |       |

 

Subsequently, on August9, 2006, the Company acquired three oil and gas fields located in Mississippiand Texas from Imperial Petroleum, Inc. (“Imperial”) for $10.2 million, with aneffective date of February 1, 2006.  Ofthe $10.2 million purchase price, approximately $9 million was paid at theclosing.  An additional $1.2 million waspaid into escrow and is reflected as restricted cash within the Company’sConsolidated Balance Sheet as of September 30, 2006.  The acquired properties are included inWhittier’s consolidated financial statements from the date of closing.

9

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**3.             Oil and Gas Properties, Equipmentand Fixtures**

In June 2005 in conjunction with itsacquisition of RIMCO, the Company adopted the full cost method of accountingfor its oil and gas activities. Under the full cost method of accounting, allcosts associated with property acquisition, exploration, and developmentactivities are capitalized. Exploration and development costs include dry holecosts, geological and geophysical costs, direct overhead related to explorationand development activities and other costs incurred for the purpose of findingoil and gas reserves. Salaries and benefits paid to employees directly involvedin the exploration and development of oil and gas properties as well as otherinternal costs that can be specifically identified with acquisition,exploration, and development activities are also capitalized. The Companycapitalizes interest costs to its unproved oil and gas properties as well. 

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

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

Sales of proved and unproved properties are accountedfor as adjustments of capitalized costs with no gain or loss recognized, unlesssuch adjustments would significantly alter the relationship between capitalizedcosts and proved reserves of oil and gas, in which case the gain or loss isrecognized in income. Abandonments of properties are accounted for asadjustments of capitalized costs with no loss recognized.  

Equipment and fixtures arestated at cost and depreciated over the estimated useful lives of the assets,which range from three to twelve years, using the straight-line method.  Maintenance and repairs, which neithermaterially add to the value of the property nor appreciably prolong its life,are charged to expense as incurred. Gains or losses on the dispositions of property and equipment, otherthan oil and gas property, are reflected in the Company’s results fromoperations. 

**4.             NotePayable**

OnJune 15, 2005 Whittier entered into its $75 million revolving Credit Facilitywith BNP Paribas as the lead bank and administrative agent. Whittier initiallyborrowed $20 million from the Credit Facility to partially fund its acquisitionof RIMCO and to fully repay approximately $8.5 million in principal and accruedinterest outstanding on the Company’s previous revolving credit facility withCompass Bank, as well as $1 million of bank debt held by RIMCO. During 2005,the Company repaid $6 million in principal outstanding on the Credit Facility,leaving $14 million in principal outstanding as of December 31, 2005.

On May11, 2006, the Credit Facility was increased to an aggregate borrowing capacityof up to $100 million. In May 2006, the Company borrowed an additional $19million in principal outstanding from the Credit Facility to fund the purchaseof the Westhoff Ranch Field discussed in Note 2.

OnAugust 9, 2006, the Company amended the Credit Facility to allow for an 18month term loan up to $6 million bearing interest at a rate of LIBOR plus3.75%.  On August 9, 2006, the Companyborrowed an additional $11 million under the Credit Facility to fund itsacquisition of various oil and gas properties from Imperial, including $6million borrowed as a term loan and $5 million borrowed under the revolvingportion of the Credit Facility.  During 

10

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thethree months ended September 30, 2006, the Company also borrowed $1.5 millionfor general working capital needs.  

As of September30, 2006, the Company had $45.5 million in total principal outstanding underthe Credit Facility, including $39.5 million of revolving credit and a $6million term loan. Amounts outstanding under the revolver bear interest atspecified margins over the London Interbank Offered Rate ("LIBOR") of1.50 % to 2.25%.  Such margins fluctuatebased on the utilization of the Credit Facility. As of September 30, 2006,amounts drawn under the revolver mature June 15, 2009, which reflects a oneyear extension granted on May 11, 2006. The term loan of $6 million is due on February 9, 2008.

OnNovember 9, 2006, the Company entered into the First Amendment to the Amendedand Restated Credit Agreement (the “Amendment”) with BNP Paribas as the leadbank and administrative agent for the lenders. The Amendment increased theinitial borrowing base under the credit facility from $45 million to $56million, which consists of $50 million in revolving credit and the $6 millionterm loan due February 9, 2008. No other material terms of the credit facilitywere amended. The borrowing capacity under the Company’s credit facility as ofNovember 9, 2006 was $9.8 million, after taking into account outstandingletters of credit of $714,000.

Thecredit facility has a potential capacity of $100 million; however, borrowingsunder the credit facility are limited to the $56 million borrowing base, whichis significantly less than the full capacity. The borrowing base that theCompany is allowed to draw upon is determined by the lender and based upon anumber of factors, including commodity prices and reserve levels. The borrowingbase is subject to review and adjustment on a semi-annual basis. As factorssuch as commodity prices and the Company’s reserve levels increase or decrease,this borrowing base may be increased or decreased accordingly, up to $100 millionas determined by the lender.

TheCredit Facility is collateralized by substantially all of the Company’s assetsand the Company is subject to various covenants, representations andwarranties. The Company is subject to certain financial covenants pertaining tominimum working capital levels, minimum coverage of interest expense, and amaximum leverage ratio. In addition, Whittier is subject to covenants limitingdividends and other restricted payments, transactions with affiliates,incurrence of debt, changes of control, asset sales, and liens on properties.The primary covenants under the Credit Facility include the following: 

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

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

TheCompany was in compliance with these covenants as of September 30, 2006 and hasclassified all of its outstanding indebtedness as long-term. 

For the three andnine months ended September 30, 2006, the Company incurred $835,000 and $1.5million respectively, in interest cost, of which $545,000 and $1.1 million wascapitalized for the respective periods to its unevaluated oil and gasproperties. For the three months ended September 30, 2005, the Companycapitalized 100% of its total interest incurred of $336,000.  For the nine months ended September 30, 2005,the Company incurred $706,000 interest cost, of which $482,000 was capitalizedto its unevaluated oil and gas properties.

11

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**5.             Asset Retirement Obligation**

As of September 30, 2006, the Company had an estimated future abandonmentobligation of $687,000, including $615,000 in costs capitalized to oil and gasproperties, net of settlements and $72,000 in cumulative accretion expense.The activity related to the Company’s future asset retirement obligation forthe nine months ended September 30, 2006, and the year ended December 31, 2005is as follows (in thousands):

|                                         | ** ** | **Nine Months Ended  September 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2006**                                            | ** ** | **2005**                               | ** ** |
| Beginning asset  retirement obligation  |       | $                                                   | 488        |                                   | $          | 121 |   |
| Liabilities  incurred during the period |       | 218                                                 |       | 341                                    |       |
| Liabilities  settled during the period  |       | (45                                                 | )          | —                                 |       |
| Accretion  expense                      |       | 26                                                  |       | 26                                     |       |
| Ending asset retirement  obligation     |       | $                                                   | 687        |                                   | $          | 488 |   |

 

**6.             Commodity Price Risk HedgingInstruments**

The Company held various derivative instruments, including crude oil andnatural gas option agreements known as “swaps” and “collars” as of September30, 2006 and December 31, 2005. Swaps are designed to fix the price ofanticipated sales of future production, while collars are designed to establishfloor and ceiling prices on anticipated sales of future production. The Companyenters into contracts at the time it acquires certain operated oil and gasproperty interests as a means to reduce the future price volatility on therelated sales of oil and gas production, as well as to achieve a more predictablecash flow from its oil and gas properties. The Company has designated its pricehedging instruments as cash flow hedges in accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS No. 133”). 

12

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Furtherdetails relating to the Company’s hedging activities are as follows:

Hedgingcontracts held as of September 30, 2006:
|                                             | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------|------------|
| **Contract Period and Type** | ** ** | **Total  Volume** | ** ** | **Floor**                          | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                                  | ** ** | ** **        | ** ** | ** **                         | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
| **Crude  Oil Contracts (barrels)**          |       |              |       |                               |       |                    |       |   |   |
| Swap Contracts:                             |       |              |       |                               |       |                    |       |   |   |
| October 2006 – December 2006           |       | 9,000             |       | N/A                                |       | $                       | 58.00      |   | $ | (57 | ) |
| October 2006 – December 2006           |       | 10,000            |       | N/A                                |       | $                       | 74.05      |   | 97 |   |
| January 2007 – June 2007               |       | 15,000            |       | N/A                                |       | $                       | 73.85      |   | 96 |   |
| July 2007 – December 2007              |       | 9,000             |       | N/A                                |       | $                       | 73.00      |   | 36 |   |
| January 2008 – December 2008           |       | 48,000            |       | N/A                                |       | $                       | 71.35      |   | 111 |   |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| October 2006 – December 2006           |       | 24,000            |       | $                                  | 30.00      |                    | $          | 34.25 |   | (716 | ) |
| October 2006 – December 2006           |       | 5,400             |       | $                                  | 49.50      |                    | $          | 68.60 |   | (7 | ) |
| January 2007 – December 2007           |       | 54,000            |       | $                                  | 47.50      |                    | $          | 69.00 |   | (269 | ) |
| January 2007 – December 2007           |       | 78,000            |       | $                                  | 47.50      |                    | $          | 69.25 |   | (380 | ) |
| January 2008 – December 2008           |       | 48,000            |       | $                                  | 60.00      |                    | $          | 83.00 |   | 18 |   |
|                                        |       |              |       |                               |       |                    |       |   |   |
| **Natural  Gas Contracts (mmbtu)**          | ** ** | ** **        | ** ** | ** **                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Swap Contracts:                             | ** ** | ** **        | ** ** | ** **                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| October 2006 – October 2006            |       | 30,000            |       | N/A                                |       | $                       | 7.44       |   | 97 |   |
| October 2006 – October 2006*           |       | 80,000            |       | N/A                                |       | $                       | (0.37      | ) | (14 | ) |
| November 2006 – March 2007             |       | 151,000           |       | N/A                                |       | $                       | 10.75      |   | 518 |   |
| April 2007 – October 2007              |       | 210,000           |       | N/A                                |       | $                       | 6.97       |   | (84 | ) |
| April 2007 – October 2007              |       | 214,000           |       | N/A                                |       | $                       | 9.25       |   | 384 |   |
| April 2007 – October 2007 *            |       | 490,000           |       | N/A                                |       | $                       | (0.37      | ) | (62 | ) |
| November 2006 – March 2007             |       | 150,000           |       | N/A                                |       | $                       | 8.16       |   | 132 |   |
| November 2007 – March 2008             |       | 152,000           |       | N/A                                |       | $                       | 10.98      |   | 307 |   |
| April 2008 – October 2008              |       | 214,000           |       | N/A                                |       | $                       | 8.65       |   | 237 |   |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| October 2006 – October 2006            |       | 40,000            |       | $                                  | 6.75       |                    | $          | 8.40 |   | 89 |   |
| October 2006 – October 2006            |       | 70,000            |       | $                                  | 7.00       |                    | $          | 7.50 |   | 173 |   |
| October 2006 – December 2006           |       | 120,000           |       | $                                  | 7.00       |                    | $          | 9.51 |   | 177 |   |
| October 2006 – December 2006           |       | 30,000            |       | $                                  | 5.00       |                    | $          | 6.45 |   | (16 | ) |
| December 2006 – March 2007             |       | 300,000           |       | $                                  | 7.50       |                    | $          | 11.20 |   | 215 |   |
| November 2006 – March 2007             |       | 151,000           |       | $                                  | 9.00       |                    | $          | 14.50 |   | 328 |   |
| April 2007 – October 2007              |       | 280,000           |       | $                                  | 6.25       |                    | $          | 7.95 |   | (100 | ) |
| April 2007 – October 2007              |       | 214,000           |       | $                                  | 7.50       |                    | $          | 12.65 |   | 229 |   |
| November 2006 – March 2007             |       | 200,000           |       | $                                  | 7.25       |                    | $          | 9.75 |   | 130 |   |
| November 2007 – March 2008             |       | 152,000           |       | $                                  | 9.00       |                    | $          | 16.25 |   | 220 |   |
| April 2008 – October 2008              |       | 214,000           |       | $                                  | 7.50       |                    | $          | 10.90 |   | 179 |   |
|                                        |       |              |       |                               |       | Total                   |       | $ | 2,068 |   |

 

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*These contracts requirethe Company to pay the Houston Ship Channel price per Mmbtu and thecounterparty to pay New York Mercantile Exchange price per Mmbtu minus $0.37. 

13

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Hedging contracts held asof December 31, 2005:

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

 

TheCompany accounts for its derivatives as cash flow hedging instruments, andrecognizes gains or losses on settlement of its hedging instruments in oil andgas revenues, and changes in their fair value as a component of othercomprehensive income, net of deferred taxes. The Company recognized pre-taxlosses in oil and gas revenues of $818,000 and $2.5 million for the three andnine months ended September 30, 2006, respectively, and $1.1 million and $2.3million for the three and nine months ended September 30, 2005, respectively,due to realized settlements of its price hedge contracts during the respectiveperiods.  

At September 30, 2006,the Company had unrealized gains on cash flow hedging contracts of $966,000,net of deferred taxes of $593,000, in accumulated other comprehensiveincome.  Comparatively, at December 31,2005, the Company had unrealized losses of $4.4 million, net of a deferred taxbenefit of $2.7 million in accumulated other comprehensive income.  As of September 30, 2006, the Companyanticipates $709,000 of unrealized gains, net of deferred tax benefit of $434,000,will be reclassified into earnings during the twelve months following September30, 2006. The Company recorded a gain from hedge ineffectiveness of $516,000and $1.2 million for the three and nine months ended September 30, 2006,respectively. The Company recorded loss from hedge ineffectiveness of $687,000and $798,000 for the three and nine months ended September 30, 2005.

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The followingtable details the activity of the cash flow hedges on a pre-tax and after-taxbasis for the period ending September 30, 2006 (in thousands).
|                                                               | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated  other comprehensive loss, December 31, 2005 |       | $           | (7,079     | )             | $          | (4,389 | ) |
| Reclassified  into earnings                                   |       | 2,479       |       | 1,537         |       |
| Change in fair  market value                                  |       | 7,381       |       | 4,576         |       |
| Ineffective  portion of cash flow hedges                      |       | (1,222      | )          | (758          | )          |
| Accumulated other  comprehensive income, September 30, 2006   |       | $           | 1,559      |          | $          | 966 |   |

 

**7.             Earnings Per Common Share**

Basicearnings per common share is calculated by dividing net income by the aggregateweighted average number of shares outstanding during the periods. Dilutedearnings per share considers the dilutive effect of the average number of commonstock equivalents, consisting of the Company’s common stock options andwarrants outstanding. The Company’s total weighted average number ofanti-dilutive common stock equivalents outstanding for the three and ninemonths ended September 30, 2006 were 1,901,710 and 1,054,513respectively.  The Company had noanti-dilutive common stock equivalents outstanding for the three and ninemonths ended September 30, 2005, respectively.

**8.             Stock-Based Compensation**

In December 2003,the Company’s Board of Directors approved a Long Term Incentive Plan (the “Plan”),which was ratified by the Company’s stockholders in July 2004 and furtheramended in October 2005. The Plan sets aside a total of 1,876,000 shares of theCompany’s common stock for issuance to the Company’s officers, directors,employees and consultants. 

Prior to 2006Whittier accounted for the related equity based compensation using APB OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), as permittedby SFAS No. 123, “Accounting for Stock-Based Compensation.”  APB No. 25 required the recognition ofcompensation expense based on an award’s intrinsic value.  Accordingly, since the Company awards optionsat the market value on the date of each grant, the Company recognized nocompensation expense for stock options through December 31, 2005. 

On January 1, 2006the Company adopted SFAS No. 123(R), “Share-Based Payment,” a revision of SFASNo. 123. SFAS No. 123(R) supersedes APB No. 25, and amends SFAS No. 95, “Statementof Cash Flows.” SFAS No. 123(R) requires a company to recognize equity basedcompensation, including stock option grants, based upon the fair value of theaward at the grant date.  The Company adopted SFAS No. 123(R),utilizing the modified prospective method to record compensation expense forthe unvested portion of all grants outstanding as of December 31, 2005 and forall future grants.  

The Companyestimates the fair value for options issued during the period, if any, as ofthe date of grant using the Black-Scholes option pricing model by usingweighted average assumptions, volatility factors of the expected market priceof the Company’s common stock, and the weighted average life expectancy of theoptions.  The expected volatilityutilized in the valuation model is based on the historical volatility of theCompany’s stock price. Similarly, the dividend yield and the expected holdingperiod are both based on historical experience and management’s estimate offuture events. The risk-free interest rate is derived from the U.S. Treasuryyield curve based on the expected life of the grant in effect at the time ofgrant.

15

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During 2004, theCompany granted a total of 262,834 options to purchase the Company’s commonstock at an average exercise price of $5.22 per share to certain directors,officers, and employees of the Company, of which 5,000 options were cancelledin May 2004. The fair value of the options outstanding on the date of grant wasestimated to be $1.2 million, or $4.41 per share, using the Black-Scholes optionpricing model with the following weighted average assumptions for the year:risk free interest rate of 4%, dividend yield of 0%, volatility factors of theexpected market price of the Company’s common stock of 4.74, and a weightedaverage life expectancy of the options of 3.5 years. 

The Company issuedan additional 497,547 options to various directors, officers, employees andconsultants of the Company during the year ended December 31, 2005, with anaverage exercise price of $8.16 per share. The fair value of the options on thedate of grant was estimated to be approximately $1.3 million, or $2.67 pershare, using the Black-Scholes option pricing model with the following weightedaverage assumptions for the year: risk free interest rate of 4.3%, dividendyield of 0%, volatility factors of the expected market price of the Company’scommon stock of .4, and a weighted average life expectancy of the options of 3years.   

The Companygranted a total of 1,111,637 options to various directors, officers, employeesand consultants of the Company during the nine months ended September 30, 2006,with an average exercise price of $9.29 per share. The fair value of theoptions on the date of grant was estimated to be approximately $3.1 million, or$2.82 per share, using the Black-Scholes option pricing model with thefollowing weighted average assumptions for the nine months ending September 30,2006: risk free interest rates of 4.6%, dividend yield of 0%, volatilityfactors of the expected market price of the Company’s common stock of .37, anda weighted average life expectancy of the options of 3 years. 

During the three and nine months ended September 30, 2006, the Companyrecorded compensation expense of $306,000 and approximately $1.0 million respectively, to general and administrative expense, of which $79,000and $221,000 was capitalized to oil and gas propertiesunder the full cost method of accounting for the three and nine months endedSeptember 30, 2006, respectively.  

As of September 30, 2006, there was approximately $2.4 million of total unrecognized compensationexpense related to unvested stock based compensation that is expected to berecognized over a weighted average period of 2.5 years. 

16

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If compensationexpense for the stock options granted to employees and directors had beendetermined using the fair value method, net income and diluted net income pershare for the three months and nine months ended September 30, 2005,respectively, would have been reduced to the following pro forma amounts:
|                                                                                                     | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                                                |       |                                                   |       |                                                  |       |
| Net income under  APB No. 25                                                                        |       | $                                                      | 2,413      |                                                  | $          | 3,549 |   |
|                                                                                                |       |                                                   |       |                                                  |       |
| Deduct: Total  stock-based compensation expense determined under the fair value method, net  of tax |       | (70                                                    | )          | (199                                                  | )          |
|                                                                                                |       |                                                   |       |                                                  |       |
| Pro forma net  income                                                                               |       | $                                                      | 2,343      |                                                  | $          | 3,350 |   |
|                                                                                                |       |                                                   |       |                                                  |       |
| Pro forma basic  earnings per share                                                                 |       | $                                                      | .59        |                                                  | $          | .86 |   |
|                                                                                                |       |                                                   |       |                                                  |       |
| Pro forma  diluted earnings per share                                                               |       | $                                                      | .18        |                                                  | $          | .45 |   |
|                                                                                                |       |                                                   |       |                                                  |       |
| As reported  basic earnings per share                                                               |       | $                                                      | .61        |                                                  | $          | .91 |   |
|                                                                                                |       |                                                   |       |                                                  |       |
| As reported diluted  earnings per share                                                             |       | $                                                      | .19        |                                                  | $          | .47 |   |

 

A summary of theCompany’s stock option activity and related information follows:
| ** **                                         | ** ** | **Shares**     | ** ** | **Weighted**              | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|----------------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                         | ** ** | **Underlying** | ** ** | **Average Exercise** | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| ** **                                         | ** ** | **Options**    | ** ** | **Price**                 | ** ** | **Contractual Term** | ** ** | **Value**     | ** ** |
| Options  Outstanding as of  December 31, 2005 |       | 753,712        |       | $                         | 7.16       |                      |       |          |       |   |
| Options Issued                                     |       | 1,111,637      |       | $                         | 9.29       |                      |       |          |       |   |
| Options Exercised                                  |       | (48,200        | )          | $                         | 5.36       |                      |       |          |       |   |
| Options Cancelled                                  |       | (208,799       | )          | $                         | 9.02       |                      |       |          |       |   |
| Options Expired                                    |       | —         |       | —                    |       |                      |       |          |       |
| Options  Outstanding as of September 30, 2006      |       | 1,608,350      |       | $                         | 8.45       |                      | 4.1  years |          | $          | 196,345 |   |
| Exercisable options as of September 30, 2006       |       | 452,186        |       | $                         | 7.33       |                      | 3.6 years  |          | $          | 133,608 |   |

 

Theintrinsic value of the 48,200 stock options exercised during 2006 was $120,154.

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**9.             New Accounting Standards**

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections: a replacement of APB Opinion No. 20 andFASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requiresvoluntary changes in accounting principles to be applied retrospectively,unless it is impracticable to determine either the period specific effects orthe cumulative effects of the change. SFAS No. 154’s retrospectiveapplication requirement replaces APB 20’s requirement to recognize mostvoluntary changes in accounting principle by including in net income of theperiod of the change the cumulative effect of changing to the new accountingprinciple. If retrospective application for all prior periods is impracticable,the method used to report the change and the reason the retrospectiveapplication is impracticable are to be disclosed. 

Under SFASNo. 154, retrospective application will be the transition method in theunusual event that a newly issued accounting pronouncement does not providespecific transition guidance. It is expected that most pronouncements willspecify transition methods other than the retrospective method. SFAS No. 154 iseffective for accounting changes made in fiscal years beginning afterDecember 15, 2005, and the adoption of this statement is expected to haveno impact on Whittier’s financial position or results of operations. 

In February of 2006, the FASB issued SFAS No. 155 “Accountingfor Certain Hybrid Financial Instruments” (“SFAS No. 155”).  SFAS No. 155 amends SFAS No. 133 and SFAS No.140 “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” (“SFAS No. 140”).  This Statement amends SFAS No. 133 andSFAS No. 140, and improves the financial reporting of certain hybridfinancial instruments by requiring more consistent accounting. Specifically,this Statement allows fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation. This Statement is effective for all financial instruments acquiredor issued after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006. Adoption of this statement is expected to haveno impact on the Company’s financial position or results of operations.

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). ThisInterpretation provides guidance for recognizing and measuring uncertain taxpositions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48,which will become effective January 1, 2007, defines the threshold forrecognizing the benefits of uncertain tax return positions in the financialstatements. Management is currently evaluating the potential impact, if any,the adoption of this statement could have on the Company’s financial positionor results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements”.  This Statement defines fair value as used innumerous accounting pronouncements, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosurerelated to the use of fair value measures in financial statements. TheStatement is to be effective for the Company’s financial statements issued in2008. The Company is currently evaluating the impact that adoption might haveon its financial position or results of operations.

In September 2006,the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides guidance on the considerationof the effects of prior year misstatements in quantifying current yearmisstatements for the purpose of a materiality assessment. The guidancerequires registrants to quantify errors using both a balance sheet and incomestatement approach and evaluate whether either approach results in quantifyinga misstatement as material, when all relevant quantitative and qualitativefactors are considered. This SAB is effective for calendar year 2006. The Companydoes not anticipate any impact to the preparation of its year-end 2006financial statements from adopting the guidance of SAB 108.

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**10.          Subsequent Events**

As discussed inNote 2, as of September 30, 2006 the Company held $1.2 million in restrictedcash as recourse reserves for post-closing matters related to its acquisitionof the Imperial properties. The Company completed its review in November 2006. Basedupon this review, the Company retained $132,000 and remitted the remainingportion to the sellers.  Additionally in Novemberof 2006, the Company acquired additional working interests from Imperial for$509,000.

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

**EXECUTIVEOVERVIEW**

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

We are focused on creatinga well-capitalized growth platform, through the growth and expansion of our oiland gas reserves and production. This growth will be achieved through ourdrilling program, as well as our accretive acquisitions. Throughout 2006, we have continued theexpansion of our drilling program and we are on track to participate in more than40 new wells in 2006. Through November 9, 2006 the Company has participated in34 gross wells (12 net) with an approximately 85% success rate.

On June 1, 2006, weacquired a 75% operated working interest in the Westhoff Ranch Field for approximately$18 million in cash from various third party sellers. The effective date ofthis acquisition was February 1, 2006. On August 9, 2006, we also acquiredthree oil and gas fields located in Mississippi and Texas from ImperialPetroleum, Inc. (“Imperial”) for approximately $10.2 million, including $1.2million paid into escrow, as further discussed in Note 2 to our consolidatedfinancial statements contained herein. We funded the Westhoff Ranch Field andthe Imperial property acquisitions using principal borrowings under our $100million credit facility further described within the *Liquidityand Capital Resources*section below. The acquisitions of theWesthoff Ranch Field and Imperial have increased our proved reserves by anestimated 15.9 billion cubic feet of natural gas equivalent (“Bcfe”).

As discussed in detail within our *Resultsof Operations* discussion below, our results have been impacted bythe volatility of oil and gas prices during the third quarter 2006; yet oursuccessful production results have significantly offset this pricingfactor.  For the nine months endedSeptember 30, 2006 pricing trends have been positive and along with oursuccessful production rates have contributed to our year-over-year favorableresults.

Our significant financial and operating highlights for the threeand nine months ended September 30, 2006 include the following:

·                  Net income forthe third quarter 2006 of $1.8 million, a 27% decrease compared to the thirdquarter 2005; and net income of $6.2 million for the nine months endedSeptember 30, 2006, a 75% increase over the nine months ended September 30,2005;

·                  Diluted earningsper share of $0.14 per share for the third quarter 2006, a 26% decrease comparedto the third quarter 2005; and diluted earnings of $0.49 per share for the ninemonths ended September 30, 2006, a 4% increase from the nine months endedSeptember 30, 2005;

·                  Revenues of $11.4million for the third quarter 2006, a 19% increase over third quarter 2005 of$9.6 million; and revenues of $32.2 million for the nine months ended September30, 2006, a 98% increase from the corresponding prior period;

·                  A 33% percentincrease in average daily production during the third quarter 2006 of 17.7 millioncubic feet of natural gas equivalent (“Mmcfe”) per day compared to 13.2 Mmcfe perday during the third quarter 2005; and an 88% increase from 8.5 Mmcfe per day forthe nine months ended September 30, 2005 to 16.0 per day for the nine monthsended September 30, 2006; and 

·                  A 156% increasein cash flow from operations for the nine months ended September 30, 2006 of$20.6 million compared to the nine months ended September 30, 2005 of $8.0million. 

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**LIQUIDITYAND CAPITAL RESOURCES**

We finance our business using acombination of cash flow from operations, bank debt and the issuance of equityand/or debt securities. Our future liquidity, in both the short and long-term,is principally dependent upon the volume of our oil and gas production and themarket price we receive on future sales of that production as mitigated by anyhedges we may have in place.  We borrowfunds on the credit facility as needed to supplement our operating cash flow asa financing source for our capital and exploration expenditures.  If marketprices decrease, both our operating cash flow as well as our asset base, whichis pledged as collateral to the banks, may decrease, causing the banks to potentiallyreduce our borrowing base.   If we cannot obtain adequate financing,we anticipate that we may be required to limit or defer our planned explorationexpenditures, thereby adversely affecting the recoverability and ultimate valueof our oil and gas properties.

As of September30, 2006, we have approximately $4.5****millionin available cash.  Our primary source ofcash during the nine months ended September 30, 2006 was from cash flow fromoperations of $20.6 million and net borrowings under our credit facility of $31.5million. For the nine months ended September30, 2006, our cash flow from operations have been positively impacted by ourproduction at an average rate of approximately 16.0****Mmcfe per day. This average rate was negatively impacted byapproximately 1 Mmcfe per day from July 7th to September 7th, related to theshut-in production from the Duhon #1 well in Lafayette Parish, Louisiana whichunderwent repairs to collapsed casing.  Additionally,during 2006 our liquidity position has been enhanced by the availability offunds under our credit facility. Effective November 9, 2006, the borrowing base was increased to $56 million,which includes a $6 million term loan due February 9, 2008.  The borrowing capacity under our creditfacility as of November 9, 2006 was $9.8 million, after taking into accountoutstanding letters of credit of $714,000. 

Our net positive operating cash flows have been used primarily to fundour exploration and development activities. Including our projects relating to our recent acquisitions of WesthoffRanch and Imperial assets, we havebudgeted $32.2 million in capital expenditures for 2006, of which approximately$24.5 million, net of sales, had been incurred through September 30, 2006. Weintend to fund our 2006 capital expenditures using operating cash flows andadditional borrowings under our credit facility, if necessary. 

Credit Facility

On May 11, 2006, we amended our revolving creditfacility to increase the aggregate borrowing capacity from $75 million to $100million and to extend the maturity date to June 15, 2009. Amounts outstandingunder the revolver bear interest at specified margins over the London InterbankOffered Rate (“LIBOR”) of 1.5% to 2.25% based upon the borrowing baseutilization. On August 9, 2006, we amended the credit facility to allow up to$6 million of the total $100 million commitment to be borrowed as a term loanbearing interest at a rate of LIBOR plus 3.75%, repayable on February 9, 2008.

On November 9, 2006, we entered into the First Amendmentto the Amended and Restated Credit Agreement (the “Amendment”) with BNP Paribasas the lead bank and administrative agent for the lenders. The Amendmentincreased the initial borrowing base under the credit facility from $45 millionto $56 million, which consists of $50 million in revolving credit and the $6million term loan due February 9, 2008. No other material terms of the creditfacility were amended.

The credit facility has a potential capacity of $100million; however, borrowings under the credit facility are limited to the $56million borrowing base, which is significantly less than the full capacity. Theborrowing base that we are allowed to draw upon is determined by the lender andbased upon a number of factors, including commodity prices and reserve levels.The borrowing base is subject to review and adjustment on a semi-annual basis.As factors such as commodity prices and our reserve levels increase ordecrease, this borrowing base may be increased or decreased accordingly, up to$100 million as determined by the lender.

Borrowings under the credit facility are secured byfirst priority liens on substantially all of our assets, including equityinterests in subsidiaries. We continue to be subject to certain financialcovenants pertaining to minimum working capital levels, minimum coverage ofinterest expenses, and a maximum leverage ratio. In addition, we are subject tocovenants limiting dividends and other restricted payments, transactions withaffiliates, incurrence of debt, changes of control, asset sales, and liens onproperties.

As of November 9,2006, we had $45.5 million in total principal outstanding under the creditfacility, including $39.5 million from the revolving portion of the facilityand the $6.0 million term loan. During the nine months ended September 30,2006, we borrowed $31.5 million, including the $6 million term loan.  Of these borrowings $19 million was utilizedto fund the purchase of the Westhoff Ranch Field; $11 million was used to fundthe acquisition of certain oil and gas properties from Imperial; and anadditional $1.5 million was borrowed from the revolving credit facility forgeneral working capital needs. 

Derivative Instruments and Hedging Activities

We regularly hedgea portion of our production to reduce our exposure to oil and gas pricevolatility, as well as to achieve more predictable cash flows from our oil andgas properties. Our current policy is to hedge a portion of our anticipatedfuture production in order to help finance acquisitions of producing oil andgas properties, to enhance the economic returns of our acquisition investments,and to support operating cash flows necessary to 

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fund ouranticipated capital budget. Gains or losses on both realized and unrealizedhedging transactions are determined as the difference between the contractprice and an applicable settlement or reference price. Settlement gains andlosses are determined monthly and are included as increases or decreases in oiland gas revenues in the period the hedged production is sold. Any ineffectiveportion of unrealized gains or losses of such hedges is recognized in earningsin the period they occur.  Our percentageof production hedged for the nine months ended September 30, 2006 approximates53% for both oil and gas production.  Ourderivative commodity positions outstanding at September 30, 2006 are disclosedin Note 6 to our consolidated financial statements contained herein. 

**RESULTSOF OPERATIONS**

*Forthe Quarter Ended September 30, 2006 compared with the Quarter Ended September30, 2005*

We generated netincome of approximately $1.8 million, or $0.14 per diluted share, for thequarter ended September 30, 2006, compared to $2.4 million, or $0.19 perdiluted share, for the period ended September 30, 2005. This decrease isprimarily attributable to (i) interest expense of $290,000 in the currentquarter compared to the prior period in which all interest expense wascapitalized, and (ii) a gain of $902,000 related to the sale of marketablesecurities in the third quarter of 2005. Significant components of Whittier’sresults of operations for the quarters ended September 30, 2006 and 2005 are asfollows:

Oil and GasRevenues. Oil and gas revenues increased 19% fromapproximately $9.6 million for the quarter ended September 30, 2005 to $11.4 millionfor the quarter ended September 30, 2006, based upon a 33% increase inproduction.  For the quarter, realized commodityprices were down 11% after hedge settlements from $7.87 per thousand cubic feetof natural gas equivalent (“Mcfe”) for the quarter ended September 30, 2005 to$6.99 per Mcfe for the quarter ended September 30, 2006. Owing to realizedsettlements of our price hedging contracts, we recognized pre-tax losses in oiland gas revenues of $818,000 and $1.1 million during the quarters ended September30, 2006 and 2005, respectively. We produced 1.6 Bcfe during the quarter ended September30, 2006, consisting of 88,186 barrels (“Bbls”) of oil and 1.1 Bcf of gas,compared to production of 1.2 Bcfe for the quarter ended September 30, 2005,consisting of 82,604 Bbls of oil and 722,920  Mmcf of gas. The increase in production wasprincipally due to the improved success rate of our drilling program and oursecond and third quarter 2006 acquisitions. 

Costs and Expenses.Total operating costs and expenses increased by 24% from $6.9 million for thequarter ended September 30, 2005 to $8.5 million for the quarter ended September30, 2006. The breakdown of variances for the components of operating costs andexpenses is as follows:

·                  Leaseoperating expenses per Mcfe remained relatively flat with just a 2% increasefrom $1.13 per Mcfe for the quarter ended September 30, 2005 to $1.15 per Mcfefor the quarter ended September 30, 2006. However, our total lease operating costs increased by 36% from $1.4 millionfor the quarter ended September 30, 2005 to $1.9 million for the quarter ended September30, 2006 as a result of our increased production; 

·                  Productiontaxes per Mcfe decreased 20%, from $0.64 per Mcfe for the quarter endedSeptember 30, 2005 to $0.51 per Mcfe for the quarter ended September 30,2006.  This decrease is attributable tolower taxes incurred on Louisiana production, which is based on a percentage ofrevenue versus actual production volumes. However, our higher production volumes did cause an increase of 6% intotal production tax costs from $777,000 for the quarter ended September 30,2005, to $825,000 for the quarter ended September 30, 2006;  

·                  Depreciation,depletion and amortization (“DD&A”) increased by 71%, from $2.8 million, or$2.33 per Mcfe, for the quarter ended September 30, 2005 to $4.8 million, or $2.97per Mcfe, for the quarter ended September 30, 2006.  The 27% increase in DD&A per Mcfe isrelated primarily to higher relative production and cost depletion rates; 

·                  Werecognized a non-cash gain of $516,000 due to the ineffective portion of thefair value adjustment to our hedge contracts for the quarter ended September30, 2006 compared to a non-cash loss of $687,000 for the quarter ended September30, 2005; and

·                  Generaland administrative expense increased from $1.2 million for the quarter ended September30, 2005 to $1.5 million for the quarter ended September 30, 2006, reflectingour enhanced operational 

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activity from the prior year, including increasing ourstaff from 18 to 26 full-time employees, as well as $227,000 in non-cashcompensation expense from the issuance of stock options recognized due to theadoption of FAS 123(R).  

Gains from Salesof Marketable Securities. During the quarter ended September 30, 2005, we sold 277,075 shares ofChaparral Resources, Inc. common stock for $1.2 million, realizing a pre-taxgain of $902,000.

*Forthe Nine Months Ended September 30, 2006 compared with the Nine Months Ended September30, 2005*

We generated netincome of approximately $6.2 million, or $0.49 per diluted share, for the ninemonths ended September 30, 2006, compared to $3.5 million, or $0.47 per dilutedshare, for the period ended September 30, 2005. The $2.7 million favorablevariance was primarily attributable to higher oil and gas production, theacquisition of RIMCO in June 2005, and higher commodity prices over the entire yeareven after factoring in lower third quarter pricing. The significant componentsof our results of operations for the nine months ended September 30, 2006 and2005 are as follows:

Oil and GasRevenues. Oil and gas revenues increased 98% fromapproximately $16.3 million, or $7.03 per Mcfe, for the nine months ended September30, 2005 to $32.2 million, or $7.38 per Mcfe, for the nine months ended September30, 2006, based upon an 88% increase in production and 5% increase in realizedcommodity prices per Mcfe after hedge settlements. We recognized pre-tax lossesin oil and gas revenues of $2.5 million and $2.3 million during the nine monthsended September 30, 2006 and 2005, respectively, due to realized settlements ofour price hedge contracts. We produced 4.4 Bcfe during the nine months ended September30, 2006, consisting of 243,167 Bbls of oil and 2.9 Bcf of gas, compared toproduction of 2.3 Bcfe for the nine months ended September 30, 2005, consistingof 177,887 Bbls of oil and 1.2 Mmcf of gas. The increase in production wasprincipally due to our June 2005 acquisition of RIMCO, as well as oursuccessful drilling program.

Costs and Expenses.Total operating costs and expenses increased by 90% from $12.0 million for the ninemonths ended September 30, 2005 to $22.8 million for the nine months ended September30, 2006. The breakdown of variances for the components of operating costs andexpenses is as follows:

·                  Leaseoperating expenses per Mcfe fell 25% from $1.46 per Mcfe for the nine monthsended September 30, 2005 to $1.10 per Mcfe for the nine months ended September30, 2006, principally due to a higher ratio of gas production from ourproperties and a reduction in non-recurring workover expenses from the priorperiod; However, total lease operating costs increased 42% from $3.4 millionfor the nine months ended September 30, 2005 to $4.8 million for the ninemonths ended September 30, 2006 as a result of our increased production;

·                  Productiontaxes per Mcfe decreased 5%, from $0.58 per Mcfe for the nine months endedSeptember 30, 2005 to $0.55 per Mcfe for the nine months ended September 30,2006.  This decrease is attributable tolower taxes incurred on Louisiana production, which is based on a percentage ofrevenue versus actual production volumes. However, our higher production volumes did cause an increase of 79% intotal production tax costs from $1.3 million for the nine months endedSeptember 30, 2005, to $2.4 million;     

·                  DD&Aincreased by 185%, from $4.5 million, or $1.94 per Mcfe, for the nine months endedSeptember 30, 2005 to $12.8 million, or $2.94 per Mcfe, for the nine months endedSeptember 30, 2006. The 52% increase in DD&A per Mcfe is related primarilyto higher relative production and cost depletion rates from Whittier’s acquisitionof RIMCO in June 2005;

·                  Werecognized a non-cash gain of $1.2 million due to the ineffective portion ofthe fair value adjustment to our hedge contracts for the nine months ended September30, 2006 compared to a non-cash loss of $798,000 for the nine months ended September30, 2005; and

·                  Generaland administrative expense increased from $2.0 million for the nine months endedSeptember 30, 2005 to $4.1 million for the nine months ended September 30,2006, reflecting our enhanced operational activity from the prior year,including increasing our staff from 18 to 26 full-time 

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employees, as well as $801,000 in non-cashcompensation expense from the issuance of stock options recognized due to theadoption of FAS 123(R). 

Gains from Salesof Marketable Securities. During the nine months ended September 30, 2005, we sold 543,850 sharesof Chaparral Resources, Inc. common stock for $1.8 million, realizing a pre-taxgain of $1.3 million.

**RECENTACCOUNTING PRONOUNCEMENTS**

We adoptedStatement of Financial Accounting Standards No, 123(R) “Share-Based Payment,” (“SFASNo. 123(R)” ) as of January 1, 2006 using the modified prospective method inwhich compensation cost is recognized based (1) on the requirements of SFAS No. 123(R)for all share-based payments granted after January 1, 2006 and (2) on the requirementsof SFAS No. 123 for all awards granted to employees prior to January 1,2006. During the three and nine months ended September 30, 2006, we recorded $306,000and approximately $1.0 million respectively, of pretax expense relating to theadoption of SFAS No. 123 (R), of which $79,000 and $221,000 was capitalized tooil and gas properties under the full cost method of accounting for the three and nine months ended September30, 2006, respectively.  See Note 8to the Consolidated Financial Statements for additional information.

Referto Note 9 for discussion of new accounting literature that is not effective forthe Company as of September 30, 2006, yet will require adoption in futureperiods.

**OFF-BALANCESHEET ARRANGEMENTS**

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

**FORWARD-LOOKING INFORMATION**

The statements regardingfuture financial and operating performance and results, market prices, futurehedging activities, and other statements that are not historical factscontained in this report are forward-looking statements.  The words “expect,” “project,” “estimate,” “believe,”“anticipate,” “intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,”“could,” “will” and similar expressions are also intended to identifyforward-looking statements.  Thesestatements involve risks and uncertainties, including, but not limited to,market factors, market prices (including regional basis differentials) ofnatural gas and oil, results of future drilling and marketing activity, futureproduction and costs, and other factors detailed in this document and in our 2005Annual Report on Form 10-KSB.  If one ormore of these risks or uncertainties materialize, or if underlying assumptionsprove incorrect, actual outcomes may vary materially from those included inthis Form 10-QSB.

**Item 3. Controls and Procedures**

**EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES**

### The term “disclosurecontrols and procedures” as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) refers to the controlsand procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files under theExchange Act is recorded, processed, summarized and reported within requiredtime periods.  Bryce W. Rhodes, theCompany’s principal executive officer, and Geoffrey M. Stone, the Company’sprincipal financial officer, have evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisquarterly report, and each of them has concluded that, as of such date,Whittier’s controls and procedures were effective. There were no changes in theCompany’s internal controls over financial reporting that occurred during thequarter covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

**Item 5. Other Information**

On November 9, 2006, we entered into an amendment to ourcredit facility, which is described in *“Management’s Discussionand Analysis—Liquidity and Capital Resources.”*

 

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### **Part II– Other Information**

#### **Item6 – Exhibits**

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

### **Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized. 
| Dated: | November 14, 2006           |                                                    |
|--------|-----------------------------|---------------------------------------------------------|
|   |                        |                                                    |
|   | Whittier Energy Corporation |
|   |                        |
|   |                        |
|   | By:                         | */s/ Bryce W. Rhodes*                                   | * * |
|   |                        | Bryce W. Rhodes                                         |
|   |                        | President, Chief Executive Officer, and Director        |
|   |                        |                                                    |
|   |                        |                                                    |
|   | By:                         | */s/ Geoffrey M. Stone*                                 | * * |
|   |                        | Geoffrey M. Stone                                       |
|   |                        | Vice President of Finance and Chief Accounting  Officer |
|   |                        | (Principal Financial and Accounting Officer)            |

 

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**INDEX TOEXHIBITS**
| Exhibit    | ** ** | **Description**                                                                                                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       |                                                                                                                                                                                                                                                                                 |
| 10.1       |       | Amended and Restated Credit Agreement dated August  9, 2006, among Whittier Energy Corporation, as Borrower, and BNP Paribas, as  Administrative Agent, and the lenders party thereto, incorporated by  reference to Exhibit 10.1 of Whittier’s Form 8-K filed August 15, 2006. |
| *10.2      |       | First Amendment to Amended and Restated Credit  Agreement dated November 9, 2006, among Whittier Energy Corporation, as  Borrower, and BNP Paribas, as Administrative Agent, and the lenders party  thereto.                                                                         |
| 10.3       |       | Employment Agreement between the Company and  Geoffrey M. Stone dated effective September 1, 2006, incorporated by  reference to Exhibit 10.1 of Whittier’s Form 8-K filed August 30, 2006.                                                                                     |
| *31.1      |       | Certification of Chief Executive Officer pursuant to  Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).                                                                                                                                                                   |
| *31.2      |       | Certification of Principal Financial and Accounting  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or  15d-14(a).                                                                                                                                               |
| *32.1      |       | Certification of Chief Executive Officer pursuant to  Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                |
| *32.2      |       | Certification of Principal Financial and Accounting  Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or  15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                             |

 

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* Filed herewith.

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